6294 Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 

DEPARTMENT OF VETERANS 

AFFAIRS 

38 CFR Part 36 

RIN 2900–AL65 

Loan Guaranty: Loan Servicing and 

Claims Procedures Modifications 

AGENCY: Department of Veterans Affairs. 

ACTION: Final rule. 

SUMMARY: This document establishes a 

new series for the Department of 

Veterans Affairs (VA) Loan Guaranty 

regulations, which will be phased in 

over an approximately eleven-month 

timeframe, as mortgage servicing 

industry segments ‘‘go live’’ on a new 

computer-based tracking system being 

established by VA. This new series 

replicates existing regulations for most 

aspects of the VA Loan Guaranty 

program, but also includes changes 

related to several aspects of the 

servicing and liquidating of guaranteed 

housing loans in default, and the 

submitting of guaranty claims by loan 

holders. Specific topics revised in the 

new 4800 series include: increasing 

authority of servicers to implement lossmitigation options, making incentive 

payments to servicers for successful 

loss-mitigation options, establishing a 

system of measuring and ranking 

servicer performance, establishing 

updated reporting requirements, 

permitting loan holders to review 

liquidation appraisals, requiring holders 

to calculate the net value of the security 

property prior to foreclosure, 

establishing a timeframe for when 

foreclosure of a defaulted loan should 

be completed, limiting the amount of 

interest and other fees and charges that 

may be included in a guaranty claim, 

establishing allowable attorneys fees to 

be included in the guaranty claim, 

establishing a deadline for the 

submission of guaranty claims, 

modifying the requirements for title 

evidence for properties conveyed to VA 

following foreclosure, modifying the 

requirements for how long a holder 

must maintain records relating to loans 

for which VA has paid a claim on the 

guaranty, and eliminating the 

requirement for the submission of legal 

procedural papers to VA. This 

document also includes specific 

revisions to three rules related to 

increased attorney fee allowances, 

establishment of a time limit for filing 

a claim under the guaranty, and granting 

authority for the Servicer Appraisal 

Processing Program that will be effective 

for all program participants upon 

publication of these rules. 

DATES: This rule is effective February 1, 

2008. 

FOR FURTHER INFORMATION CONTACT: 

Mike Frueh, Assistant Director for Loan 

Management (261), Veterans Benefits 

Administration, Department of Veterans 

Affairs, 810 Vermont Avenue, NW., 

Washington, DC 20420, at 202–461– 

9521. (This is not a toll-free telephone 

number.) 

SUPPLEMENTARY INFORMATION: 

Statutory Background 

Under 38 U.S.C. chapter 37, VA 

guarantees loans made by private 

lenders to veterans for the purchase, 

construction, and refinancing of homes 

owned and occupied by veterans. 

Business Process Reengineering Review 

Beginning in 2001, VA conducted an 

internal, in-depth review of the entire 

Loan Administration process that was 

effectively a business process 

reengineering (BPR) effort. ‘‘Loan 

Administration’’ includes the servicing 

of existing loans, dealing with loans in 

default and loans being terminated, and 

the processing of claims by loan holders 

under the guaranty after defaulted loans 

have been foreclosed or otherwise 

terminated. Loan Administration also 

includes efforts by VA and private loan 

holders to assist homeowners whose 

loans are in default to cure the default, 

retain their home if possible, or find 

other means short of foreclosure. VA’s 

BPR team recommended revising the 

Loan Administration process to reflect 

changes in the loan servicing industry 

in recent years, as well as advances in 

technology. VA’s BPR team also 

recommended placing greater reliance 

on private sector servicing in 

accordance with VA guidelines, with 

VA using advanced technology to 

oversee servicing actions. 

Regulatory Background 

On February 18, 2005 (70 FR 8472), 

VA proposed to amend its loan guaranty 

regulations in order to implement the 

following recommendations proposed 

by the BPR team: giving servicers 

increased authority to implement lossmitigation alternatives to foreclosure 

and paying servicers an incentive bonus 

for each successful loss-mitigation 

alternative to foreclosure; establishing a 

performance-based tier-ranking system 

for servicers; permitting qualified loan 

holders to review liquidation appraisals 

and establish the fair market value of 

the property; requiring loan holders to 

calculate the net value of properties 

securing loans prior to foreclosure; 

establishing timeframes for when VA 

would expect holders, exercising 

reasonable diligence, should be able to 

complete the foreclosure of defaulted 

loans; limiting the amount of interest 

and other fees and charges that may be 

included in a guaranty claim; 

establishing reasonable and customary 

attorney fees allowed to be claimed 

under the guaranty; establishing a 

deadline for holders to submit claims 

under the guaranty and to request 

reconsideration of denied claims; 

modifying the requirements for title 

evidence submitted to VA when the 

holder is conveying the property to VA 

following the liquidation sale; 

modifying the requirements for how 

long a holder must maintain records 

relating to loans for which VA has paid 

a claim on the guaranty; modifying the 

requirements for holders to report key 

events with regard to loans being 

serviced; and repealing the requirement 

for holders to provide VA with 

procedural papers in legal or equitable 

proceedings related to a loan on the 

security property. VA published a 

supplemental notice on November 27, 

2006 (71 FR 68498), to provide specific 

information regarding the computerbased system that VA proposed to 

implement as part of the loan servicing 

and claims procedure modifications. VA 

published another supplemental notice 

on June 1, 2007 (72 FR 30505), to 

provide information on a decision to 

phase-in implementation of most of the 

new rules, based on previous comments 

from the industry and the development 

of VA’s computer-based tracking 

system. 

Discussion of Public Comments 

The initial public comment period 

closed on April 19, 2005. VA received 

51 comments from the public about 

various aspects of the proposed changes. 

The public comment period was 

reopened following publication of the 

first supplemental notice and closed 

December 11, 2006. VA received an 

additional 8 comments from the public 

about the proposed reporting 

requirements for VA’s new computerbased system. The public comment 

period was again reopened following 

publication of the second supplemental 

notice and closed June 15, 2007. VA 

received 2 comments from the public 

about its proposed phased 

implementation and clarifications 

regarding modifications. 

The final rule has been revised to 

incorporate changes that VA agrees are 

necessary in light of, or as the logical 

outgrowth of, the comments provided. 

In order to accommodate the phased 

implementation of the new rules, VA is 

establishing a new subpart F (§§ 36.4800 

through 36.4893, inclusive) of part 36 

that contains substantive rules identical 


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to those in the current rules (§§ 36.4300 

through 36.4393). In addition, we 

redesignate those current rules as 

subpart B of title 38, CFR. Subpart F 

will be effective upon publication of 

this notice only for the first segment of 

the mortgage servicing industry, as 

described in the second supplemental 

notice published June 1, 2007 (72 FR 

30505). The table below is similar to the 

one in that notice, and provides the 

effective date for the first segment that 

will be affected by these rules, as well 

as an indication of the time periods 

during which we expect to make these 

rules applicable to all other segments of 

the industry (although these time 

periods may change due to unforeseen 

circumstances). We will publish as 

notices in the Federal Register the 

actual applicability dates for industry 

segments two through nine. 

Segment No. 

Applicability date of 

phased-in rules (by 

calendar year quarter) 

1 ................................ February 1, 2008. 

2 ................................ 2nd Quarter, 2008. 

3 ................................ 2nd Quarter, 2008. 

4 ................................ 4th Quarter, 2008. 

5 ................................ 2nd Quarter, 2008. 

6 ................................ 3rd Quarter, 2008. 

7 ................................ 3rd Quarter, 2008. 

8 ................................ 3rd Quarter, 2008. 

9 ................................ 4th Quarter, 2008. 

Subpart B will continue to be the 

governing rules for industry segments 

until the dates they become subject to 

the new subpart F. VA is aware that 

certain portions of subpart B, 

specifically §§ 36.4302 and 36.4312, are 

in need of revision to match recent 

legislative amendments, as well as to 

update VA positions on certain 

requirements. However, in order to 

avoid confusion with those issues not 

directly impacting the servicing and 

liquidating of guaranteed housing loans 

in default, and the submitting of 

guaranty claims by loan holders, those 

changes have not been included in this 

rulemaking. Instead, VA is preparing 

proposed changes to §§ 36.4302 and 

36.4312 in subpart B and in the 

corresponding §§ 36.4802 and 36.4813 

in the new subpart F, and will request 

comments from the public on those 

changes after the effective date of these 

new rules. 

In our review of subpart B, we also 

identified a number of minor errors, 

such as erroneous cross-references, 

typographical errors, and hanging 

provisions (flush text) that needed 

reformatting, and have corrected these 

wherever necessary in the new subpart 

F. However such corrections have not 

affected the rights, responsibilities, or 

obligations of program participants. 

The following paragraphs discuss the 

comments VA received in response to 

the proposed rules and the 

supplemental notices. The paragraphs 

are in order by the new subpart F 

section number and provide VA 

responses. The preamble does not 

discuss sections about which we did not 

receive any public comment. The 

preamble also does not discuss any 

section that is substantively the same as 

its counterpart in §§ 36.4300 through 

36.4393. However, such a section may 

contain conforming renumbering 

changes and/or technical revisions or 

reorganization. This final rule includes 

three changes to subpart B in 

§§ 36.4313(b)(5), 36.4321(d), and 

36.4344a, and the comments and 

rationale for those changes are the same 

as those in the comments and responses 

on the new final rules in corresponding 

§§ 36.4814(b)(5), 36.4824(d), and 

36.4848. 

36.4800 Applicability of §§ 36.4800 

Through 36.4893, Inclusive 

Comment: VA should consider the 

time needed to adapt industry servicing 

systems and carefully test all aspects of 

the proposed electronic reporting 

requirements. This could also include 

special circumstances such as recent 

acquisitions, changes in servicing 

platforms, or other unforeseen 

situations. 

VA Response: VA has carefully 

considered the factors that are essential 

to the success of its new electronic 

reporting environment, and determined 

that a phased implementation by 

industry segment offers the best chance 

for success. Accordingly, VA has 

established nine industry segments for 

program participants, with each 

segment ‘‘going live’’ on VA’s new 

computer-based tracking system over an 

approximately 11-month timeframe. 

Each phase of implementation will 

include time for data clean-up, system 

modifications, defect corrections, testing 

of interfaces and data transmission, and 

review of lessons learned before 

initiating the next phase. Throughout 

this phase-in process, VA will remain 

flexible in adjusting its implementation 

schedule in order to accommodate 

participants’ unique circumstances, 

such as changes in servicing platforms 

or unforeseen events. In addition, VA 

has the authority under § 36.4838 to 

administratively offer relief to entities 

not meeting VA requirements, such as 

electronic reporting. 

36.4801 Definitions 

Comments: VA should provide its 

definitions of ‘‘repayment plans’’ and 

‘‘special forbearances.’’

VA Response: When VA published 

the proposed rule to replace the existing 

§ 36.4317 with an arrangement to 

establish incentive payments for loss 

mitigation options, VA believed that the 

mortgage industry had a common 

understanding of the basic concepts of 

repayment plans and special 

forbearance agreements. However, while 

reviewing comments, and in researching 

definitions established by major 

industry participants (Fannie Mae, 

Freddie Mac, and the Department of 

Housing and Urban Development 

[HUD]), VA realized that each entity has 

its own slightly different definition for 

each of these terms. Accordingly, VA 

has added detailed definitions of 

‘‘repayment plan’’ and ‘‘special 

forbearance’’ in this final rule in 

§ 36.4801 to avoid any confusion as to 

what is required for each of these types 

of loss mitigation actions. VA is also 

clarifying the role of the servicer by 

adding a definition to state that the 

servicer is the entity which will be 

assigned a tier ranking based on its 

performance and will receive any 

incentive payment on a loan it services 

for the loan holder. The definitions are 

only minor clarifications of basic 

concepts customary in the loan 

servicing industry and do not impose 

any new requirements or take away any 

substantive rights of program 

participants. VA has listed all of the loss 

mitigation options in § 36.4819 in their 

preferred order of consideration (i.e., a 

hierarchy for review), but recognizes 

that individual circumstances may lead 

to ‘‘out of the ordinary’’ procedures. VA 

also plans to provide more detailed 

examples and advice on a number of 

issues, including repayment plans and 

special forbearances, as part of the 

training it will provide to servicers after 

publishing these rules. 

Comment: VA should clarify the 

payment of incentives for successful 

loss mitigation efforts. 

VA Response: VA concurs. The holder 

is the entity ultimately responsible for 

compliance with VA regulations and 

under § 36.4801 ‘‘Holder’’ includes ‘‘the 

authorized servicing agent of the lender 

or assignee or transferee.’’ However, for 

purposes of tier ranking (§ 36.4818) and 

loss mitigation options and incentives 

(§ 36.4819), VA’s intent is to measure 

performance of the actual loan servicer 

and reward it accordingly. In order to 

make this distinction clearer, we 

provide a definition in § 36.4801 of 

‘‘servicer.’’ The authorized servicer is 


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either the servicing agent of a holder; or 

the holder itself, if the holder is 

performing all servicing functions on a 

loan. The servicer is typically the entity 

reporting all loan activity to VA and 

filing claims under the guaranty on 

behalf of the holder. VA will generally 

issue guaranty claims and other 

payments to the servicer, who will be 

responsible for forwarding funds to the 

holder in accordance with its servicing 

agreement. Incentives under § 36.4819 

will generally be paid directly to the 

servicer based on its performance under 

that section and in accordance with its 

tier ranking under § 36.4818. 

Comment: VA should clarify the 

procedures and implications of debt 

reductions used to ensure a property is 

eligible for conveyance to VA. 

VA Response: In § 36.4823, we clarify 

the procedures to be followed to reduce 

debts in order to gain the right to convey 

to VA properties acquired at liquidation 

sales. However, to avoid confusion with 

multiple definitions of similar terms, we 

do not use the terms ‘‘Indebtedness’’, 

‘‘Specified amount’’ and ‘‘Unguaranteed 

portion of the indebtedness’’ in this 

final rule in § 36.4801; that section will 

instead use the term ‘‘Total 

indebtedness.’’ The terms are defined in 

§ 36.4301 because they are used 

primarily in §§ 36.4320 and 36.4321. 

However, the new final §§ 36.4823 and 

36.4824 do not contain them and refer 

only to the total indebtedness as defined 

in the statute and the new final 

§ 36.4801. 

The other definitions included in 

§ 36.4801 that are different from those in 

§ 36.4301 were previously proposed. 

36.4809 Transfer of Title by Borrower 

or Maturity by Demand or Acceleration 

In § 36.4308(g), we refer to a time 

period specified in § 36.4316, which in 

turn establishes a three-month waiting 

period prior to the filing of a notice of 

intention to foreclose. The reporting and 

processing of defaults is handled 

differently under the new rules in 

§§ 36.4800 through 36.4893, and 

§ 36.4818 does not refer to a waiting 

period. Therefore, in § 36.4809(g), we do 

not refer to another section but rather 

refer to the actual time frame of three 

months. 

36.4814 Advances and Other Charges 

Comment: VA should review its 

proposed foreclosure attorney fee 

schedule, which is very similar to those 

published by HUD, Fannie Mae, and 

Freddie Mac in 2001, to account for 

reasonable increases in living costs over 

the past several years, as well as other 

cost increases since that time due to 

increased labor and operational 

expenses for attorneys. 

VA Response: VA concurs. VA has 

carefully reviewed the proposed 

foreclosure attorney fee schedule and 

has adjusted the amounts in accordance 

with the information provided in the 

comments, as well as updated 

information obtained from other 

sources. The table provided below, as 

referenced in final rules 

§ 36.4313(b)(5)(ii) and 

§ 36.4814(b)(5)(ii), is reasonably 

consistent with the fees allowed by 

other agencies for comparable work, and 

the commitment in paragraph (b)(5)(ii) 

to review the schedule annually will 

ensure the opportunity to timely 

address any imbalance in the schedule. 

In addition, VA has slightly modified 

the proposed language in new final 

rules § 36.4313(b)(5)(iii) and 

§ 36.4814(b)(5)(iii) to allow additional 

trustee fees, above those allowed for 

legal services, when the trustee 

conducting the sale must be a 

Government official under local law, or 

if an individual other than the 

foreclosing attorney (or any employee of 

that attorney) is appointed as part of 

judicial proceedings, and local law also 

establishes the fees payable for the 

services of the public or judicially 

appointed trustee. 

VA intends to reimburse only for 

attorney fees for services related to 

foreclosure of loans. Most of the 

attorneys commenting on the proposed 

rule reported that over the past five 

years many servicers have been 

outsourcing the foreclosure oversight 

process (i.e., hiring third parties to 

perform functions previously handled 

as part of the servicer’s routine duties), 

and firms providing such outsourcing 

services are charging attorney firms a fee 

for providing the file needed to initiate 

the foreclosure action. While VA 

understands that servicers may find 

efficiencies in outsourcing certain 

functions, the cost for such outsourcing 

must be considered as an operating 

expense of the firm contracting for the 

outsourcing; i.e., the servicer. VA 

cannot consider outsourcing fees to be 

part of the cost of an attorney fee for 

completing a foreclosure. Consistent 

with our proposed rule, VA is 

establishing maximum amounts for legal 

services in each State, and those 

amounts are intended to reimburse for 

reasonable attorney fees. This is 

consistent with the position taken by 

Freddie Mac, which prohibits payment 

for referral fees, packaging or other 

similar fees, and new case start-up fees 

in its Single Family Seller/Servicer 

Guide, Volume 2, Chapter 71, section 

71.18. Fannie Mae also notes in its 2006 

Servicing Guide, Part VIII, Chapter 1, 

section 104.03, that it will not reimburse 

a servicer for legal fees and expenses 

related to actions that are essentially 

servicing functions. 

Comment: VA should allow a fee to 

cover the costs of restarting a 

foreclosure that has been postponed, for 

example, by the filing of a bankruptcy 

petition. This would be in addition to 

the reimbursement for obtaining relief 

from the bankruptcy stay. 

VA Response: VA concurs. VA 

recognizes that this is occurring more 

frequently, and is a true cost of doing 

business. Therefore, VA has allowed in 

the table provided herein in accordance 

with the final rules § 36.4313(b)(5)(ii) 

and § 36.4814(b)(5)(ii) an additional 

$350 ‘‘foreclosure restart’’ fee when a 

foreclosure sale is postponed or 

cancelled through no fault of the 

servicer or its foreclosure attorney. This 

includes but is not limited to 

bankruptcy, VA requested delay, 

property damage, hazardous conditions, 

condemnation, natural disaster, 

property seizure, or relief under the 

Servicemembers Civil Relief Act. 

Comment: VA should consider 

increasing its maximum allowable 

bankruptcy fees, for reasons similar to 

those suggested for foreclosure fees. 

VA Response: VA concurs. VA has 

reviewed the fees allowed by other 

entities, as well as the arguments made 

for increasing bankruptcy fees. VA 

believes that a modest adjustment is 

appropriate at this time and is revising 

the table referenced in the final rules in 

§ 36.4313(b)(5)(ii) and § 36.4814(b)(5)(ii) 

to allow attorney fees of $650 (Chapter 

7) or $850 (initial Chapter 13) for 

obtaining bankruptcy releases directly 

related to loan termination. For 

additional relief filed under either 

chapter, VA will allow an additional 

$250. VA will continue to monitor these 

fees on an annual basis. 

The current legal services table is as 

follows: 

Jurisdiction Non-judicial 

foreclosure 

Judicial 

foreclosure 

Deed-in-lieu of 

foreclosure 

Foreclosure 

restart fee 2

Chapter 13 

release 3

Chapter 7 

release 3

Alabama ................................................... 550 N/A 350 350 850 650 

Alaska ...................................................... 1200 N/A 350 350 850 650 


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Jurisdiction Non-judicial 

foreclosure 

Judicial 

foreclosure 

Deed-in-lieu of 

foreclosure 

Foreclosure 

restart fee 2

Chapter 13 

release 3

Chapter 7 

release 3

Arizona ..................................................... 625 N/A 350 350 850 650 

Arkansas .................................................. 750 N/A 350 350 850 650 

California .................................................. 600 N/A 350 350 850 650 

Colorado ................................................... 800 N/A 350 350 850 650 

Connecticut .............................................. N/A 1250 350 350 850 650 

Delaware .................................................. N/A 950 350 350 850 650 

District of Columbia .................................. 600 N/A 350 350 850 650 

Florida ...................................................... N/A 1200 350 350 850 650 

Georgia .................................................... 600 N/A 350 350 850 650 

Guam ....................................................... 1200 N/A 350 350 850 650 

Hawaii ...................................................... N/A 1850 350 350 850 650 

Idaho ........................................................ 600 N/A 350 350 850 650 

Illinois ....................................................... N/A 1100 350 350 850 650 

Indiana ..................................................... N/A 1000 350 350 850 650 

Iowa .......................................................... 550 850 350 350 850 650 

Kansas ..................................................... N/A 850 350 350 850 650 

Kentucky .................................................. N/A 1100 350 350 850 650 

Louisiana .................................................. N/A 900 350 350 850 650 

Maine ....................................................... N/A 1250 350 350 850 650 

Maryland .................................................. 800 N/A 350 350 850 650 

Massachusetts ......................................... N/A 1250 350 350 850 650 

Michigan ................................................... 650 N/A 350 350 850 650 

Minnesota ................................................. 650 N/A 350 350 850 650 

Mississippi ................................................ 550 N/A 350 350 850 650 

Missouri .................................................... 650 N/A 350 350 850 650 

Montana ................................................... 600 N/A 350 350 850 650 

Nebraska .................................................. 600 850 350 350 850 650 

Nevada ..................................................... 600 N/A 350 350 850 650 

New Hampshire ....................................... 900 N/A 350 350 850 650 

New Jersey .............................................. N/A 1300 350 350 850 650 

New Mexico ............................................. N/A 900 350 350 850 650 

New York—Western Counties 1 ............... N/A 1250 350 350 850 650 

New York—Eastern Counties .................. N/A 1800 350 350 850 650 

North Carolina .......................................... 550 N/A 350 350 850 650 

North Dakota ............................................ N/A 900 350 350 850 650 

Ohio .......................................................... N/A 1100 350 350 850 650 

Oklahoma ................................................. N/A 900 350 350 850 650 

Oregon ..................................................... 675 N/A 350 350 850 650 

Pennsylvania ............................................ N/A 1250 350 350 850 650 

Puerto Rico .............................................. N/A 1100 350 350 850 650 

Rhode Island ............................................ 900 N/A 350 350 850 650 

South Carolina ......................................... N/A 850 350 350 850 650 

South Dakota ........................................... 650 850 350 350 850 650 

Tennessee ............................................... 550 N/A 350 350 850 650 

Texas ....................................................... 550 N/A 350 350 850 650 

Utah .......................................................... 600 N/A 350 350 850 650 

Vermont .................................................... N/A 950 350 350 850 650 

Virginia ..................................................... 600 N/A 350 350 850 650 

Virgin Islands ........................................... N/A 1100 350 350 850 650 

Washington .............................................. 675 N/A 350 350 850 650 

West Virginia ............................................ 550 N/A 350 350 850 650 

Wisconsin ................................................. N/A 1100 350 350 850 650 

Wyoming .................................................. 600 N/A 350 350 850 650 

1Western Counties of New York are: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Livingston, Monroe, Niagara, Ontario, Orleans, Steuben, Wayne, Wyoming, and Yates. The remaining counties are in Eastern New York. 2When a foreclosure is stopped due to circumstances beyond control of the holder or its attorney (including, but not limited to bankruptcy, VArequested delay, property damage, hazardous conditions, condemnation, natural disaster, property seizure, or relief under the Servicemembers 

Civil Relief Act) and then restarted, VA will allow the restart fee in addition to the base foreclosure attorney fee. 3For each additional relief of stay under either chapter, VA will pay $250. 

Comment: VA should publish a single 

national reimbursable fee schedule so 

that servicers will be able to accurately 

calculate total indebtedness. VA should 

provide at least 30 days advance notice 

of changes in fees to allow for system 

updates and procedural modifications. 

VA Response: VA does not concur at 

this time because this information is 

maintained at the Regional Loan Center 

(RLC) level in order to be updated as 

quickly as possible when local changes 

occur, so that holders may be 

reimbursed for actual expenses as they 

occur, rather than experiencing a lag 

time. The current schedules provide the 

local fees and expenses and we believe 

that this data should continue to be 

provided at the local level. However, 

VA will initiate plans to post such a 

national schedule of fees when this can 

be accomplished in a timely manner. 

36.4815 Loan Modifications 

Comment: VA should not require 

holders to reduce the interest rate on a 

loan modification where market interest 

rates have decreased since the date of 

loan origination. 


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VA Response: VA does not concur, 

but is changing the new final rule in 

§ 36.4815 in an effort to make it easier 

for servicers to administer. The existing 

VA regulation dealing with loan 

modifications (§ 36.4314) allows no 

change to the interest rate on the loan. 

In fact, another regulation (§ 36.4311(c)) 

specifically states that interest in excess 

of the rate reported by the lender when 

requesting evidence of guaranty shall 

not be payable. The vast majority of VAguaranteed loans are securitized in 

GNMA (Government National Mortgage 

Association) insured pools, which 

require the holder to purchase the loan 

from the pool in order to modify the 

loan. The proposed change recognized 

the difficulty faced by loan servicers in 

attempting to resecuritize loans with 

interest rates well below the market 

average, and thus allowed for increasing 

interest rates on modifications when 

market conditions dictate. However, VA 

also believes it is only fair to veterans 

to similarly reduce interest rates when 

market rates have decreased since loan 

origination. The impact of reduced 

interest rates would be similar to the 

effect of other creditworthy borrowers 

refinancing at lower interest rates, and 

should not adversely affect VA lenders. 

Therefore, VA is not departing from 

requiring an interest rate reduction 

where market interest rates have 

decreased since loan origination. VA is, 

however, removing the one percent cap 

on interest rate increases that had been 

contained in the proposed rule so that 

modifications will become a more 

widely used tool to help veterans retain 

their homes. VA is also slightly 

modifying the language that had been in 

paragraph (c) of the proposed rule in 

§ 36.4314 to make adjustments easier, by 

allowing the maximum interest rate to 

be based on a month-end rate, rather 

than requiring a daily adjustment as the 

proposed rule had provided. Therefore, 

§ 36.4812(c) is changed to allow a higher 

interest rate on a modified loan. The 

final rule in § 36.4815 is changed as 

described above to remove the one 

percent cap on increases and to clarify 

the date to be used in establishing the 

new maximum interest rate allowable 

on a modified loan. 

Comment: VA should increase the 

guaranty on a modified loan to match 

the percentage guaranteed at loan 

origination, rather than only allowing an 

increase in the amount of guaranty if it 

would otherwise provide less than 25% 

guaranty of the modified loan amount. 

VA Response: VA does not concur. 

The proposal in § 36.4314(g) to increase 

the guaranty on a modified loan to 25% 

of the loan amount was another effort to 

help modified VA-guaranteed loans 

qualify for resecuritization. Under the 

existing § 36.4314, the amount of the 

guaranty does not increase upon loan 

modification, which means that the 

percentage of guaranty, in effect, will 

decrease if the modified loan amount is 

greater than the original loan amount. 

This is important because all VAguaranteed loans greater than $144,000 

at origination have a maximum 25% 

guaranty, and the average new loan is 

often well above that amount. Under the 

existing § 36.4314 any such loan being 

modified would retain the same amount 

of guaranty, and thus have an effective 

percentage of guaranty less than 25% 

whenever the modified loan amount is 

greater than the original loan amount. 

This final rule in § 36.4815(h) (due to 

minor realignment of the section 

paragraphs) allows the guaranty amount 

on the modified loan to increase up to 

25% of the modified loan amount, 

subject to the maximum amount of 

guaranty allowable under the law. This 

should be sufficient to allow repooling 

in a new GNMA-insured security, and 

provide adequate risk sharing for the 

modified loan among VA, the holder, 

and GNMA. Therefore, no further 

revision is necessary, other than 

conforming language in §§ 36.4802(h) 

and 36.4824(a). 

Comment: VA should not require the 

same underwriting standards for loan 

modifications as those used at loan 

origination. 

VA Response: VA does not concur. 

VA’s existing § 36.4314(a) governing 

loan modifications requires that the 

holder determine that the borrower is a 

satisfactory credit risk, and the 

proposed rule did the same by 

referencing the criteria in § 36.4337. In 

establishing that the veteran is a 

satisfactory credit risk, there must be an 

analysis of the veteran’s income and 

obligations, as well as a review of the 

credit history. The proposed rule 

specifically addressed the issue of credit 

history with respect to the event(s) that 

led to the need for loan modification, 

and the criteria in § 36.4337 provide for 

the acknowledgement of compensating 

factors to address issues that might 

otherwise preclude the extension of 

credit. VA therefore believes the 

proposed regulation was sufficiently 

flexible to accommodate the assessment 

of the creditworthiness of borrowers 

who seek to modify their loans, and no 

changes are necessary in the final 

§ 36.4815(a). A specific comment 

requested that the use of ‘‘in-file’’ credit 

reports be allowed to reduce costs, and 

VA agrees this will be in accordance 

with the way its underwriting criteria 

have been interpreted in order to 

expedite processing. 

Comment: VA should make provision 

for other expenses of modification not 

being rolled into the new loan. 

VA Response: VA concurs. The 

existing § 36.4314 makes no provision 

for inclusion of any expenses in the 

modified loan amount. The proposed 

rule provided that only certain items 

could be included in the modified 

indebtedness. VA carefully reviewed the 

comments on this subject and is 

clarifying § 36.4815(e) so that it 

addresses all possible expenses of 

modification. In addition to allowing 

holders to include unpaid principal, 

accrued interest, and deficits in the 

taxes and insurance impound accounts 

in the modified indebtedness, holders 

will also be allowed to capitalize 

advances required to preserve their lien 

position, such as homeowner 

association fees, special assessments, 

water and sewer liens, etc. By limiting 

the items that may be included in the 

modified loan indebtedness, VA is 

attempting to protect both the interests 

of the Government and the veteran 

borrower by keeping the potential loanto-value (LTV) ratio as low as possible, 

while recognizing that it may often 

exceed 100%. In a case where 

modification is determined to be the 

best alternative early in the course of a 

default, there will be little else in the 

way of other fees and expenses that 

need to be paid. In such a case the 

borrower should be able to handle those 

other costs as a demonstration of 

creditworthiness, and after including 

the expenses allowed by the new final 

rule in the modified loan amount, the 

resulting LTV ratio may not be 

significantly different than at loan 

origination. If a default has continued 

for quite some time before modification 

is deemed feasible, then it is likely that 

the additional fees and costs may have 

accrued to a sum equal to one or more 

monthly mortgage payments. VA never 

envisioned that such fees and costs 

would be forgiven by the loan holder. 

Because the modification process 

involves some period when regular 

payments are not made on the loan, the 

borrower should be able to accumulate 

funds to cover the fees and costs 

accrued during the default, rather than 

having them rolled into the modified 

loan indebtedness. This is similar to the 

HUD requirements for modifications. As 

for any costs associated with processing 

the modification, VA expects that the 

incentives paid for successful 

modifications will offset such expenses, 

and VA will not allow any processing 

costs to be charged to the borrower as 

stated in the final § 36.4815(f). 

Comment: VA should not require that 

all current owners occupy the property 


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and should pay for a title insurance 

policy covering the modified loan. 

VA Response: VA agrees that 

occupancy should not be a requirement 

because the basic program requirements 

do not require continued occupancy in 

order for the guaranty to remain in effect 

(i.e., at some point a veteran borrower 

may move from the home securing the 

VA-guaranteed loan, but that does not 

invalidate the guaranty). Hence, 

§ 36.4815(a) will not require that all 

current owners occupy the property. 

As for title insurance policies, 

existing VA regulation § 36.4828(b) does 

require that holders obtain and retain a 

lien of proper dignity against the 

security property, and title insurance is 

often used at loan origination to satisfy 

this requirement. If a holder decides to 

require title insurance in connection 

with a loan modification to ensure its 

lien status, then VA would not object to 

a reasonable expense to the buyer for 

this service. Since in most cases a title 

insurance policy was obtained at loan 

origination, any insurance obtained at 

modification would only need to cover 

the period from loan origination to the 

date of modification, and it is expected 

that the cost for a title endorsement, or 

other form of insurance ‘‘update,’’

would be considerably less than the 

amount paid at loan origination. The 

final rule in § 36.4815(f) slightly revises 

the proposed rule to provide this 

clarification. 

Comment: VA should not require that 

all current owners agree to the 

modification. 

VA Response: VA does not concur. 

VA is retaining the provision in the new 

final rule in § 36.4815(a)(5) that all 

current owners must be obligated on the 

loan and participate in any 

modification, because it would not be 

fair to allow a change in the terms of a 

loan secured by a property without first 

notifying all parties with an ownership 

interest in that property and obtaining 

their agreement to the change. If a 

holder encounters unusual 

circumstances that lead it to believe a 

modification not meeting the 

requirements in § 36.4815(a)(1)–(6) 

would be beneficial to a veteran, then 

the case may be submitted to VA for 

prior approval. 

Comment: VA should not restrict the 

number of times that a loan may be 

modified because other agencies/ 

investors have no such limits. 

VA Response: Under § 36.4314, we 

permit three modifications to any one 

loan without prior VA approval, but 

also may allow unlimited modifications 

with prior VA approval. To that extent, 

we agree with the comment. 

However, to the extent that the 

comment requests unlimited 

modifications without VA review, VA 

does not concur because VA has a 

responsibility to ensure that loan 

modifications are fair to the borrower, 

and to protect the interests of the 

Government. The final rule in § 36.4815 

provides sufficient flexibility to address 

almost all situations that may arise. 

Although the rule cannot address every 

possible circumstance, it does 

adequately provide for loss mitigation 

by authorizing holders in advance to 

modify the vast majority of loans, while 

allowing holders to seek direct approval 

from VA for unusual cases that do not 

fit the general criteria described in the 

regulation. 

In order to avoid any 

misunderstandings about the 

authorizations granted, the final rule is 

modified by adding paragraph (j), which 

advises that the authority contained in 

§ 36.4815 does not create a right of a 

borrower to have a loan modified but 

simply authorizes the loan holder to 

modify a loan in certain situations 

without the prior approval of the 

Secretary. This is in keeping with past 

VA policy and court decisions over the 

years that have found that VA’s 

refunding program (§ 36.4820) is not a 

veteran’s benefit, but rather an 

administrative option established by the 

regulation to enable VA to assist a 

veteran when VA makes the 

determination that the option is 

appropriate. 

Comment: VA should include the 

words ‘‘or default is imminent’’ in § 36. 

4815(a)(1). 

VA Response: VA does not concur. 

The proposed rule in § 36.4314(a) 

included those words and the second 

supplemental notice proposed deleting 

them. As stated in the second 

supplemental notice, because VA is 

proposing a hierarchy of loss mitigation 

options for consideration within the 

new regulatory package, it would not be 

appropriate for a holder to consider 

modification of a loan until after first 

considering a repayment plan or a 

period of forbearance in order to allow 

loan reinstatement. Therefore, it would 

not normally be feasible for a holder to 

consider modification of a loan where 

default is only imminent, because that 

would not allow for prior consideration 

of a repayment plan or a period of 

forbearance. However, if an unusual 

circumstance arises, a holder may seek 

direct approval from VA for approval of 

a case that does not fit the general 

criteria. Therefore, the final rule in 

§ 36.4815(a)(1) will remain as proposed 

in the second supplemental notice. 

36.4817 Servicer Reporting 

Requirements 

Comment: VA should review its need 

for the requested data, should reduce 

the number of reportable items, and 

should eliminate the expedited, eventspecific reporting. 

VA Response: VA concurs for the 

most part. VA has carefully reviewed 

the report timing and the required items 

in the proposed rule in § 36.4315a in 

light of industry comments, 

consultation with information 

technology specialists, and review of the 

goals and operating procedures in VA’s 

new loan servicing environment, as well 

as the reporting requirements of HUD, 

Fannie Mae, and Freddie Mac. In 

conducting this review, VA identified 

and retained only those items for 

reporting that VA determined absolutely 

necessary to conduct proper oversight of 

servicer actions. That oversight must 

include review of servicer actions that 

are being newly delegated by VA, 

servicer actions that were previously 

reviewed by VA utilizing extensive 

paper reports provided by servicers, and 

servicer actions that in the past were 

reviewed only upon submission of 

various documentation from servicers. 

Providing this information 

electronically should greatly reduce the 

time required for interaction between 

VA and servicers via telephone and 

written communications that occurs 

under the present operating procedures. 

VA has determined that a number of 

items (including escrow disbursements 

and legal actions other than 

terminations) will not be included in 

the list of what must be reported to VA. 

We discuss these items later in this 

document, responding to specific 

comments. In addition, remaining items 

for loans not in default may all be 

reported on a monthly basis (i.e., no 

later than the seventh calendar day of 

the month following the month in 

which the event occurred), while most 

of the items related to loan defaults will 

also be required on a monthly basis, 

rather than within five business days of 

an event. VA is changing these events 

and most of the remaining events that 

must be reported expeditiously to 

require reporting within 7 calendar 

days, rather than 5 business days 

because most tracking systems are not 

equipped to calculate business days, but 

can easily handle computation of 

calendar days. 

As suggested by the comments, one 

item previously proposed to be reported 

on all loans, bankruptcy filing 

information, will only be required on 

loans reported in default. Only events 

denoting significant action on loans 


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reported in default (such as referral to 

an attorney to initiate foreclosure, 

establishment of a liquidation sale date, 

advice that a sale has been held, etc.) 

will still need to be reported within 

seven calendar days of the event. As in 

the past, holders will need to notify VA 

within 15 calendar days of a liquidation 

sale when they desire to convey a 

property to VA. 

An example of one item that was in 

the proposed rule § 36.4315a(c)(2) with 

a five business day reporting 

requirement was information on 

assumption of a VA-guaranteed loan. 

Existing rule § 36.4303 presently 

requires reporting of information on 

approved assumptions and 

unauthorized transfers of ownership. 

The first supplemental notice, which 

provided more detail on the specific 

events to be reported, required 

electronic reporting of transfer of 

ownership (i.e., an authorized 

assumption) and unauthorized transfer 

of ownership. In light of the comments, 

VA is not, under § 36.4817(c), requiring 

electronic reporting of unauthorized 

transfer of ownership, but is requiring 

electronic reporting of authorized 

transfer of ownership, which will be 

renamed accordingly. The final rule in 

§ 36.4803(l)(2) continues to require the 

holder to notify VA within 60 days of 

learning of an unauthorized transfer, as 

in the existing § 36.4303(l)(2). 

Comment: Information on the 

Servicemembers Civil Relief Act should 

only be required if that is a reason for 

delay of a foreclosure sale. 

VA Response: VA concurs with 

deleting the requirement to report this 

event. If the event causes delay in loan 

termination, then information about it 

may be reported as part of the claim 

event reporting. 

Comment: VA should allow reporting 

of multiple events occurring on a single 

loan during a monthly reporting period. 

VA Response: VA agrees with this 

comment and the file reporting format 

will allow for multiple events to be 

reported on each loan. 

Comment: The requirement to report 

substantial equity (25% or more) will 

necessitate a special title search and 

should be deleted, as it could require 

servicers to upgrade their systems to 

load junior lien information and to 

calculate the equity. 

VA Response: VA concurs with 

deleting this requirement. VA proposed 

this requirement in § 36.4315a(f) in 

order to ensure review of cases where 

substantial equity could exist. However, 

after reviewing the other data requested 

and the computing capabilities offered 

by its new computer system, VA 

decided it can instead use the other 

reported data to calculate its own 

estimate of equity and take appropriate 

action to ensure that veterans receive 

every reasonable opportunity to salvage 

that equity prior to loss through 

foreclosure. Therefore, there is no 

requirement in the final rule to calculate 

or report substantial equity. 

Comment: VA should consider using 

the HUD Single Family Default 

Monitoring System (SFDMS) file layout 

for reporting information, rather than 

requesting data that may not presently 

be available in many loan servicing 

systems. 

VA Response: VA considered this 

possibility, but decided it was not 

feasible. As VA began developing the 

computer system that it will use to 

receive data from servicers, VA obtained 

considerable information about HUD’s 

file layout and other systems from a 

leading provider of loan accounting and 

default tracking services, which is 

subcontracted to the contractor 

developing VA’s system. As that 

development continued, it was clear 

that the information VA needs to 

monitor servicer activities that have 

been delegated will require more details 

than those obtained by HUD’s SFDMS. 

This is due to different processes used 

by the agencies in conducting oversight, 

as well as making payments for 

incentives, acquisitions, and claims. VA 

has found that almost all of the data 

fields it is still seeking presently exist in 

most servicing systems. VA worked 

collaboratively with the providers of the 

most widely utilized loan servicing 

systems, and continued to reduce its 

data requirements as much as possible, 

in order to develop the easiest file 

layout and method of transmission for 

reporting. That layout has been posted 

on VA’s public Web site. Therefore, VA 

expects that the industry will be able to 

easily comply with its remaining 

reporting requirements in § 36.4817. 

Comment: VA should consider the 

potential cost to servicers of the 

additional reporting requirements, the 

time needed to implement those 

changes, and the security risks of 

transmitting additional information. 

VA Response: VA has carefully 

considered all of those issues in 

developing its final reporting rule in 

§ 36.4817. 

VA recognizes that few changes can 

be made without some costs. However, 

by using a fixed width flat file layout, 

VA is utilizing the simplest format 

currently available for reporting data. 

Moreover, VA has developed a 

methodology to reduce the amount of 

computations required by most loan 

servicing platforms when extracting 

data from their systems to report events 

to VA. This should also significantly 

reduce the cost of changes. There will 

be a few additional data fields that most 

servicing systems will need to add over 

time, and VA realizes that there will be 

some expenses to accomplish this, but 

the result will be data that is available 

electronically rather than manually. 

While there may be some 

programming costs incurred by servicers 

due to the additional reporting 

requirements in § 36.4817, VA expects 

that servicers will benefit in a number 

of ways. First, with the change to 

electronic reporting, servicers will 

greatly reduce their monthly expenses 

of reporting defaults and loan status 

updates via paper forms to VA, as well 

as reducing the time required by their 

employees to respond to written and 

telephone inquiries from VA. Second, 

the additional data required is for 

purposes of VA oversight, but that data 

should be of considerable value to 

servicers in tracking their internal 

servicing performance (for example, 

providing greater control over insoluble 

defaults and ensuring faster referral for 

termination, allowing closer review of 

payment plans to monitor performance, 

etc.). Third, having the data available 

electronically should eliminate many 

manual processes that are much more 

costly. VA expects there will be many 

more areas in which servicers will 

benefit from the availability of this new 

data. 

VA is well aware that considerable 

lead time is needed in order to change 

loan servicing systems to capture 

additional data. VA has worked with its 

contractor and subcontractor to develop 

a phased approach to implementation of 

its new, computer-based tracking 

system, the VA Loan Electronic 

Reporting Interface (VALERI). VA will 

implement VALERI over an 

approximately 11-month timeframe, 

with program participants grouped into 

nine segments that will ‘‘go live’’ on 

VA’s new system during designated 

phases of implementation. Each phase 

of implementation will incorporate time 

for data clean-up, system modifications, 

defect corrections, testing of interfaces 

and data transmission, and review of 

lessons learned before initiating the next 

phase. VA is also developing a Web 

portal to allow manual input of 

information that is not yet contained in 

major loan servicing systems, and for 

smaller servicers who may not utilize 

servicing system providers, although the 

ultimate goal is automated file transfers 

of all information. 

Data security is of the utmost 

importance to VA. Servicer suggestions 

to delete requests for sensitive 

information, such as Social Security 


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Numbers (SSNs), have been honored as 

much as possible. VA will not request 

SSNs as part of the basic monthly 

reporting as originally proposed. 

Instead, the only request for SSNs will 

be when servicers report them for new 

loan assumers. Those SSNs and all other 

data will be encrypted during 

transmission, appropriate protocols will 

be established with each servicer and its 

loan servicing system (or provider) to 

ensure secure transmissions, and access 

to the data at VA and its contractors will 

be limited to authorized users. 

36.4818 Servicer Tier Rankings—

Temporary Procedures 

Comment: In developing its tier 

rankings, VA should consider a 

methodology that is publicly 

disseminated and can easily be 

determined by servicers based on 

information available to them. VA 

should also incorporate some allowance 

for the purchase of delinquent loans 

from other servicers. 

VA Response: VA concurs to an 

extent. In our development of a 

proposed rule to implement the tier 

ranking system, we will consider the 

negative impact of the purchase of 

delinquent loans from other servicers. In 

the preamble to this proposed rule, VA 

indicated an intent to model its tier 

ranking system after that used by the 

Federal Home Loan Mortgage 

Corporation (FHLMC), also known as 

Freddie Mac. After VA has collected 

data under its new reporting 

requirements for six months, VA 

intends to review the data and develop 

the criteria for ranking servicers. Those 

criteria will then be published in the 

Federal Register for notice and 

comment. Whether the final rule that 

implements the tier ranking system is 

similar to the Freddie Mac model will 

depend upon the data we collect and 

the comments we receive. VA expects 

that the computer system for collecting 

data will be operational in 2008, and 

proposed rules for tier ranking will be 

published in calendar year 2009. 

Accordingly, the final rule in § 36.4818 

remains as proposed. 

Comment: VA should consider paying 

incentives at higher than the Tier II 

ranking during the first year, either due 

to some assessment of higher 

performance, or else based on a 

servicer’s participation in VA’s current 

Server Loss Mitigation Program (SLMP). 

VA Response: VA does not concur. 

The proposed rule § 36.4316(a) provided 

for four levels of tier rankings of 

servicers, with all servicers in Tier II for 

the initial ranking period as of the 

effective date of this rule. Because VA 

will have no published methodology for 

rating servicer performance during the 

first year of the new program, it would 

not be fair to attempt to determine 

which servicers should be paid at the 

Tier I or any other level, other than the 

initial Tier II rating for all servicers. 

While VA has had the SLMP in 

operation for many years, that program 

has not attempted to measure specific 

performance in a manner similar to the 

proposed Servicer Tier Ranking system, 

and the SLMP has only allowed two loss 

mitigation alternatives, and not the 

three home retention alternatives in the 

new program. Accordingly, it would not 

be fair to grant SLMP participants a 

higher tier ranking until the criteria for 

performance have been established. In 

any event, the proposed incentive 

payments for Tier II compare favorably 

to what VA allowed under SLMP, and 

have been adjusted slightly to account 

for the time elapsed since the initial 

publication of the proposed amounts, as 

well as changes by other agencies 

during that time. Therefore, the final 

rule in § 36.4818 remains as proposed. 

36.4819 Servicer Loss Mitigation 

Options and Incentives 

Comment: VA should simply adopt 

HUD (Department of Housing and Urban 

Development) loss mitigation 

procedures, fees, and reimbursement 

schedules, including incentive payment 

upon execution of a repayment plan, 

rather than waiting for final or partial 

completion of the plan to pay for the 

additional work required in analyzing 

data and establishing a plan. 

VA Response: VA does not concur. 

VA carefully considered loss mitigation 

programs developed by HUD, Fannie 

Mae, Freddie Mac, and private mortgage 

insurers as part of its BPR project. 

Although most had attractive features, 

no one program by itself addressed all 

the issues of loss mitigation in the 

manner VA felt was necessary to ensure 

proper assistance to veterans, while also 

rewarding loan servicers in an 

appropriate fashion for success in 

mitigating potential losses. 

As for the comment suggesting that 

incentives be paid upon execution of a 

repayment plan or special forbearance 

agreement because of the work involved 

in developing the plan, VA believes this 

is part of the normal activity of servicing 

a delinquent loan in order to determine 

whether it may be reinstated or whether 

the default is insoluble. While one 

comment was that loss mitigation efforts 

have historically been considered 

extraordinary servicing activity, VA 

believes that any servicer interested in 

properly managing its portfolio (and 

ensuring future servicing income) will 

exert reasonable efforts to obtain 

borrower financial information to 

determine the likelihood of loan 

reinstatement. Therefore, the incentives 

authorized under this section are in 

recognition of basic concepts customary 

in the loan servicing industry, and do 

not impose any new requirements or 

take away any substantive rights of 

program participants. However, paying 

an incentive simply for executing a 

repayment or forbearance agreement 

would not serve as a true incentive for 

developing a plan that is likely to 

succeed, but could instead encourage 

plans where success is improbable. 

Therefore, VA will not revise its 

program to make an incentive payable 

upon execution of a loss-mitigation 

alternative and the new final rules in 

§§ 36.4819 and 36.4822(e) and (f) 

(adjusted from (f) and (g)) remain 

generally as proposed. In order to clarify 

VA’s intended use of the options and 

alternatives, they are listed in 

§ 36.4819(b) from top to bottom in their 

preferred order of consideration (i.e., a 

hierarchy for review), but VA recognizes 

that individual circumstances may 

occasionally lead to ‘‘out of the 

ordinary’’ considerations. 

Comment: VA should provide a 

partial claim loss mitigation benefit 

similar to that offered by HUD. 

VA Response: VA does not concur. 

Under the HUD Partial Claim option, a 

mortgagee will advance funds on behalf 

of a mortgagor in an amount necessary 

to reinstate a delinquent loan (not to 

exceed the equivalent of 12 months 

PITI). The mortgagor will execute a 

promissory note and subordinate 

mortgage payable to HUD. Currently, 

these promissory or ‘‘Partial Claim’’

notes assess no interest and are not due 

and payable until the mortgagor either 

pays off the first mortgage or no longer 

owns the property. 

The issue of a similar VA partial 

claim program has been discussed for 

many years within Congress and at VA. 

However, Congress has not specifically 

authorized VA to develop such a 

program. As explained above, partial 

claim payments are actually payments 

on behalf of homeowners to their loan 

holders, but VA has no authorization to 

make direct loans to borrowers to cover 

their delinquent payments, so a partial 

claim program is not feasible. Instead, 

VA believes that by encouraging holders 

to consider extended repayment plans 

or even loan modifications, borrowers 

should receive the assistance necessary 

to retain ownership of their homes. 

Therefore, VA does not concur that a 

partial claim program should be 

instituted in the new final rule in 

§ 36.4819. 


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36.4820 Refunding of Loans in Default 

Comment: VA should establish a 

process to extend the deadline to allow 

for recording of documents. 

VA Response: VA does not concur. 

VA proposed in § 36.4318(c) to establish 

a deadline for submission of title 

documents on refunded loans, and to 

allow VA to impose a penalty for 

continued failure to comply with that 

deadline. VA must retain the option to 

take appropriate action when a holder 

has demonstrated a continued pattern of 

non-compliance with VA requests for 

timely delivery of documents that 

should be readily available, given the 

routine nature of loan transfers within 

the industry. VA has slightly modified 

the language to clarify that in 

accordance with the general rule, as 

applied throughout VA’s regulations, 

notice to VA is deemed to be effective 

as of the date that VA receives such 

notice; notice from VA to others is 

deemed effective as of the date that VA 

sends or transmits such notice. If a 

holder encounters an occasional delay 

due to failure by a former servicer to 

adequately document a servicing 

transfer, for example, then VA does not 

expect to take the action authorized by 

the proposed rule in § 36.4318(c). On 

the other hand, if a servicer routinely 

fails to properly perform its duties on 

behalf of the holder and consistently 

fails to timely provide documents that 

should be readily available, and if the 

servicer fails to correct its practices after 

VA provides notice, then the final rule 

in § 36.4820(c) enables VA to focus the 

attention of the servicer to its problems 

by temporarily withholding all 

payments until the specific deficiencies 

cited by VA have been resolved. 

Therefore, the ‘‘process’’ proposed by 

the comment is not necessary and the 

final rule in § 36.4820 remains as 

proposed. 

Comment: VA should make the title 

document requirements for refunding 

conform to the liquidation title package 

requirements. 

VA Response: VA does not concur. 

The proposed rule § 36.4318 required 

provision of all legal documents 

required to evidence proper loan 

transfer. Refunding of a loan is simply 

an assignment, rather than a liquidation, 

and therefore does not involve 

documents establishing ownership of a 

property. Accordingly, the title 

document requirements for refunding 

review and conveyance of properties 

must be different. The final rule 

§ 36.4820(c) remains as proposed. 

36.4821 Service of Process 

Comment: VA should define 

‘‘procedural papers’’ in more detail—for 

example, does this include pleadings, 

claim back up, etc.? 

VA Response: VA does not concur. 

The existing rule § 36.4319(a) requires 

that all ‘‘procedural papers’’ be 

provided to VA whenever a loan holder 

institutes suit or otherwise becomes a 

party in any legal or equitable 

proceeding brought on or in connection 

with the guaranteed or insured loan 

indebtedness, or involving title to, or 

other lien on, the security. The final rule 

§ 36.4821(a) requires only that VA and 

the United States Attorney be provided 

with process when the Secretary of 

Veterans Affairs is actually named as a 

party to a legal action, which is 

effectively the definition of ‘‘procedural 

papers’’ that must be delivered to VA. 

VA has no specific requirement for the 

retention of pleadings or other actions 

in the normal course of a loan 

termination, although the final rule in 

§ 36.4833 requires the holder to 

maintain a record of the amounts 

received on the obligation and 

disbursements chargeable thereto and 

the dates thereof, including copies of 

bills and receipts for such 

disbursements. This is the type of 

‘‘claim backup’’ referenced in 

§ 36.4824(d)(5), which provides that 

supporting documents will not be 

submitted with the claim under 

guaranty, but are subject to inspection 

as provided in § 36.4833. The final rule 

§ 36.4821 remains as proposed. 

36.4822 Loan Termination 

Comment: VA should adjust the 

timeframes for foreclosure and also 

establish automatic extensions for many 

different types of delays. 

VA Response: VA has reviewed all of 

the individual State timeframes for 

foreclosure in the proposed rule 

§ 36.4319a(a), has taken into 

consideration the specific information 

provided in the comments on the 

processes, and is adjusting the 

timeframes in the final rule. In addition, 

VA is slightly revising the final 

§ 36.4814(f)(2) and § 36.4824(a)(3)(ii), 

which describe the calculation of the 

maximum interest payable on a 

foreclosure, so that the calculation of 

the date to which interest will be paid 

shall include 210 calendar days from 

the due date of the last paid installment, 

in addition to the State calendar day 

timeframe for foreclosure. This is in 

response to comments requesting 

additional time for loss mitigation 

efforts. It equates to the present 

guideline used by VA in establishing 

interest cutoffs, in that it allows 180 

days from the date of last paid 

installment (which is typically the time 

that VA requests initiation to terminate 

a loan), plus 30 days (which reflects the 

time allowed for initiation of such 

action under the existing § 36.4319(f)), 

plus the actual time to complete 

foreclosure. The timeframes will be 

reviewed as appropriate and changes 

published in the Federal Register, and 

maintained throughout the year on a 

Web site under VA’s control, such as at 

http://www.homeloans.va.gov. The 

timeframes have been revised to reflect 

that the timeframes are in calendar days. 

The timeframes effective as of the date 

of this rule are as follows: 

Jurisdiction Procedure Final event 

Time frame 

(calendar 

days) 

Alabama ................................................... Non-Judicial ............................................. Sale ......................................................... 60 

Alaska ...................................................... Non-Judicial ............................................. Sale ......................................................... 120 

Arizona ..................................................... Non-Judicial ............................................. Sale ......................................................... 120 

Arkansas .................................................. Non-Judicial ............................................. Sale ......................................................... 90 

California .................................................. Non-Judicial ............................................. Sale ......................................................... 150 

Colorado .................................................. Non-Judicial ............................................. Sale ......................................................... 150 

Connecticut .............................................. Judicial ..................................................... Sale (Vesting Date) ................................. 180 

Delaware .................................................. Judicial ..................................................... Confirmation/Ratification ......................... 240 

District of Columbia ................................. Non-Judicial ............................................. Sale ......................................................... 60 

Florida ...................................................... Judicial ..................................................... Confirmation/Ratification ......................... 150 

Georgia .................................................... Non-Judicial ............................................. Sale ......................................................... 90 

Guam ....................................................... Non-Judicial ............................................. Sale ......................................................... 180 

Hawaii ...................................................... Judicial ..................................................... Confirmation ............................................ 240 

Idaho ........................................................ Non-Judicial ............................................. Sale ......................................................... 180 


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Jurisdiction Procedure Final event 

Time frame 

(calendar 

days) 

Illinois ....................................................... Judicial ..................................................... Sale ......................................................... 300 

Indiana ..................................................... Judicial ..................................................... Sale ......................................................... 270 

Iowa ......................................................... Judicial ..................................................... Sale ......................................................... 180 

Non-Judicial ............................................. Sale (Filing of Affidavit) ........................... 60 

Kansas ..................................................... Judicial ..................................................... Sale ......................................................... 150 

Kentucky .................................................. Judicial ..................................................... Confirmation ............................................ 150 

Louisiana ................................................. Judicial ..................................................... Sale ......................................................... 180 

Maine ....................................................... Judicial ..................................................... Sale ......................................................... 300 

Maryland .................................................. Non-Judicial ............................................. Ratification Date ...................................... 90 

Massachusetts ......................................... Judicial Order .......................................... Sale ......................................................... 180 

Michigan .................................................. Non-Judicial ............................................. Sale ......................................................... 90 

Minnesota ................................................ Non-Judicial ............................................. Sale ......................................................... 90 

Mississippi ............................................... Non-Judicial ............................................. Sale ......................................................... 90 

Missouri ................................................... Non-Judicial ............................................. Sale ......................................................... 60 

Montana ................................................... Non-Judicial ............................................. Sale ......................................................... 150 

Nebraska ................................................. Judicial ..................................................... Confirmation ............................................ 180 

Non-Judicial ............................................. Sale ......................................................... 120 

Nevada .................................................... Non-Judicial ............................................. Sale ......................................................... 150 

New Hampshire ....................................... Non-Judicial ............................................. Sale ......................................................... 90 

New Jersey .............................................. Judicial ..................................................... Sale ......................................................... 300 

New Mexico ............................................. Judicial ..................................................... Confirmation ............................................ 180 

New York—Western Counties 1 .............. Judicial ..................................................... Sale ......................................................... 240 

New York—Eastern Counties .................. Judicial ..................................................... Sale ......................................................... 270 

North Carolina ......................................... Non-Judicial ............................................. Sale ......................................................... 120 

North Dakota ........................................... Judicial ..................................................... Sale ......................................................... 240 

Ohio ......................................................... Judicial ..................................................... Confirmation ............................................ 360 

Oklahoma ................................................ Judicial ..................................................... Confirmation ............................................ 210 

Oregon ..................................................... Non-Judicial ............................................. Sale ......................................................... 150 

Pennsylvania ........................................... Judicial ..................................................... Sale ......................................................... 270 

Puerto Rico .............................................. Judicial ..................................................... Confirmation ............................................ 450 

Rhode Island ........................................... Non-Judicial ............................................. Sale ......................................................... 90 

South Carolina ......................................... Judicial ..................................................... Sale ......................................................... 180 

South Dakota ........................................... Judicial ..................................................... Sale ......................................................... 150 

Non-Judicial ............................................. Sale ......................................................... 90 

Tennessee ............................................... Non-Judicial ............................................. Sale ......................................................... 60 

Texas ....................................................... Non-Judicial ............................................. Sale ......................................................... 90 

Utah ......................................................... Non-Judicial ............................................. Sale ......................................................... 150 

Vermont ................................................... Judicial ..................................................... Sale ......................................................... 300 

Virginia ..................................................... Non-Judicial ............................................. Sale ......................................................... 60 

Virgin Islands ........................................... Judicial ..................................................... Sale ......................................................... 540 

Washington .............................................. Non-Judicial ............................................. Sale ......................................................... 150 

West Virginia ........................................... Non-Judicial ............................................. Sale ......................................................... 60 

Wisconsin ................................................ Judicial—Abandoned ............................... Confirmation ............................................ 210 

Judicial—Tenant Occupied ..................... Confirmation ............................................ 240 

Judicial—Owner Occupied ...................... Confirmation ............................................ 330 

Wyoming .................................................. Non-Judicial ............................................. Sale ......................................................... 90 

1Western Counties of New York are: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Livingston, Monroe, Niagara, Ontario, Orleans, Steuben, Wayne, Wyoming, and Yates. The remaining counties are in Eastern New York. 

As for automatic extensions of 

timeframes due to delays beyond the 

control of the holder, VA has been 

developing its system to accomplish 

this, based on event updates provided 

by holders. In determining those events 

that are beyond the control of the 

holder, VA considered the policy of 

HUD and the other comments provided. 

VA believes the largest factor causing 

delays in foreclosures is the filing of 

bankruptcy petitions, and by receiving 

information on such actions as part of 

the normal event reporting, VA will 

have on hand the information to 

automatically adjust the interest 

computation date when calculating the 

claim payable under § 36.4824. 

When VA receives notice of a 

bankruptcy filing, the system should 

automatically allow up to 180 calendar 

days to enable the servicer to obtain 

relief from the bankruptcy. VA believes 

this should be sufficient for most single 

filings and may cover some multiple 

bankruptcy cases. If more time is 

needed, the servicer can request 

approval from VA for additional time 

due to delays caused by multiple 

bankruptcy filings. 

VA believes that many of the other 

events mentioned in the comments as 

beyond the control of the holder are 

very infrequent and do not require a 

process to automatically account for 

those delays in claim calculation. First, 

this final rule provides VA the 

discretion to treat such delays as 

exceptions and then to allow the holder 

to justify charging additional interest if 

the delays extend completion of the 

liquidation past the timeframe 

calculated under § 36.4824(a)(3). Given 

this discretionary authority, we do not 

find it necessary to incorporate specific 

rules as to infrequent events. 

Furthermore, VA does not believe that 

additional interest should be payable for 

delays that are generally within the 

control of the loan holder, such as title 

issues or missing documents that the 

holder should have resolved in the 

normal course of business, rather than 

waiting until termination to seek 

resolution. However, we recognize that 

some delays may require detailed 


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review and exchange of information to 

establish whether they were beyond the 

control of the holder. VA’s regulations 

are flexible enough to allow for this. 

Comment: VA should eliminate the 

requirement for a promissory note in 

connection with deeds-in-lieu of 

foreclosure and compromise sales. 

VA Response: VA concurs. VA 

reviewed the proposed rule, 

§ 36.4319a(f)(v), (g)(vi), and (h), which 

required a promissory note in 

connection with certain deeds-in-lieu of 

foreclosure and compromise sales, as 

well as the comments concerning the 

additional work required in calculating 

whether a promissory note would be 

required, and the work necessary to 

actually obtain such a note. Because the 

purpose in authorizing deeds and 

compromise sales is to expedite the 

processing of such alternatives, and 

because VA has the authority in 

§ 36.4826(e)(1) to approve a complete 

release of the Secretary’s right to collect 

a debt related to payment of a claim 

under the loan guaranty, and the law 

governing the program provides in 38 

U.S.C. 3703(e) that the majority of 

veterans will not be liable for such 

indebtedness following loan default, VA 

has decided to automatically determine 

that the cooperation of the borrower in 

completing a deed-in-lieu of foreclosure 

or a compromise sale is sufficient to 

justify VA waiver of collection of any 

indebtedness. Accordingly, the final 

version of § 36.4822 does not require the 

holder to obtain a promissory note in 

connection with a deed-in-lieu of 

foreclosure or a compromise sale. 

VA has also removed the 

requirements proposed in 

§§ 36.4319a(f)(iii) and 36.4319a(g)(iv) 

that the holder determine that the 

estimated guaranty payment following a 

deed-in-lieu of foreclosure or 

compromise would not exceed the 

estimated payment if the loan 

proceeded to foreclosure. VA believes 

there will almost always be cost savings 

associated with deeds-in-lieu of 

foreclosure and compromise sales, and 

therefore will not require the holder to 

perform an additional calculation as 

part of the approval process. Cost 

savings will typically accrue from the 

reduced cost of a deed versus a 

foreclosure action, the likelihood that 

the borrower will be more cooperative 

in vacating a home after giving a deed 

instead of being foreclosed upon, and 

the probability that the home will be in 

better condition after the borrower gives 

a deed and arranges an orderly transfer 

of custody to the holder or VA’s agent, 

rather than the property being 

abandoned due to foreclosure and 

subject to possible vandalism. In the 

case of a compromise claim, VA’s 

requirement that the credit to the 

indebtedness equals or exceeds the net 

value of the property will generally 

ensure cost savings as compared to 

foreclosure, but even in the rare case 

when this does not occur, the benefit to 

the veteran of avoiding foreclosure 

through a private sale of the home is 

more than enough to justify acceptance 

of a compromise offer. The final rule in 

§ 36.4822 incorporates the changes 

discussed in this section along with 

those not changed from the proposed 

rule. 

36.4823 Election to Convey Security 

Comment: VA should clarify the 

procedures and implications of debt 

reductions used to ensure that a 

property is eligible for conveyance to 

VA. 

VA Response: VA has revised the 

applicable portions of the new final rule 

in § 36.4823 to clarify the procedures to 

be followed to reduce debts in order to 

gain the right to convey to VA 

properties acquired at liquidation sales. 

Under the law (38 U.S.C. 3732(c)), if the 

calculation by the holder shows that the 

net value is less than the unguaranteed 

portion of the loan (i.e., the eligible 

indebtedness minus VA’s maximum 

claim payable under the guaranty), then 

the property may not be conveyed to 

VA. VA has had a longstanding policy, 

however, of allowing holders to bring 

such a conveyance into statutory 

compliance by ‘‘buying down’’ the debt 

to a level where the unguaranteed 

portion of indebtedness is less than the 

net value. In these situations, holders 

must waive any liability a veteran might 

have otherwise with regard to the 

amount of indebtedness bought down. 

This policy would have continued 

under the proposal, but it would have 

been the holder, rather than VA, that 

was responsible for calculating the buydown, if any, prior to a liquidation sale. 

VA received a number of comments 

expressing concern about the impact 

that any miscalculation would have on 

the holder, the servicer, and the veteran, 

and has therefore revised the final rule 

in § 36.4823, so that a holder may wait 

until after the liquidation sale to 

determine the amount that must be 

bought down. To make sure the veteran 

is fully informed, the holder will be 

required to send the borrower notice no 

later than 15 calendar days after receipt 

of VA’s guaranty claim payment that the 

indebtedness in excess of the net value 

and VA’s claim payment has been 

waived. In addition, VA is revising the 

final rule in § 36.4838 to designate the 

conveyance as of an administrative or 

procedural nature to allow for 

reasonable accommodations. 

Comment: VA should withdraw the 

proposal to require three year warranties 

when conveying property to VA, due to 

the additional burden this would place 

on servicers and foreclosure attorneys, 

who would bear the cost of insuring title 

to the property without receiving 

adequate compensation. 

VA Response: VA concurs. VA’s goal 

in the proposed § 36.4320(c) was to 

standardize and reduce the 

documentation required as evidence of 

acceptable title on properties conveyed 

to the Secretary. The comments received 

to the proposed rule provided 

additional insight on many aspects of 

the present processes that were not 

clearly evident to VA previously. For 

example, in many jurisdictions VA was 

paying for title insurance policies, but 

had little occasion to seek indemnity 

under those policies and believed that 

purchasing title policies was not cost 

effective. However, the comments 

disclosed that many title issues were 

resolved through the title examination 

required prior to issuance of the 

policies. Moreover, many attorneys 

commented that the compensation 

received for their participation in the 

sale of title insurance served to reduce 

the cost they charged for foreclosure 

services. It appears that if VA were to 

eliminate title insurance as an option to 

establish acceptability of title on 

properties conveyed to VA, foreclosure 

attorney fees would increase and many 

title issues would not be discovered 

until well after conveyance, which 

could cause considerable interruption in 

VA’s resale efforts. Accordingly, VA is 

withdrawing the proposed requirement 

for a three year warranty, and will 

instead attempt to standardize 

document requirements nationwide as 

much as possible, which in most cases 

will still include an owner’s title 

insurance policy issued after loan 

termination in the name of the Secretary 

along with minimal other documents, 

such as the state-specific foreclosure 

document, the original deed of trust or 

mortgage, special warranty deed from 

the holder to the Secretary, an original 

or a copy of mortgagee’s title policy, 

loan assignments, and appointment of 

substitute trustee. This information is 

maintained at the RLC level and will 

continue to be available in the same 

manner. Accordingly, the proposal to 

change § 36.4320(c) to require a three 

year warranty on a conveyance is not 

included in the new final rule § 36.4823. 

Comment: VA should require and pay 

for a title insurance policy in 

connection with a deed-in-lieu of 

foreclosure. 


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VA Response: VA concurs. VA agrees 

that requiring a title policy in 

connection with a deed-in-lieu of 

foreclosure is necessary and would 

expedite the process of conveying a 

property to VA and the subsequent 

marketing of that property. Therefore, 

VA is revising the final rule in 

§ 36.4823(c)(4) to provide 

reimbursement for a title policy when a 

property is subsequently conveyed to 

VA by deed-in-lieu of foreclosure. 

36.4824 Guaranty Claims; Subsequent 

Accounting 

Comment: VA should incorporate in 

its rule that any errors found in post 

claim audits will not be extrapolated 

over a servicer’s prior claim 

submissions in an effort to recover claim 

payments that have not been actually 

identified. 

VA Response: VA does not concur, as 

VA does not believe that such a 

restrictive rule in § 36.4824 would be in 

the best interests of the taxpayers 

supporting the VA home loan program. 

Extrapolation is basically the practice of 

reviewing a small sample of cases, 

determining an error rate, and then 

applying that error rate across an entire 

population of claims. While VA does 

not expect to routinely extrapolate in 

such a manner, this is a generally 

accepted tool of auditing that must be 

preserved. 

Before VA would reach the point of 

exercising this option, it would first 

follow-up with a holder/servicer to 

address errors that occurred on a routine 

basis, and would provide extensive 

notice of errors discovered that might 

lead to the extrapolation of errors across 

all claim submissions. VA does not 

expect that extrapolation will be applied 

except in the most egregious cases. 

Hence, we make no changes based on 

this comment. 

Comment: VA should not impose a 

one-year deadline for filing claims, or 

should at least make the penalty more 

reasonable, because the penalty far 

outweighs the impact of late filing. In 

addition, VA should wait until the end 

of any redemption period before starting 

the one-year deadline. 

VA Response: VA does not concur. 

The proposed rule § 36.4321(d) required 

submission of a claim under guaranty 

no later than one year after the 

liquidation sale. To ensure accuracy in 

the Federal budget process, VA needs to 

know within a reasonable time that 

specific loans for particular cohort years 

have been terminated and that costs will 

be incurred. With the highly automated 

processes that are being implemented, 

VA believes that holders should be able 

to ascertain all necessary information 

and submit a claim within one year of 

the completion of the loan termination 

process, even if a redemption period 

exists in the particular jurisdiction. 

However, if there is some valid reason 

why an individual claim is not timely 

submitted, we will reserve the right to 

pay a late claim. Accordingly, VA 

§ 36.4838(a)(3) includes the failure to 

timely file a claim as a provision of an 

administrative or procedural nature that 

may be waived by an official named in 

§ 36.4845. The final rules in § 36.4321(f) 

and § 36.4824(d) retain the requirement 

to submit a claim within one year after 

the liquidation sale. VA § 36.4335 is not 

modified to include failure to timely file 

a claim as a provision of an 

administrative or procedural nature 

because all servicers will be under the 

new subpart F requirements in less than 

one year, so the need to grant relief 

under subpart B will not be necessary. 

36.4828 Partial or Total Loss of 

Guaranty or Insurance 

Comment: The proposed rules did not 

discuss any plans to implement 

penalties for late or faulty reporting. 

VA Response: The ability to impose 

penalties already exists. Final rule 

§ 36.4828, based on current § 36.4325, 

allows VA to adjust claims to the extent 

that any failure to comply with a 

regulation increases the ultimate 

liability of the Secretary. Therefore, no 

further provision is needed to establish 

VA’s right to impose a penalty when a 

servicer’s failure causes increased 

liability to VA. The new final rule 

§ 36.4828(b) is slightly different from 

the existing § 36.4325(b) in order to 

improve its structure. In addition, while 

the proposed rule stated that in 

§ 36.4325 two citations (§ 36.4325(b)(5) 

and (6)) would be deleted and replaced 

by one new citation for electronic 

reporting, in the final rule § 36.4828(b), 

the one citation for electronic reporting 

(§ 36.4828(b)(4)) actually replaces what 

are three citations in the existing 

§ 36.4325(b)(4), (5) and (6). 

36.4833 Maintenance of Records 

Comment: Servicers should not be 

required to submit audit documentation 

to VA in a particular imaged format as 

a condition of doing business with VA. 

VA Response: VA concurs. VA did 

not intend to require a specific imaging 

format, but inadvertently did so by 

citing only three specific formats in the 

proposed rule. This has been changed in 

the final § 36.4833 to provide that 

required documents sent to VA 

electronically be in .jpg, .gif, .pdf, or a 

similarly widely accepted format. 

Comment: Servicers should not be 

required to provide imaged documents 

for audits, as this will greatly increase 

their costs. 

VA Response: VA does not concur. 

Servicers are presently required by VA 

policy and the authority in § 36.4330 to 

submit paper documentation with all 

claims under the guaranty. That 

involves copying all documents related 

to payments received on a loan, 

disbursements chargeable thereto, and 

the dates thereof, including copies of 

bills and receipts for such 

disbursements, which may require 

conversion of electronic documents to 

paper form. VA proposed instead in 

§ 36.4321(d) that servicers submit the 

information in those documents in an 

electronic format when filing a claim, 

while retaining the supporting 

documents in the event of a post-claim 

audit by VA. Post-claim audits by VA 

will typically involve only a percentage 

sampling of submitted claims, so the 

number of cases for which 

documentation will eventually be 

submitted to VA will be greatly reduced. 

VA does not specify how servicers must 

retain documents in order to comply 

with this or any other regulatory and 

statutory requirements, but will allow a 

reasonable period of time for access to 

the documents upon request. The 

proposed requirement to submit 

electronically only the documents on 

cases selected for post-audit should be 

much less of a burden on servicers, 

because even if converting a document 

to electronic format may be more costly 

than making a paper copy, the overall 

reduction in the number of documents 

that must be submitted should result in 

lower costs. Therefore, VA finds no 

basis for changing the proposal in the 

final rule § 36.4833. 

Comment: The proposed exception to 

allow submission of paper documents 

based on size of servicing portfolio is 

confusing. 

VA Response: VA concurs and has 

deleted this exception in the final rule 

§ 36.4833. The fast-paced growth in 

technology has resulted in its wider 

availability at ever decreasing costs, so 

the requirement for electronic 

submission of documents to VA will not 

create a significant burden for a servicer 

of any size. 

VA has also corrected erroneous dates 

that appeared in the proposed 

§ 36.4330(c). When the rule was being 

drafted it was hoped that it could be 

effective October 1, 2005, and that date 

was intended to apply to both types of 

documentation required, even though 

the second date was shown as October 

1, 2004. In the final § 36.4833 both dates 

are shown as the effective date of the 

new rule. 


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36.4836 [Reserved] 

The corresponding § 36.4333 titled 

‘‘Satisfaction of indebtedness’’ will not 

be included in subpart F. This is 

because the new final § 36.4817(c)(1) 

requires electronic reporting of loans 

paid in full, thereby obviating the need 

for instructions on paper notification of 

payment in full. This § 36.4836 will be 

shown as reserved for future use. 

36.4838 Supplementary 

Administrative Action 

In response to several comments 

about the need for discretion on the 

exercise of new authorities in the new 

subpart F, VA is including in the new 

final § 36.4838 additional items of an 

administrative or procedural nature, 

including some which replace existing 

items in the corresponding section of 

subpart B. 

36.4848 Servicer Appraisal Processing 

Program 

Comment: Servicers expressed 

concern about accepting the risk that 

VA might later determine that values 

rendered by the Servicer Appraisal 

Processing Program (SAPP) were too 

high and then adjust claims or even 

reconvey properties. Servicers also 

expressed concern that they would be 

unable to employ sufficient numbers of 

staff review appraisers, and instead 

want to rely only on values provided by 

VA-approved appraisers. 

VA Response: VA believes that 

servicers should not be concerned about 

these matters. VA presently prescribes 

uniform qualifications for appraisers in 

accordance with 38 U.S.C. 3731. 

However, that same section requires 

review by VA of appraisal reports prior 

to determining the reasonable value of 

a property that is the security for a VAguaranteed loan. Public Law 100–198, 

enacted December 21, 1987, authorized 

the Lender Appraisal Processing 

Program (LAPP), which enables VA to 

permit qualified lenders to review loanorigination appraisals, ensure adherence 

to VA-published minimum property 

requirements, and set the reasonable 

value of properties for purposes of 

determining the maximum loan VA 

could guarantee. 

VA’s experience is that delegating 

appraisal reviews to lenders under the 

LAPP has worked well and often 

expedites the loan-origination process. 

About 95% of all new appraisals are 

reviewed under LAPP. The number of 

appraisals required for loan liquidation 

purposes is significantly lower than the 

number related to new loan 

originations, amounting to about 15% of 

total appraisals reviewed. With lenders 

employing enough qualified staff 

appraisal reviewers to handle 95% of 

new appraisals, there should be no 

shortage of reviewers available to 

handle the much lower volume of 

liquidation appraisals. 

Servicers should have no concerns 

about VA reconveying properties due to 

value increases made by staff appraisal 

reviewers, as VA regulations do not 

provide for such a practice. As 

contained in the proposed rule, the final 

rule in §§ 36.4344a(d) and 36.4848(d) 

does retain the right for VA to be 

indemnified for additional loss caused 

by an increase in value made by the 

servicer that was unwarranted, or 

arbitrary and capricious. The final rule 

in §§ 36.4344a(h) and 36.4848(h) also 

retains provisions to withdraw, for 

proper cause, authority of servicers to 

determine reasonable values, such as 

determination of a pattern of appraisal 

reviews being conducted in a careless or 

negligent manner, especially after being 

called to the servicer’s attention. Such 

withdrawal of authority would simply 

return servicers to the position of 

waiting for VA staff appraisers to review 

liquidation appraisals and establish 

reasonable values, rather than being able 

to more quickly establish fair market 

value and determine the net value of the 

property for liquidation purposes. 

Accordingly, we make no changes based 

on this comment. 

36.4850 Servicing Procedures for 

Holders 

Comment: VA should adjust the 

timeframe for reporting abandoned 

properties in relation to the date on 

which inspections will be required. VA 

should also retain the 15-day reporting 

schedule rather than the proposed 5-day 

rule. 

VA Response: VA concurs. In the 

proposed § 36.4346(i) VA intended 

simply to ensure prompt notice when a 

holder learns of an abandoned property, 

which could occur prior to verification 

through a required property inspection. 

However, VA agrees that the majority of 

notices about abandoned property will 

be the result of property inspections, 

which will not typically be received 

until a loan is at least 60 days 

delinquent, and is therefore changing 

the final rule accordingly. Reporting of 

this event will fall under the provisions 

of the final rule in 38 CFR 

36.4817(c)(10), which will require 

reporting no later than the 7th calendar 

day of the month following the month 

the occupancy status change was 

verified. 

Comment: VA should reconsider the 

requirements related to abandonment 

and extraordinary waste or hazard. 

VA Response: VA concurs. Since the 

time of the proposed rule change to 

§ 36.4346(i)(2), events such as Hurricane 

Katrina have demonstrated the difficulty 

in mandating loan termination due to 

the appearance of the potential for 

extraordinary waste. VA has even issued 

guidance to holders following Katrina to 

exercise additional caution before 

deciding that a property in a major 

disaster area could be subject to 

additional waste because of an apparent 

lack of care, since many people were 

displaced without the resources to 

quickly return and attempt repairs to 

their homes. Therefore, VA is deleting 

that part of the proposed rule that 

would have added ‘‘extraordinary waste 

or hazard’’. 

The first two sentences of the existing 

rule § 36.4346(i)(2) describe actions to 

be taken when a holder obtains 

information that ‘‘indicates’’ a property 

may be abandoned, and the proposed 

rule change was primarily to conform 

reporting requirements to the proposed 

rule § 36.4315a. VA believes that while 

the term abandoned may be somewhat 

subjective, there are obvious situations, 

such as when the borrower mails in the 

keys and advises the holder that no 

further payments will be made, in 

which a holder will have no doubt that 

the property is abandoned. The existing 

rule calls for action that should lead to 

confirmation of whether or not a 

property is actually abandoned. Thus, 

the final rule in § 36.4850(i)(2) will 

retain the mandate to report 

abandonment in accordance with 

§ 36.4817(c)(10) as a change in 

occupancy status and initiate 

termination when abandonment has 

been confirmed. 

Comment: In changing the 

requirement for provision of an annual 

statement for income tax purposes, VA 

should be consistent with Internal 

Revenue Service (IRS) requirements. 

VA Response: VA concurs. It was 

VA’s intent in the proposed revision to 

§ 36.4346(c) to change from 60 days to 

30 days to achieve that consistency. 

However, the comment pointed out that 

IRS requires annual statements be sent 

no later than January 31st of each year, 

so VA’s requirement of 30 days would 

be different. Accordingly, the final rule 

§ 36.4850(c) has been changed to require 

an annual statement be provided before 

February 1st of each calendar year. 

36.4979 Payment of Insurance 

As with § 36.4809, this requires a 

conforming amendment in the final 

rule. The existing rule in § 36.4374 

refers to a time period specified in 

§ 36.4316, which is three months. 

Because reporting and processing of 


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defaults are handled differently in the 

new rules in §§ 36.4800 through 

36.4893, inclusive, there is not a similar 

waiting period specified in § 36.4818. 

Therefore, the final rule in § 36.4879 

will replace the reference to another 

section with the actual time frame of 

three months. There is a similar 

situation with a reference in § 36.4374 

to reporting under § 36.4317, and in this 

case the final rule in § 36.4879 will refer 

to the applicable reporting required by 

§§ 36.4817 and 36.4850. 

Restructuring of and Authority for Part 

36 

In order to make it easier to refer to 

the new §§ 36.4800 through 36.4893, 

inclusive, VA is designating those 

sections as subpart F of part 36. VA is 

grouping other portions of part 36 into 

appropriate subparts as shown in this 

notice. Also, to make it easier to identify 

the appropriate authority for each 

section of the new subpart F, VA is 

revising the citation for the authority of 

part 36 to refer only to the general 

authorities, and is including the specific 

appropriate authority for each section in 

the new subpart F. 

Administrative Procedures Act 

Pursuant to 5 U.S.C. 553(d)(3), we 

find that there is good cause to dispense 

with the 30-day delayed effective date 

requirement. The public has received 

extensive knowledge of the changes 

effected by the new rules through the 

initial publication of the proposed rules 

and two supplemental notices of 

revisions to the initial proposals, and 

VA has received advice that the public 

is anxious for the new rules to be 

effective. 

One of the primary changes in the 

new rules is the implementation of 

electronic reporting of information on 

VA-guaranteed home loans. Due to the 

extensive time required for information 

technology system changes, industry 

participants in the VA home loan 

program initiated development work on 

the system changes soon after the first 

supplemental notice provided sufficient 

details. The first industry segment 

under the planned phased 

implementation is prepared to begin 

operations under the proposed changes 

immediately upon publication of the 

new rules, and any delays in 

implementation would create financial 

burdens as they continue to operate 

under the old rules while maintaining 

additional system capability for 

operations under the new rules. 

Moreover, all other industry segments 

will not be subject to these electronic 

reporting rules for more than 30 days 

after these rules become effective, and 

therefore the 30-day delayed effective 

date would not affect any segment other 

than the first. VA is also prepared to 

accept electronic reporting upon 

publication of the new rules, and 

veterans will begin to benefit from the 

new rules as soon as they are effective. 

Any delays will be financially costly to 

the Government, both in terms of 

additional contracting support required 

until final implementation, and with 

respect to the loss of savings expected 

for the program under the new rules. 

The changing economic situation, 

with increasing numbers of foreclosures 

nationwide, also contributes to the need 

for immediate implementation of the 

new rules for several reasons. The new 

environment for servicing VAguaranteed home loans created by these 

rules will encourage earlier additional 

loss mitigation efforts by private 

servicers in place of the present 

Government outreach at later stages of 

loan default. These earlier efforts should 

result in more veterans being able to 

reinstate delinquent loans and avoiding 

foreclosure. This will also result in 

fewer claims paid by VA, while the 

claims actually paid will be less under 

the new rules due to the standardized 

timeframes for completing termination 

in those cases where it is unavoidable. 

In addition, the increased legal fees for 

termination allowed under the new 

rules will ensure that VA-guaranteed 

loans receive the same priority as those 

of other guarantors, insurers and 

investors in the termination process, 

thereby avoiding the costs associated 

with undue delays. 

Due to the issues described above, it 

is imperative that the new rules become 

effective immediately upon publication. 

Accordingly, there is good cause under 

section 553(d)(3) to dispense with the 

30-day delayed effective date 

requirement. 

Paperwork Reduction Act of 1995 

This final rule contains provisions 

that constitute collections of 

information under the Paperwork 

Reduction Act (44 U.S.C. 3501–3521). In 

the preamble of the proposed rule, we 

described the information collections 

that would need OMB approval and 

provided a comment period. OMB has 

approved those proposed collections 

and has assigned control numbers 2900–

0021, 2900–0045, 2900–0112, 2900–

0362, and 2900–0381. 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. 

Unfunded Mandates 

The Unfunded Mandates Reform Act 

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

agencies prepare an assessment of 

anticipated costs and benefits before 

issuing any rule that may result in an 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million or more 

(adjusted annually for inflation) in any 

given year. This final rule will have no 

such effect on State, local, and tribal 

governments, or on the private sector. 

Executive Order 12866 

Executive Order 12866 directs 

agencies to assess all costs and benefits 

of available regulatory alternatives and, 

when regulation is necessary, to select 

regulatory approaches that maximize 

net benefits (including potential 

economic, environmental, public health 

and safety, and other advantages; 

distributive impacts; and equity). The 

Executive Order classifies a ‘‘significant 

regulatory action,’’ requiring review by 

the Office of Management and Budget 

(OMB) unless OMB waives such review, 

as any regulatory action that is likely to 

result in a rule that may: (1) Have an 

annual effect on the economy of $100 

million or more or adversely affect in a 

material way the economy, a sector of 

the economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local, or tribal 

governments or communities; (2) create 

a serious inconsistency or otherwise 

interfere with an action taken or 

planned by another agency; (3) 

materially alter the budgetary impact of 

entitlements, grants, user fees, or loan 

programs or the rights and obligations of 

recipients thereof; or (4) raise novel 

legal or policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. 

The economic, interagency, 

budgetary, legal, and policy 

implications of this final rule have been 

examined, and it has been determined 

to be a significant regulatory action 

under Executive Order 12866. 

Regulatory Flexibility Act 

The Secretary hereby certifies that 

this final rule would 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 et seq. The 

vast majority of VA loans are serviced 

by very large financial companies. Only 

a handful of small entities service VA 

loans and they service only a very small 

number of loans. This rule, which only 

impacts veterans, other individual 


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6308 Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 

obligors with guaranteed loans, and 

companies that service VA loans, will 

have very minor impact on a very small 

number of small entities servicing such 

loans. Therefore, pursuant to 5 U.S.C. 

605(b), this rule is exempt from the 

initial and final regulatory flexibility 

analysis requirements of sections 603 

and 604. 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance program number and title for 

this program is 64.114, Veterans 

Housing Guaranteed and Insured Loans. 

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: October 24, 2007. 

Gordon H. Mansfield, 

Acting Secretary of Veterans Affairs. 

Editorial Note: This document was 

received at the Office of the Federal Register 

on January 23, 2008. 

■ 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 is 

revised to read as follows: 

Authority: 38 U.S.C. 501 and as otherwise 

noted. 

■ 2. Remove the undesignated center 

heading preceding § 36.4201 and the 

authority citation directly below that 

center heading. 

■ 3. A heading for subpart A is added 

preceding § 36.4201 to read as follows: 

Subpart A—Guaranty of Loans to 

Veterans to Purchase Manufactured 

Homes and Lots, Including Site 

Preparation 

* * * * * 

■ 4. Remove the undesignated center 

heading preceding § 36.4300 and the 

authority citation directly below that 

center heading. 

■ 5. A heading for subpart B is added 

preceding § 36.4300 to read as follows: 

Subpart B—Guaranty or Insurance of 

Loans to Veterans 

* * * * * 

■ 6. Revise § 36.4313(b)(5) to read as 

follows: 

§ 36.4313 Advances and other charges. 

* * * * * 

(b) * * * 

(5)(i) Fees for legal services actually 

performed, not to exceed the reasonable 

and customary fees for such services in 

the State where the property is located, 

as determined by the Secretary. 

(ii) In determining what constitutes 

the reasonable and customary fees for 

legal services, the Secretary shall review 

allowances for legal fees in connection 

with the foreclosure of single-family 

housing loans, including bankruptcyrelated services, issued by HUD, Fannie 

Mae, and Freddie Mac. The Secretary 

will review such fees annually and, as 

the Secretary deems necessary, publish 

in the Federal Register a table setting 

forth the amounts the Secretary 

determines to be reasonable and 

customary. The table will reflect the 

primary method for foreclosing in each 

state, either judicial or non-judicial, 

with the exception of those States where 

either judicial or non-judicial is 

acceptable. The use of a method not 

authorized in the table will require prior 

approval from VA. This table will be 

available throughout the year on a VA 

controlled Web site, such as at 

www.homeloans.va.gov. 

(iii) If the foreclosure attorney has the 

discretion to conduct the sale or to 

name a substitute trustee to conduct the 

sale, the combined total paid for legal 

fees under paragraph (b)(5)(i) of this 

section and trustee’s fees pursuant to 

paragraph (b)(4) of this section shall not 

exceed the applicable maximum 

allowance for legal fees established 

under paragraph (b)(5)(ii) of this section. 

If the trustee conducting the sale must 

be a Government official under local 

law, or if an individual other than the 

foreclosing attorney (or any employee of 

that attorney) is appointed as part of 

judicial proceedings, and local law also 

establishes the fees payable for the 

services of the public or judicially 

appointed trustee, then those fees will 

not be subject to the maximum 

established for legal fees under 

paragraph (b)(5)(ii) of this section and 

may be included in the total 

indebtedness. 

* * * * * 

■ 7. Amend § 36.4321 by adding 

paragraph (f) immediately before the 

authority citation at the end of the 

section to read as follows: 

§ 36.4321 Computation of guaranty claims; 

subsequent accounting. 

* * * * * 

(f)(1)(i) Except as provided in 

paragraph (f)(1)(ii) of this section, a 

holder shall file a claim for payment 

under the guaranty no later than 1 year 

after the completion of the liquidation 

sale. For purposes of this section, the 

liquidation sale will be considered 

completed when: 

(A) The last act required under State 

law is taken to make the liquidation sale 

final, but excluding any redemption 

period permitted under State law; 

(B) If a holder accepts a voluntary 

conveyance of the property in lieu of 

foreclosure, the date of recordation of 

the deed to the holder or the holder’s 

designee; or 

(C) In the case of a sale of the property 

to a third party for an amount less than 

is sufficient to repay the unpaid balance 

on the loan where the holder has agreed 

in advance to release the lien in 

exchange for the proceeds of such sale, 

the date of settlement of such sale. 

(ii) With respect to any liquidation 

sale completed prior to February 1, 

2008, all claims must be submitted no 

later than February 2, 2009. 

(2) If additional information becomes 

known to a holder after the filing of a 

guaranty claim, the holder may file a 

supplemental claim provided that such 

supplemental claim is filed within the 

time period specified in paragraph (f)(1) 

of this section. 

(3) No claim under a guaranty shall be 

payable unless it is submitted within 

the time period specified in paragraph 

(f)(1) of this section. 

(4) In the event that VA does not 

approve payment of any item submitted 

under a guaranty claim, VA shall notify 

the holder what items are being denied 

and the reasons for such denial. The 

holder may, within 30 days after the 

date of such denial notification, submit 

a request to VA that one or more items 

that were denied be reconsidered. The 

holder must present any additional 

information justifying payment of items 

denied. 

* * * * * 

■ 8. Add § 36.4344a to read as follows: 

§ 36.4344a Servicer appraisal processing 

program (SAPP). 

(a) Delegation of authority to servicers 

to review liquidation appraisals and 

determine reasonable value. Based on 

the reasonable value, the servicer will 

be able to determine net value. 

(1) To be eligible for delegation of 

authority to review VA liquidation 

appraisals and determine the reasonable 

value for liquidation purposes on 

properties secured by VA guaranteed or 

insured loans, a lender must—

(i) Have automatic processing 

authority under 38 U.S.C. 3702(d), and 

(ii) Employ one or more Staff 

Appraisal Reviewers (SAR) acceptable 

to the Secretary. 


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(2) To qualify as a servicer’s staff 

appraisal reviewer an applicant must be 

a full-time member of the servicer’s 

permanent staff and may not be 

employed by, or perform services for, 

any other mortgagee. The individual 

must not engage in any private pursuits 

in which there will be, or appear to be, 

any conflict of interest between those 

pursuits and his/her duties, 

responsibilities, and performance as a 

SAPP staff appraisal reviewer. Three 

years of appraisal related experience is 

necessary to qualify as a servicer’s staff 

appraisal reviewer. That experience 

must demonstrate knowledge of, and the 

ability to apply industry-accepted 

principles, methods, practices and 

techniques of appraising, and the ability 

to competently determine the value of 

property. The individual must 

demonstrate the ability to review the 

work of others and to recognize 

deviations from accepted appraisal 

principle, practices, and techniques, 

error in computations, and unjustifiable 

and unsupportable conclusions. 

(3) Servicers that have a staff 

appraisal reviewer determined 

acceptable to VA, will be authorized to 

review liquidation appraisals and make 

reasonable value determinations for 

liquidation purposes on properties that 

are the security for VA guaranteed or 

insured loans. Additionally, servicers 

must satisfy initial VA office case 

review requirements prior to being 

allowed to determine reasonable value 

without VA involvement. The initial 

office case review requirement must be 

satisfied in the VA regional loan center 

in whose jurisdiction the servicer’s staff 

appraisal reviewer is located before the 

SAPP authority may be utilized by that 

servicer in any other VA office’s 

jurisdiction. To satisfy the initial office 

case review requirement, the first five 

cases of each servicer staff appraisal 

reviewer involving properties in the 

regional office location where the staff 

appraisal reviewer is located will be 

processed by him or her up to the point 

where he or she has made a reasonable 

value determination and fully drafted, 

but not issued, the servicer’s notice of 

value. At that point, and prior to loan 

termination, each of the five cases will 

be submitted to the VA regional loan 

center having jurisdiction over the 

property. After a staff review of each 

case, VA will issue a notice of value 

which the servicer may use to compute 

the net value of the property for 

liquidation purposes. If these five cases 

are found to be acceptable by VA, the 

servicer’s staff appraisal reviewer will 

be allowed to fully process subsequent 

appraisals for properties regardless of 

jurisdictional location without prior 

submission to VA and issuance by VA 

of a notice of value. Where the servicer’s 

reviewer cannot readily meet the 

jurisdictional review requirement, the 

SAR applicant may request that VA 

expand the geographic area of 

consideration. VA will accommodate 

such requests if practicable. The initial 

office case review requirement may be 

expanded by VA if acceptable 

performance has not been demonstrated. 

After satisfaction of the initial office 

case review requirement, routine 

reviews of SAPP cases will be made by 

VA staff based upon quality control 

procedures established by the Under 

Secretary for Benefits. Such review will 

be made on a random sampling or 

performance related basis. 

(4) Certifications required from the 

servicer will be specified with 

particularity in the separate instructions 

issued by the Secretary, as noted in 

paragraph (b) of this section. 

(b) Instructions for SAPP Procedures. 

The Secretary will publish separate 

instructions for processing appraisals 

under the Servicer Appraisal Processing 

Program. Compliance with these 

regulations and the separate instructions 

issued by the Secretary is deemed by 

VA to be the minimum exercise of due 

diligence in processing SAPP cases. Due 

diligence is considered by VA to 

represent that care, as is to be properly 

expected from, and ordinarily exercised 

by, a reasonable and prudent servicer 

who would be dependent on the 

property as security to protect its 

investment. 

(c) Adjustment of value 

recommendations. The amount of 

authority to upwardly adjust the fee 

appraiser’s estimated market value 

during the servicer staff appraisal 

reviewer’s initial review of the appraisal 

report or to subsequently process an 

appeal of the servicer’s established 

reasonable value will be specified in the 

separate instructions issued by VA as 

noted in § 36.4344a(b). The amount 

specified must not in any way be 

considered an administrative 

adjustment figure which may be applied 

indiscriminately and without valid basis 

or justification. 

(1) Adjustment during initial review. 

Any adjustment during the staff 

appraisal reviewer’s initial review of the 

appraisal report must be fully and 

clearly justified in writing on the 

appraisal report form or, if necessary, on 

an addendum. The basis for the 

adjustment must be adequate and 

reasonable by professional appraisal 

standards. If real estate market or other 

valid data was utilized in arriving at the 

decision to make the adjustment, such 

data must be attached to the appraisal 

report. All adjustments, comments, 

corrections, justifications, etc., to the 

appraisal report must be made in a 

contrasting color, be clearly legible, and 

signed and dated by the staff appraisal 

reviewer. 

(2) Processing appeals. The authority 

provided under 38 U.S.C. 3731(d) which 

permits a lender to obtain a VA fee 

panel appraiser’s report which VA is 

obligated to consider in an appeal of the 

established reasonable value shall not 

apply to cases processed under the 

authority provided by this section. All 

appeals of VA fee appraiser’s estimated 

market values or servicer’s reasonable 

value determinations above the amount 

specified in the separate instructions 

issued by VA must be submitted, along 

with the servicer’s recommendations, if 

any, to VA for processing and final 

determination. Unless otherwise 

authorized in the separate instructions 

servicers must also submit appeals, 

regardless of the amount, to VA in all 

cases where the staff appraisal reviewer 

has made an adjustment during their 

initial review of the appraisal report to 

the fee appraiser’s market value 

estimate. The fee appraiser’s estimated 

market value or servicer’s reasonable 

value determination may be increased 

only when such increase is clearly 

warranted and fully supported by real 

estate market or other valid data 

considered adequate and reasonable by 

professional appraisal standards and the 

servicer’s staff appraisal reviewer 

clearly and fully justifies the reasoning 

and basis for the increase in writing on 

the appraisal report form or an 

addendum. The staff appraisal reviewer 

must date and sign the written 

justification and must cite within it the 

data used in arriving at the decision to 

make the increase. All such data shall 

be attached to the appraisal report form 

and any addendum. 

(d) Indemnification. When the 

Secretary has incurred a loss as a result 

of a payment of claim under guaranty 

and in which the Secretary determines 

an increase made by the servicer under 

paragraph (c) of this section was 

unwarranted, or arbitrary and 

capricious, the lender shall indemnify 

the Secretary to the extent the Secretary 

determines such loss was caused or 

increased, by the increase in value. 

(e) Affiliations. A servicer affiliated 

with a real estate firm, builder, land 

developer or escrow agent as a 

subsidiary division, or in any other 

entity in which it has a financial interest 

or which it owns may not use the 

authority for any cases involving the 

affiliate unless the servicer 

demonstrates to the Secretary’s 


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6310 Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 

satisfaction that the servicer and its 

affiliate(s) are essentially separate 

entities that operate independently of 

each other, free of all cross-influences 

(e.g., a formal corporate agreement 

exists which specifically sets forth this 

fact). 

(f) Quality control plans. The servicer 

must have an effective self-policing or 

quality control system to ensure the 

adequacy and quality of their SAPP staff 

appraisal reviewer’s processing and, 

that its activities do not deviate from 

high standards of integrity. The quality 

control system must include frequent, 

periodic audits that specifically address 

the appraisal review activity. These 

audits may be performed by an 

independent party, or by the servicer’s 

independent internal audit division 

which reports directly to the firm’s chief 

executive officer. The servicer must 

agree to furnish findings and 

information under this system to VA on 

demand. While the quality control 

personnel need not be appraisers, they 

should have basic familiarity with 

appraisal theory and techniques and the 

ability to prescribe appropriate 

corrective action(s) in the appraisal 

review process when discrepancies or 

problems are identified. The basic 

elements of the system will be described 

in separate instructions issued by the 

Secretary. Copies of the lender’s quality 

control plan or self-policing system 

evidencing appraisal related matters 

must be provided to the VA office of 

jurisdiction with the servicer’s 

application of SAPP authority. 

(g) Fees. The Secretary will require 

servicers to pay a $100.00 application 

fee for each SAR the servicer nominates 

for approval. The application fee will 

also apply if the SAR begins work for 

another servicer. 

(h) Withdrawal of servicer authority. 

The authority for a servicer to determine 

reasonable value may be withdrawn by 

the Loan Guaranty Officer when proper 

cause exists. A servicer’s authority to 

make reasonable value determinations 

shall be withdrawn when the servicer 

no longer meets the basic requirements 

for delegating the authority, or when it 

can be shown that the servicer’s 

reasonable value determinations have 

not been made in accordance with VA 

regulations, requirements, guidelines, 

instructions or applicable laws, or when 

there is adequate evidence to support 

reasonable belief by VA that a particular 

unacceptable act, practice, or 

performance by the servicer or the 

servicer’s staff has occurred. Such acts, 

practices, or performance include, but 

are not limited to: Demonstrated 

technical incompetence (i.e., conduct 

which demonstrates an insufficient 

knowledge of industry accepted 

appraisal principles, techniques and 

practices; or the lack of technical 

competence to review appraisal reports 

and make value determinations in 

accordance with those requirements); 

substantive or repetitive errors (i.e., any 

error(s) of a nature that would 

materially or significantly affect the 

determination of reasonable value or 

condition of the property; or a number 

or series of errors that, considered 

individually, may not significantly 

impact the determination of reasonable 

value or property condition, but which 

when considered in the aggregate would 

establish that appraisal reviews or SAPP 

case processing are being performed in 

a careless or negligent manner), or 

continued instances of disregard for VA 

requirements after they have been called 

to the servicer’s attention. 

(1) Withdrawal of authority by the 

Loan Guaranty Officer may be either for 

an indefinite or a specified period of 

time. For any withdrawal longer than 90 

days a reapplication for servicer 

authority to process appraisals under 

these regulations will be required. 

Written notice will be provided at least 

30 days in advance of withdrawal 

unless the Government’s interests are 

exposed to immediate risk from the 

servicer’s activities in which case the 

withdrawal will be effected 

immediately. The notice will clearly 

and specifically set forth the basis and 

grounds for the action. There is no right 

to a formal hearing to contest the 

withdrawal of SAPP processing 

privileges. However, if within 15 days 

after receiving notice the servicer 

requests an opportunity to contest the 

withdrawal, the servicer may submit, in 

person, in writing, or through a 

representative, information and 

argument to the Loan Guaranty Officer 

in opposition to the withdrawal. The 

Loan Guaranty Officer will make a 

recommendation to the Regional Loan 

Center Director who shall make the 

determination as to whether the action 

should be sustained, modified or 

rescinded. The servicer will be informed 

in writing of the decision. 

(2) The servicer has the right to appeal 

the Regional Loan Center Director’s 

decision to the Undersecretary for 

Benefits. In the event of such an appeal, 

the Under Secretary for Benefits will 

review all relevant material concerning 

the matter and make a determination 

that shall constitute final agency action. 

If the servicer’s submission of 

opposition raises a genuine dispute over 

facts material to the withdrawal of SAPP 

authority, the servicer will be afforded 

an opportunity to appear with a 

representative, submit documentary 

evidence, present witnesses and 

confront any witness the Veterans 

Benefits Administration presents. The 

Under Secretary for Benefits will 

appoint a hearing officer or panel to 

conduct the hearing. When such 

additional proceedings are necessary, 

the Under Secretary for Benefits shall 

base the determination on the facts as 

found, together with any information 

and argument submitted by the servicer. 

(3) In actions based upon a conviction 

or civil judgment, or in which there is 

no genuine dispute over material facts, 

the Under Secretary for Benefits shall 

make a decision on the basis of all the 

information in the administrative 

record, including any submission made 

by the servicer. 

(4) Withdrawal of the SAPP authority 

will require that VA make subsequent 

determinations of reasonable value for 

the servicer. Consequently, VA staff will 

review each appraisal report and issue 

a Notice of Value which can then be 

used by the servicer to compute the net 

value of properties for liquidation 

purposes. 

(5) Withdrawal by VA of the servicer’s 

SAPP authority does not prevent VA 

from also withdrawing automatic 

processing authority or taking 

debarment or suspension action based 

upon the same conduct of the servicer. 

(Authority: 38 U.S.C. 3731) 

■ 9. Remove the undesignated center 

heading preceding § 36.4400 and the 

authority citation directly below that 

center heading. 

■ 10. A heading for subpart C is added 

preceding § 36.4400 to read as follows: 

Subpart C—Assistance to Certain 

Disabled Veterans in Acquiring 

Specially Adapted Housing 

* * * * * 

■ 11. Remove the undesignated center 

heading preceding § 36.4500 and the 

authority citation directly below that 

center heading. 

■ 12. A heading for subpart D is added 

preceding § 36.4500 to read as follows: 

Subpart D—Direct Loans 

* * * * * 

■ 13. Remove the undesignated center 

heading preceding § 36.4600 and the 

authority citation directly below that 

center hearing. 

■ 14. A heading for subpart E is added 

preceding § 36.4600 to read as follows: 

Subpart E—Sale of Loans, Guarantee 

of Payment, and Flood Insurance 

* * * * * 

■ 15. Add subpart F to read as follows: 


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Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 6311 

Subpart F—Guaranty or Insurance of Loans 

to Veterans With Electronic Reporting 

Sec. 

36.4800 Applicability of this subpart. 

36.4801 Definitions. 

36.4802 Computation of guaranties or 

insurance credits. 

36.4803 Reporting requirements. 

36.4804 Deviations; changes of identity. 

36.4805 Partial disbursement. 

36.4806 Refinancing of mortgage or other 

lien indebtedness. 

36.4807 Interest rate reduction refinancing 

loan. 

36.4808 Joint loans. 

36.4809 Transfer of title by borrower or 

maturity by demand or acceleration. 

36.4810 Amortization. 

36.4811 Prepayment. 

36.4812 Interest rates. 

36.4813 Charges and fees. 

36.4814 Advances and other charges. 

36.4815 Loan modifications. 

36.4816 Acceptability of partial payments. 

36.4817 Servicer reporting requirements. 

36.4818 Servicer tier ranking—temporary 

procedures. 

36.4819 Servicer loss-mitigation options 

and incentives. 

36.4820 Refunding of loans in default. 

36.4821 Service of process. 

36.4822 Loan termination. 

36.4823 Election to convey security. 

36.4824 Guaranty claims; subsequent 

accounting. 

36.4825 Computation of indebtedness. 

36.4826 Subrogation and indemnity. 

36.4827 Release of security. 

36.4828 Partial or total loss of guaranty or 

insurance. 

36.4829 Hazard insurance. 

36.4830 Substitution of trustees. 

36.4831 Capacity of parties to contract. 

36.4832 Geographical limits. 

36.4833 Maintenance of records. 

36.4835 Delivery of notice. 

36.4836 [Reserved]. 

36.4837 Conformance of loan instruments. 

36.4838 Supplementary administrative 

action. 

36.4839 Eligibility of loans; reasonable 

value requirements. 

36.4840 Underwriting standards, processing 

procedures, lender responsibility, and 

lender certification. 

36.4841 Death or insolvency of holder. 

36.4842 Qualification for designated fee 

appraisers. 

36.4843 Restriction on designated 

appraisers. 

36.4845 Delegation of authority. 

36.4846 Cooperative loans. 

36.4847 Lender appraisal processing 

program. 

36.4848 Servicer appraisal processing 

program. 

36.4849 Waivers, consents, and approvals; 

when effective. 

36.4850 Servicing procedures for holders. 

36.4851 Minimum property and 

construction requirements. 

36.4852 Authority to close loans on the 

automatic basis. 

36.4853 Withdrawal of authority to close 

loans on the automatic basis. 

36.4854 Estate of veteran in real property. 

36.4855 Loans, first, second, or unsecured. 

36.4856 Tax, special assessment and other 

liens. 

36.4857 Combination residential and 

business property. 

36.4858 [Reserved] 

36.4859 Supplemental loans. 

36.4860 Condominium loans. 

36.4861 Acceptable ownership 

arrangements and documentation. 

36.4862 Rights and restrictions. 

36.4863 Miscellaneous legal requirements. 

36.4864 Documentation and related 

requirements-flexible condominiums 

and condominiums with offsite facilities. 

36.4865 Appraisal requirements. 

36.4867 Requirement of construction 

warranty. 

36.4868 Nondiscrimination and equal 

opportunity in housing certification 

requirements. 

36.4869 Correction of structural defects. 

36.4870 Advertising and solicitation 

requirements. 

36.4875 Insured loan and insurance 

account. 

36.4877 Transfer of insured loans. 

36.4878 Debits and credits to insurance 

account under § 36.4820. 

36.4879 Payment of insurance. 

36.4880 Reports of insured institutions. 

36.4890 Purpose. 

36.4891 Applicability. 

36.4892 Certification requirements. 

36.4893 Complaint and hearing procedure. 

Subpart F—Guaranty or Insurance of 

Loans to Veterans With Electronic 

Reporting 

§ 36.4800 Applicability of this subpart. 

(a) This subpart applies to loans 

serviced by a mortgage servicing 

industry segment on or after the date 

that VA issues a Federal Register notice 

making this subpart applicable to that 

segment. This includes loans entitled to 

an automatic guaranty, or otherwise 

guaranteed or insured, on or after the 

date assigned in the Federal Register, 

and loans that were previously 

guaranteed or insured to the extent that 

no legal rights vested under the 

regulations are impaired. 

(b) Title 38 U.S.C., chapter 37, is a 

continuation and restatement of the 

provisions of Title III of the 

Servicemen’s Readjustment Act of 1944, 

and may be considered an amendment 

to such Title III. References to the 

sections or chapters of title 38 U.S.C., 

shall, where applicable, be deemed to 

refer to the prior corresponding 

provisions of the law. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4801 Definitions. 

Whenever used in 38 U.S.C. chapter 

37 or subpart F of this part, unless the 

context otherwise requires, the terms 

defined in this section shall have the 

following meaning: 

A period of more than 180 days. For 

the purposes of sections 3707 and 

3702(a)(2)(C) of title 38 U.S.C., the term 

a period of more than 180 days shall 

mean 181 or more calendar days of 

continuous active duty. 

Acquisition and improvement loan. A 

loan to purchase an existing property 

which includes additional funds for the 

purpose of installing energy 

conservation improvements or making 

other alterations, improvements, or 

repairs. 

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(1), 

(4), and (7)) 

Alterations. Any structural changes or 

additions to existing improved realty. 

Automatic lender. A lender that may 

process a loan or assumption without 

submitting the credit package to the 

Department of Veterans Affairs for 

underwriting review. Pursuant to 38 

U.S.C. 3702(d) there are two categories 

of lenders who may process loans 

automatically: 

(1) Entities such as banks, savings and 

loan associations, and mortgage and 

loan companies that are subject to 

examination by an agency of the United 

States or any State and 

(2) Lenders approved by the 

Department of Veterans Affairs pursuant 

to standards established by the 

Department of Veterans Affairs. 

(Authority: 38 U.S.C. 3702(d)) 

Compromise sale. A sale to a third 

party for an amount less than is 

sufficient to repay the unpaid balance 

on the loan where the holder has agreed 

in advance to release the lien in 

exchange for the proceeds of such sale. 

Condominium. Unless otherwise 

provided by State law, a condominium 

is a form of ownership where the buyer 

receives title to a three dimensional air 

space containing the individual living 

unit together with an undivided interest 

or share in the ownership of common 

elements. 

Cost. Cost means the entire 

consideration paid or payable for or on 

account of the application of materials 

and labor to tangible property. 

Credit package. Any information, 

reports or verifications used by a lender, 

holder or authorized servicing agent to 

determine the creditworthiness of an 

applicant for a Department of Veterans 

Affairs guaranteed loan or the assumer 

of such a loan. 

(Authority: 38 U.S.C. 3710 and 3714) 

Date of first uncured default. Date of 

first uncured default means the due date 

of the earliest payment not fully 

satisfied by the proper application of 

available credits or deposits. 


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Default. Default means failure of a 

borrower to comply with the terms of a 

loan agreement. 

Designated appraiser. Designated 

appraiser means a person requested by 

the Secretary to render an estimate of 

the reasonable value of a property, or of 

a specified type of property, within a 

stated area for the purpose of justifying 

the extension of credit to an eligible 

veteran for any of the purposes stated in 

38 U.S.C. chapter 37. An appraiser on a 

fee basis is not an agent of the Secretary. 

Discharge or release. For purposes of 

basic eligibility a person will be 

considered discharged or released if the 

veteran was issued a discharge 

certificate under conditions other than 

dishonorable (38 U.S.C. 3702(c)). The 

term discharge or release includes—

(1) Retirement from the active 

military, naval, or air service, and 

(2) The satisfactory completion of the 

period of active military, naval, or air 

service for which a person was obligated 

at the time of entry into such service in 

the case of a person who, due to 

enlistment or reenlistment, was not 

awarded a discharge or release from 

such period of service at the time of 

such completion thereof and who, at 

such time, would otherwise have been 

eligible for the award of a discharge or 

release under conditions other than 

dishonorable. 

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

Dwelling. Any building designed 

primarily for use as a home consisting 

of not more than four family units plus 

an added unit for each veteran if more 

than one eligible veteran participates in 

the ownership, except that in the case 

of a condominium housing development 

or project within the purview of 38 

U.S.C. 3710(a)(6) and §§ 36.4860 

through 36.4865 of this part the term is 

limited to a one single-family residential 

unit. Also, a manufactured home, 

permanently affixed to a lot owned by 

a veteran and classified as real property 

under the laws of the State where it is 

located. 

(Authority: 38 U.S.C. 3710(a) and (f)) 

Economic readjustment. Economic 

readjustment means rearrangement of an 

eligible veteran’s indebtedness in a 

manner calculated to enable the veteran 

to meet obligations and thereby avoid 

imminent loss of the property which 

secures the delinquent obligation. 

Energy conservation improvement. An 

improvement to an existing dwelling or 

farm residence through the installation 

of a solar heating system, a solar heating 

and cooling system, or a combined solar 

heating and cooling system or through 

application of a residential energy 

conservation measure as prescribed in 

38 U.S.C. 3710(d) or by the Secretary. 

(Authority: 38 U.S.C. 3710(a)(7)) 

Full disbursement. Payment by a 

lender of the entire proceeds of a loan 

or the purposes described in the report 

of the lender in respect of such loan to 

the Secretary either: 

(1) By payment to those contracting 

with the borrower for such purposes, or 

(2) By payment to the borrower, or 

(3) By transfer to an account against 

which the borrower can draw at will, or 

(4) By transfer to an escrow account, 

or 

(5) By transfer to an earmarked 

account if 

(i) The amount is not in excess of 10 

percent of the loan, or 

(ii) The loan is an Acquisition and 

Improvement loan pursuant to 

§ 36.4801, or 

(iii) The loan is one submitted by a 

lender of the class specified in 38 U.S.C. 

3702(d) or 3703(a)(2). 

(Authority: 38 U.S.C. 3703(c)(1)) 

Graduated payment mortgage loan. A 

loan for the purpose of acquiring a 

single-family dwelling unit involving a 

plan for repayment in which a portion 

of the interest due is deferred for a 

period of time. The interest so deferred 

is added to the principal balance thus 

resulting in a principal amount greater 

than at loan origination (negative 

amortization). The monthly payments 

increase on an annual basis (graduate) 

for a predetermined period of time until 

the payments reach a level which will 

fully amortize the loan during the 

remaining loan term. 

(Authority: 38 U.S.C. 3703(c) and (d)) 

Guaranty. Guaranty means the 

obligation of the United States, assumed 

by virtue of 38 U.S.C. chapter 37, to 

repay a specified percentage of a loan 

upon the default of the primary debtor. 

Holder. The lender or any subsequent 

assignee or transferee of the guaranteed 

obligation or the authorized servicing 

agent (also referred to as ‘‘the servicer’’) 

of the lender or of the assignee or 

transferee. 

(Authority: 38 U.S.C. 3714) 

Home. Home means place of 

residence. 

Improvements. Any alteration that 

improves the property for the purpose 

for which it is occupied. 

Insurance. Insurance means the 

obligation assumed by the United States 

to indemnify a lender to the extent 

specified in this subpart for any loss 

incurred upon any loan insured under 

38 U.S.C. 3703(a)(2). 

Insurance account. Insurance account 

means the record of the amount 

available to a lender or purchaser for 

losses incurred on loans insured under 

38 U.S.C. 3703(a). 

Lender. The payee or assignee or 

transferee of an obligation at the time it 

is guaranteed or insured. This term also 

includes any sole proprietorship, 

partnership, or corporation and the 

owners, officers and employees of a sole 

proprietorship, partnership, or 

corporation engaged in the origination, 

procurement, transfer, servicing, or 

funding of a loan which is guaranteed 

or insured by VA. 

(Authority: 38 U.S.C. 3703(c)(1) and 3704(d)) 

Lien. Lien means any interest in, or 

power over, real or personal property, 

reserved by the vendor, or created by 

the parties or by operation of law, 

chiefly or solely for the purpose of 

assuring the payment of the purchase 

price, or a debt, and irrespective of the 

identity of the party in whom title to the 

property is vested, including but not 

limited to mortgages, deeds with a 

defeasance therein or collaterally, deeds 

of trust, security deeds, mechanics’

liens, lease-purchase contracts, 

conditional sales contracts, 

consignments. 

Liquidation sale. Any judicial, 

contractual or statutory disposition of 

real property, under the terms of the 

loan instruments and applicable law, to 

liquidate a defaulted loan that is 

secured by such property. This includes 

a voluntary conveyance made to avoid 

such disposition of the obligation or of 

the security. This term also includes a 

compromise sale. 

(Authority: 38 U.S.C. 3732) 

Lot. A parcel of land acceptable to the 

Secretary as a manufactured home site. 

(Authority: 38 U.S.C. 3710(a)(9)) 

Manufactured home. A moveable 

dwelling unit designed and constructed 

for year-round occupancy by a single 

family, on land, containing permanent 

eating, cooking, sleeping and sanitary 

facilities. A double-wide manufactured 

home is a moveable dwelling designed 

for occupancy by one family and 

consisting of: 

(1) Two or more units intended to be 

joined together horizontally when 

located on a site, but capable of 

independent movement or 

(2) A unit having a section or sections 

which unfold along the entire length of 

the unit. For the purposes of this section 

of VA regulations, manufactured home/ 

lot loans guaranteed under the purview 

of §§ 36.4800 through 36.4893 must be 

for units permanently affixed to a lot 

and considered to be real property 

under the laws of the State where it is 

located. If the loan is for the purchase 


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of a manufactured home and lot it must 

be considered as one loan. 

(Authority: 38 U.S.C. 3710(a)(9)) 

Net loss (insured loans). Net loss on 

insured loans means the indebtedness, 

plus any other charges authorized under 

§ 36.4814, remaining unsatisfied after 

the liquidation of all available security 

and recourse to all intangible rights of 

the holder against those obligated on the 

debt. 

Net value. The fair market value of 

real property, minus an amount 

representing the costs that the Secretary 

estimates would be incurred by VA in 

acquiring and disposing of the property. 

The number to be subtracted from the 

fair market value will be calculated by 

multiplying the fair market value by the 

current cost factor. The cost factor used 

will be the most recent percentage of the 

fair market value that VA calculated and 

published in the Notices section of the 

Federal Register (it is intended that this 

percentage will be calculated annually). 

In computing this cost factor, VA will 

determine the average operating 

expenses and losses (or gains) on resale 

incurred for properties acquired under 

§ 36.4823 which were sold during the 

preceding fiscal year and the average 

administrative cost to VA associated 

with the property management activity. 

The final net value derived from this 

calculation will be stated as a whole 

dollar amount (any fractional amount 

will be rounded up to the next whole 

dollar). The cost items included in the 

calculation will be: 

(1) Property operating expenses. All 

disbursements made for payment of 

taxes, assessments, liens, property 

maintenance and related repairs, 

management broker’s fees and 

commissions, and any other charges to 

the property account excluding property 

improvements and selling expenses. 

(2) Selling expenses. All 

disbursements for sales commissions 

plus any other costs incurred and paid 

in connection with the sale of the 

property. 

(3) Administrative costs. (i) An 

estimate of the total cost for VA of 

personnel (salary and benefits) and 

overhead (which may include things 

such as travel, transportation, 

communication, utilities, printing, 

supplies, equipment, insurance claims 

and other services) associated with the 

acquisition, management and 

disposition of property acquired under 

§ 36.4823 of this part. The average 

administrative costs will be determined 

by: 

(A) Dividing the total cost for VA 

personnel and overhead salary and 

benefits costs by the average number of 

properties on hand and adjusting this 

figure based on the average holding time 

for properties sold during the preceding 

fiscal year; and 

(B) Dividing the figure calculated in 

paragraph (3)(i)(A) of this definition by 

the VBA ratio of personal services costs 

to total obligations. 

(ii) The three cost averages will be 

added to the average loss (or gain) on 

property sold during the preceding 

fiscal year (based on the average 

property purchase price) and the sum 

will be divided by the average fair 

market value at the time of acquisition 

for properties which were sold during 

the preceding fiscal year to derive the 

percentage to be used in estimating net 

value. 

(Authority: 38 U.S.C. 3732) 

Purchase price. The entire legal 

consideration paid or payable upon or 

on account of the sale of property, 

exclusive of acquisition costs, or for the 

cost of materials and labor to be applied 

to the property. 

Real-estate loan. Any obligation 

incurred for the purchase of real 

property or a leasehold estate as limited 

in §§ 36.4800 through 36.4893 or for the 

construction of fixtures or 

appurtenances thereon or for alterations, 

improvements, or repairs thereon 

required by §§ 36.4800 through 36.4893 

to be secured by a lien on such property 

or is so secured. Loans for the purpose 

specified in 38 U.S.C. 3710(a)(5) 

(refinancing of mortgage loans or other 

liens on a dwelling or farm residence), 

loans for the purpose specified in 38 

U.S.C. 3710(a)(8) (refinancing of a VA 

guaranteed, insured or direct loan to 

lower the interest rate), loans for the 

purposes specified in 38 U.S.C. 

3710(a)(9) (purchase of manufactured 

homes/lots or the refinancing of such 

loans in order to reduce the interest rate 

or purchase a lot, in States in which 

manufactured homes, when 

permanently affixed to a lot, are 

considered real property, and loans to 

purchase one-family residential units in 

condominium housing developments or 

projects within the purview of 38 U.S.C. 

3710(a)(6) and §§ 36.4860 through 

36.4865 shall also be considered real 

estate loans. 

Reasonable value. Reasonable value 

means that figure which represents the 

amount a reputable and qualified 

appraiser, unaffected by personal 

interest, bias, or prejudice, would 

recommend to a prospective purchaser 

as a proper price or cost in the light of 

prevailing conditions. 

Registered mail. The term registered 

mail wherever used in the regulations 

concerning guaranty or insurance of 

loans to veterans shall include certified 

mail. 

Repairs. Any alteration of existing 

improved realty or equipment which is 

necessary or advisable for protective, 

safety or restorative purposes. 

Repayment plan. A repayment plan is 

a written executed agreement by and 

between the borrower and the holder to 

reinstate a loan that is 61 or more 

calendar days delinquent, by requiring 

the borrower to pay each month over a 

fixed period (minimum of three months 

duration) the normal monthly payments 

plus an agreed upon portion of the 

delinquency each month. 

Repossession. Repossession means 

recovery or acquisition of such physical 

control of property (pursuant to the 

provisions of the security instrument or 

as otherwise provided by law) as to 

make further legal or other action 

unnecessary in order to obtain actual 

possession of the property or to dispose 

of the same by sale or otherwise. 

Residential property. 

(1) Any one-family residential unit in 

a condominium housing development 

within the purview of 38 U.S.C. 

3710(a)(6) and §§ 36.4860 through 

36.4865; 

(2) Any manufactured home 

permanently affixed to a lot owned or 

being purchased by a veteran and 

considered to be real property under the 

laws of the State where it is located; 

(3) Any improved real property (other 

than a condominium housing 

development or a manufactured home 

and/or lot) or leasehold estate therein as 

limited by this subpart, the primary use 

of which is for occupancy as a home, 

consisting of not more than four family 

units, plus an added unit for each 

eligible veteran if more than one 

participates in the ownership thereof; or 

(4) Any land to be purchased out of 

the proceeds of a loan for the 

construction of a dwelling, and on 

which such dwelling is to be erected. 

(Authority: 38 U.S.C. 3703(c)(1) and 3710(a)) 

Secretary. The Secretary of Veterans 

Affairs, or any employee of the 

Department of Veterans Affairs 

authorized to act in the Secretary’s 

stead. 

Servicer. The authorized servicer is 

either: 

(1) The servicing agent of a holder; or 

(2) The holder itself, if the holder is 

performing all servicing functions on a 

loan. The servicer is typically the entity 

reporting all loan activity to VA and 

filing claims under the guaranty on 

behalf of the holder. VA will generally 

issue guaranty claims and other 

payments to the servicer, who will be 

responsible for forwarding funds to the 


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6314 Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 

holder in accordance with its servicing 

agreement. Incentives under § 36.4819 

will generally be paid directly to the 

servicer based on its performance under 

that section and in accordance with its 

tier ranking under § 36.4818. 

Servicing agent. An agent designated 

by the loan holder as the entity to 

collect installments on the loan and/or 

perform other functions as necessary to 

protect the interests of the holder. 

(Authority: 38 U.S.C. 3714) 

Special forbearance. This is a written 

agreement executed by and between the 

holder and the borrower where the 

holder agrees to suspend all payments 

or accept reduced payments for one or 

more months, on a loan 61 or more 

calendar days delinquent, and the 

borrower agrees to pay the total 

delinquency at the end of the specified 

period or enter into a repayment plan. 

Total indebtedness: For purposes of 

38 U.S.C. 3732(c), the veteran’s ‘‘total 

indebtedness’’ shall be the sum of: the 

unpaid principal on the loan as of the 

date of the liquidation sale, accrued 

unpaid interest permitted by 

§ 36.4824(a) of this part, and allowable 

advances/other charges permitted to be 

included in the guaranty claim by 

§ 36.4814 of this part. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4802 Computation of guaranties or 

insurance credits. 

(a) With respect to a loan to a veteran 

guaranteed under 38 U.S.C. 3710 the 

guaranty shall not exceed the lesser of 

the dollar amount of entitlement 

available to the veteran or—

(1) 50 percent of the original principal 

loan amount where the loan amount is 

not more than $45,000; or 

(2) $22,500 where the original 

principal loan exceeds $45,000, but is 

not more than $56,250; or 

(3) Except as provided in paragraph 

(a)(4) of this section, the lesser of 

$36,000 or 40 percent of the original 

principal loan amount where the loan 

amount exceeds $56,250; or 

(4) The lesser of $60,000 or 25 percent 

of the original principal loan amount 

where the loan amount exceeds 

$144,000 and the loan is for the 

purchase or construction of a home or 

the purchase of a condominium unit. 

(b) With respect to an interest rate 

reduction refinancing loan guaranteed 

under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), 

or (a)(11), the dollar amount of guaranty 

may not exceed the greater of the 

original guaranty amount of the loan 

being refinanced, or 25 percent of the 

refinancing loan amount. 

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

(c) With respect to a loan for an 

energy efficient mortgage guaranteed 

under 38 U.S.C. 3710(d), the amount of 

the guaranty shall be in the same 

proportion as would have been 

provided if the energy efficient 

improvements were not added to the 

loan amount, and there shall be no 

additional charge to the veteran’s 

entitlement as a result of the increased 

guaranty amount. 

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

(d) An amount equal to 15 percent of 

the original principal amount of each 

insured loan shall be credited to the 

insurance account of the lender and 

shall be charged against the guaranty 

entitlement of the borrower: Provided, 

That no loan may be insured unless the 

borrower has sufficient entitlement 

remaining to permit such credit. 

(e) Subject to the provisions of 

§ 36.4803(g), the following formulas 

shall govern the computation of the 

amount of the guaranty or insurance 

entitlement which remains available to 

an eligible veteran after prior use of 

entitlement: 

(1) If a veteran previously secured a 

nonrealty (business) loan, the amount of 

nonrealty entitlement used is doubled 

and subtracted from $36,000. The sum 

remaining is the amount of available 

entitlement for use, except that: 

(i) Entitlement may be increased by 

up to $24,000 if the loan amount 

exceeds $144,000 and the loan is for 

purchase or construction of a home or 

purchase of a condominium; and 

(ii) Entitlement for manufactured 

home loans that are to be guaranteed 

under 38 U.S.C. 3712 may not exceed 

$20,000. 

(2) If a veteran previously secured a 

realty (home) loan, the amount of realty 

(home) loan entitlement used is 

subtracted from $36,000. The sum 

remaining is the amount of available 

entitlement for use, except that: 

(i) Entitlement may be increased by 

up to $24,000 if the loan amount 

exceeds $144,000 and the loan is for 

purchase or construction of a home or 

purchase of a condominium; and 

(ii) Entitlement for manufactured 

home loans that are to be guaranteed 

under 38 U.S.C. 3712 may not exceed 

$20,000. 

(3) If a veteran previously secured a 

manufactured home loan under 38 

U.S.C. 3712, the amount of entitlement 

used for that loan is subtracted from 

$36,000. The sum remaining is the 

amount of available entitlement for 

home loans and the sum remaining may 

be increased by up to $24,000 if the loan 

amount exceeds $144,000 and the loan 

is for purchase or construction of a 

home or purchase of a condominium. 

To determine the amount of entitlement 

available for manufactured home loans 

processed under 38 U.S.C. 3712, the 

amount of entitlement previously used 

for that purpose is subtracted from 

$20,000. The sum remaining is the 

amount of available entitlement for use 

for manufactured home loan purposes 

under 38 U.S.C. 3712. 

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

(f) For the purpose of computing the 

remaining guaranty or insurance benefit 

to which a veteran is entitled, loans 

guaranteed prior to February 1, 2008 

shall be taken into consideration as if 

made subsequent thereto. 

(g) A loan eligible for insurance may 

be either guaranteed or insured at the 

option of the borrower and the lender, 

provided that if the Secretary is not 

advised of the exercise of such option at 

the time the loan is reported pursuant 

to § 36.4803, such loan will not be 

eligible for insurance. 

(h) A guaranty is reduced or increased 

pro rata with any deduction or increase 

in the amount of the guaranteed 

indebtedness, but in no event will the 

amount payable on a guaranty exceed 

the amount of the original guaranty, 

except where the guaranty has been 

increased under § 36.4815, or the 

percentage of the total indebtedness 

corresponding to that of the original 

guaranty whichever is less. However, on 

a graduated payment mortgage loan, the 

percentage of guaranty applicable to the 

original loan amount pursuant to 

paragraph (a) of this section shall apply 

to the loan indebtedness to the extent 

scheduled deferred interest is added to 

principal during the graduation period 

without regard to the original maximum 

dollar amount of guaranty. 

(Authority: 38 U.S.C. 3703(b) and (d)) 

(i) The amount of any guaranty or the 

amount credited to a lender’s insurance 

account in relation to any insured loan 

shall be charged against the original or 

remainder of the guaranty benefit of the 

borrower. Complete or partial 

liquidation, by payment or otherwise, of 

the veteran’s guaranteed or insured 

indebtedness does not increase the 

remainder of the guaranty benefit, if 

any, otherwise available to the veteran. 

When the maximum amount of guaranty 

or insurance legally available to a 

veteran shall have been granted, no 

further guaranty or insurance is 

available to the veteran. 

(j) Notwithstanding the provisions of 

paragraph (i) of this section, in 

computing the aggregate amount of 

guaranty or insurance housing loan 

entitlement available to a veteran under 


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Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 6315 

this chapter, the Secretary may exclude 

the amount of guaranty or insurance 

housing loan entitlement used for any 

guaranteed, insured, or direct loan 

under any one of the following 

circumstances: 

(1)(i) The property which secured the 

loan has been disposed of by the veteran 

or has been destroyed by fire or other 

natural hazard; and 

(ii) The loan has been repaid in full; 

or, the Secretary has been released from 

liability as to the loan; or, if the 

Secretary has suffered a loss on such 

loan, the loss has been paid in full. 

(2) A veteran-transferee has agreed to 

assume the outstanding balance on the 

loan and consented to the use of the 

veteran-transferee’s entitlement, to the 

extent that the entitlement of the 

veteran-transferor had been used 

originally, in place of the veterantransferor’s for the guaranteed, insured, 

or direct loan, and the veteran-transferee 

otherwise meets the requirements of this 

chapter. 

(3)(i) The loan has been repaid in full; 

and 

(ii) The loan for which the veteran 

seeks to use entitlement under this 

chapter is secured by the same property 

which secured the loan referred to in 

the preceding paragraph (j)(3)(i) of this 

paragraph. 

(4) In a case not covered by (j)(1) or 

(j)(2) of this section, the Secretary may, 

one time per veteran, exclude 

entitlement used if: 

(i) The loan has been repaid in full 

and, if the Secretary has suffered a loss 

on the loan, the loss has been paid in 

full; or 

(ii) The Secretary has been released 

from liability as to the loan and, if the 

Secretary has suffered a loss on the loan, 

the loss has been paid in full. 

(k) The Secretary may, in any case 

involving circumstances that the 

Secretary deems appropriate, waive one 

or more of the requirements set forth in 

paragraph (j)(1) of this section. 

(Authority: 38 U.S.C. 3702(b), 3710) 

(l)(1) The amount of guaranty 

entitlement, available and unused, of an 

eligible unmarried surviving spouse 

(whose eligibility does not result from 

his or her own service) is determinable 

in the same manner as in the case of any 

veteran, and any entitlement which the 

decedent (who was his or her spouse) 

used shall be disregarded. A certificate 

as to the eligibility of such surviving 

spouse, issued by the Secretary, shall be 

a condition precedent to the guaranty or 

insurance of any loan made to a 

surviving spouse in such capacity. 

(Authority: 38 U.S.C. 3701(a)) 

(2) An unmarried surviving spouse 

who was a co-obligor under an existing 

VA guaranteed, insured or direct loan 

shall be considered to be a veteran 

eligible for an interest rate reduction 

refinancing loan pursuant to 38 U.S.C. 

3710(a)(8) or (9)(B)(i). 

(Authority: 38 U.S.C. 3710(e)(3), 3703(c)(1)) 

§ 36.4803 Reporting requirements. 

(a) With respect to loans 

automatically guaranteed under 38 

U.S.C. 3703(a)(1), evidence of the 

guaranty will be issuable to a lender of 

a class described under 38 U.S.C. 

3702(d) if the loan is reported to the 

Secretary not later than 60 days 

following full disbursement and upon 

the certification of the lender that: 

(1) No default exists thereunder that 

has continued for more than 30 days; 

(2) Except for acquisition and 

improvement loans as defined in 

§ 36.4801, any construction, repairs, 

alterations, or improvements effected 

subsequent to the appraisal of 

reasonable value, and paid for out of the 

proceeds of the loan, which have not 

been inspected and approved upon 

completion by a compliance inspector 

designated by the Secretary, have been 

completed properly in full accordance 

with the plans and specifications upon 

which the original appraisal was based; 

and any deviations or changes of 

identity in said property have been 

approved as required in § 36.4804 

concerning guaranty or insurance of 

loans to veterans; 

(3) The loan conforms otherwise with 

the applicable provisions of 38 U.S.C. 

chapter 37 and of the regulations 

concerning guaranty or insurance of 

loans to veterans. 

(Authority: 38 U.S.C. 3703(c)(1)) 

(b) Loans made pursuant to 38 U.S.C. 

3703(a), although not entitled to 

automatic insurance thereunder, may, 

when made by a lender of a class 

described in 38 U.S.C. 3702(d)(1), be 

reported for issuance of an insurance 

credit. 

(Authority: 38 U.S.C. 3702(d), 3703(a)(2)) 

(c) Each loan proposed to be made to 

an eligible veteran by a lender not 

within a class described in 38 U.S.C. 

3702(d) shall be submitted to the 

Secretary for approval prior to closing. 

Lenders described in 38 U.S.C. 3702(d) 

shall have the optional right to submit 

any loan for such prior approval. The 

Secretary, upon determining any loan so 

submitted to be eligible for a guaranty, 

or for insurance, will issue a certificate 

of commitment with respect thereto. 

(d) A certificate of commitment shall 

entitle the holder to the issuance of the 

evidence of guaranty or insurance upon 

the ultimate actual payment of the full 

proceeds of the loan for the purposes 

described in the original report and 

upon the submission within 60 days 

thereafter of a supplemental report 

showing that fact and: 

(1) The identity of any property 

purchased therewith, 

(2) That all property purchased or 

acquired with the proceeds of the loan 

has been encumbered as required by the 

regulations concerning guaranty or 

insurance of loans to veterans, 

(3) Except for acquisition and 

improvement loans as defined in 

§ 36.4801(c), any construction, repairs, 

alterations, or improvements paid for 

out of the proceeds of the loan, which 

have not been inspected and approved 

subsequent to completion by a 

compliance inspector designated by the 

Secretary, have been completed 

properly in full accordance with the 

plans and specifications upon which the 

original appraisal was based; and that 

any deviations or changes of identity in 

said property have been approved as 

required by § 36.4804, and 

(4) That the loan conforms otherwise 

with the applicable provisions of 38 

U.S.C. chapter 37 and the regulations 

concerning guaranty or insurance of 

loans to veterans. 

(Authority: 38 U.S.C. 3703(c)(1)) 

(e) Upon the failure of the lender to 

report in accordance with the provisions 

of paragraph (d) of this section, the 

certificate of commitment shall have no 

further effect, or the amount of guaranty 

or insurance shall be reduced pro rata, 

as may be appropriate under the facts of 

the case: Provided, nevertheless, that if 

the loan otherwise meets the 

requirements of this section, said 

certificate of commitment may be given 

effect by the Secretary, notwithstanding 

the report is received after the date 

otherwise required. 

(f) For loans not reported within 60 

days, evidence of guaranty will be 

issued only if the loan report is 

accompanied by a statement signed by 

a corporate officer of the lending 

institution which explains why the loan 

was reported late. The statement must 

identify the case or cases in issue and 

must set forth the specific reason or 

reasons why the loan was not submitted 

on time. Upon receipt of such a 

statement evidence of guaranty will be 

issued. A pattern of late reporting and 

the reasons therefore will be considered 

by VA in taking action under § 36.4853. 

(g) Evidence of a guaranty will be 

issued by the Secretary by appropriate 

endorsement on the note or other 

instrument evidencing the obligation, or 


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by a separate certificate at the option of 

the lender. Notice of credit to an 

insurance account will be given to the 

lender. Unused certificates of eligibility 

issued prior to March 1, 1946, are void. 

No certificate of commitment shall be 

issued and no loan shall be guaranteed 

or insured unless the lender, the 

veteran, and the loan are shown to be 

eligible. Evidence of guaranty or 

insurance will not be issued on any loan 

for the purchase or construction of 

residential property unless the veteran, 

or the veteran’s spouse in the case of a 

veteran who cannot occupy the property 

because of active duty status with the 

Armed Forces, certifies in such form as 

the Secretary shall prescribe that the 

veteran, or spouse of the active duty 

veteran, intends to occupy the property 

as his or her home. Guaranty or 

insurance evidence will not be issued 

on any loan for the alteration, 

improvement, or repair of any 

residential property or on a refinancing 

loan unless the veteran, or spouse of an 

active duty servicemember, certifies that 

he or she presently occupies the 

property as his or her home. An 

exception to this is if the home 

improvement or refinancing loan is for 

extensive changes to the property that 

will prevent the veteran or the spouse 

of the active duty veteran from 

occupying the property while the work 

is being completed. In such a case the 

veteran or spouse of the active duty 

veteran must certify that he or she 

intends to occupy or reoccupy the 

property as his or her home upon 

completion of the substantial 

improvements or repairs. All of the 

mentioned certifications must take place 

at the time of loan application and 

closing except in the case of loans 

automatically guaranteed, in which case 

veterans or, in the case of an active duty 

veteran, the veteran’s spouse shall make 

the required certification only at the 

time the loan is closed. 

(Authority: 38 U.S.C. 3704(c)) 

(h) Subject to compliance with the 

regulations concerning guaranty or 

insurance of loans to veterans, the 

certificate of guaranty or the evidence of 

insurance credit will be issuable within 

the available entitlement of the veteran 

on the basis of the loan stated in the 

final loan report or certification of loan 

disbursement, except for refinancing 

loans for interest rate reductions. The 

available entitlement of a veteran will 

be determined by the Secretary as of the 

date of receipt of an application for 

guaranty or insurance of a loan or of a 

loan report. Such date of receipt shall be 

the date the application or loan report 

is date-stamped into VA. Eligibility 

derived from the most recent period of 

service: 

(1) Shall cancel any unused 

entitlement derived from any earlier 

period of service, and 

(2) Shall be reduced by the amount by 

which entitlement from service during 

any earlier period has been used to 

obtain a direct, guaranteed, or insured 

loan: 

(i) On property which the veteran 

owns at the time of application, or 

(ii) As to which the Secretary has 

incurred actual liability or loss, unless 

in the event of loss or the incurrence 

and payment of such liability by the 

Secretary, the resulting indebtedness of 

the veteran to the United States has 

been paid in full. Provided, that if the 

Secretary issues or has issued a 

certificate of commitment covering the 

loan described in the application for 

guaranty or insurance or in the loan 

report, the amount and percentage of 

guaranty or the amount of the insurance 

credit contemplated by the certificate of 

commitment shall not be subject to 

reduction if the loan has been or is 

closed on a date that is not later than the 

expiration date of the certificate of 

commitment, notwithstanding that the 

Secretary in the meantime and prior to 

the issuance of the evidence of guaranty 

or insurance shall have incurred actual 

liability or loss on a direct, guaranteed, 

or insured loan previously obtained by 

the borrower. For the purposes of this 

paragraph, the Secretary will be deemed 

to have incurred actual loss on a 

guaranteed or insured loan if the 

Secretary has paid a guaranty or 

insurance claim thereon and the 

veteran’s resultant indebtedness to the 

Government has not been paid in full, 

and to have incurred actual liability on 

a guaranteed or insured loan if the 

Secretary is in receipt of a claim on the 

guaranty or insurance or is in receipt of 

a notice of default. In the case of a direct 

loan, the Secretary will be deemed to 

have incurred an actual loss if the loan 

is in default. A loan, the proceeds of 

which are to be disbursed progressively 

or at intervals, will be deemed to have 

been closed for the purposes of this 

paragraph if the loan has been 

completed in all respects excepting the 

actual ‘‘payout’’ of the entire loan 

proceeds. 

(Authority: 38 U.S.C. 3702(a), 3710(c)) 

(i) Any amounts that are disbursed for 

an ineligible purpose shall be excluded 

in computing the amount of guaranty or 

insurance credit. 

(j) Notwithstanding the lender has 

erroneously, but without intent to 

misrepresent, made certification with 

respect to paragraph (a)(1) of this 

section, the guaranty or insurance will 

become effective upon the curing of 

such default and its continuing current 

for a period of not less than 60 days 

thereafter. For the purpose of this 

paragraph a loan will be deemed current 

so long as the installment is received 

within 30 days after its due date. 

(k) No guaranty or insurance 

commitment or evidence of guaranty or 

insurance will be issuable in respect to 

any loan to finance a contract that: 

(1) Is for the purchase, construction, 

repair, alteration, or improvement of a 

dwelling or farm residence; 

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

(3) Provides for a purchase price or 

cost to the veteran in excess of the 

reasonable value established by the 

Secretary; and 

(4) Was signed by the veteran prior to 

the veteran’s receipt of notice of such 

reasonable value; unless such contract 

includes, or is amended to include, a 

provision that reads substantially as 

follows: 

It is expressly agreed that, notwithstanding 

any other provisions of this contract, the 

purchaser shall not incur any penalty by 

forfeiture of earnest money or otherwise be 

obligated to complete the purchase of the 

property described herein, if the contract 

purchase price or cost exceeds the reasonable 

value of the property established by the 

Department of Veterans Affairs. The 

purchaser shall, however, have the privilege 

and option of proceeding with the 

consummation of this contract without 

regard to the amount of the reasonable value 

established by the Department of Veterans 

Affairs. 

(Authority: 38 U.S.C. 501, 3703(c)(1)) 

(l) With respect to any loan for which 

a commitment was made on or after 

March 1, 1988, the Secretary must be 

notified whenever the holder receives 

knowledge of disposition of the 

residential property securing a VAguaranteed loan. 

(1) If the seller applies for prior 

approval of the assumption of the loan, 

then: 

(i) A holder (or its authorized 

servicing agent) who is an automatic 

lender must examine the 

creditworthiness of the purchaser and 

determine compliance with the 

provisions of 38 U.S.C. 3714. The 

creditworthiness review must be 

performed by the party that has 

automatic authority. If both the holder 

and its servicing agent are automatic 

lenders, then they must decide between 

themselves which one will make the 

determination of creditworthiness, 

whether the loan is current and whether 

there is a contractual obligation to 

assume the loan, as required by 38 

U.S.C. 3714. If the actual loan holder 


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does not have automatic authority and 

its servicing agent is an automatic 

lender, then the servicing agent must 

make the determinations required by 38 

U.S.C. 3714 on behalf of the holder. The 

actual holder will remain ultimately 

responsible for any failure of its 

servicing agent to comply with the 

applicable law and VA regulations. 

(A) If the assumption is approved and 

the transfer of the security is completed, 

then the notice required by this 

paragraph (l) shall consist of the credit 

package (unless previously provided in 

accordance with paragraph (l)(1)(i)(B) of 

this section) and a copy of the executed 

deed and/or assumption agreement as 

required by VA office of jurisdiction. 

The notice shall be submitted to the 

Department with the VA receipt for the 

funding fee provided for in 

§ 36.4813(e)(2). 

(B) If the application for assumption 

is disapproved, the holder shall notify 

the seller and the purchaser that the 

decision may be appealed to the VA 

office of jurisdiction within 30 days. 

The holder shall make available to that 

VA office all items used by the holder 

in making the holder’s decision in case 

the decision is appealed to VA. If the 

application remains disapproved after 

60 days (to allow time for appeal to and 

review by VA), then the holder must 

refund $50 of any fee previously 

collected under the provisions of 

§ 36.4813(d)(8). If the application is 

subsequently approved and the sale is 

completed, then the holder (or its 

authorized servicing agent) shall 

provide the notice described in 

paragraph (l)(1)(i)(A) of this section. 

(C) In performing the requirements of 

paragraphs (l)(1)(i)(A) or (l)(1)(i)(B) of 

this section, the holder must complete 

its examination of the creditworthiness 

of the prospective purchaser and advise 

the seller no later than 45 days after the 

date of receipt by the holder of a 

complete application package for the 

approval of the assumption. The 45-day 

period may be extended by an interval 

not to exceed the time caused by delays 

in processing of the application that are 

documented as beyond the control of 

the holder, such as employers or 

depositories not responding to requests 

for verifications, which were timely 

forwarded, or follow-ups on those 

requests. 

(ii) If neither the holder nor its 

authorized servicing agent is an 

automatic lender, the notice to VA shall 

include: 

(A) Advice regarding whether the loan 

is current or in default; 

(B) A copy of the purchase contract; 

and 

(C) A complete credit package 

developed by the holder which the 

Secretary may use for determining the 

creditworthiness of the purchaser. 

(D) The notice and documents 

required by this section must be 

submitted to the VA office of 

jurisdiction no later than 35 days after 

the date of receipt by the holder of a 

complete application package for the 

approval of the assumption, subject to 

the same extensions as provided in 

paragraph (l)(l)(i) of this section. If the 

assumption is not automatically 

approved by the holder or its authorized 

agent, pursuant to the automatic 

authority provisions, $50 of any fee 

collected in accordance with 

§ 36.4813(d)(8) must be refunded. If the 

Department of Veterans Affairs does not 

approve the assumption, the holder will 

be notified and an additional $50 of any 

fee collected under § 36.4813(d)(8) must 

be refunded following the expiration of 

the 30-day appeal period set out in 

paragraph (l)(l)(i)(B) of this section. If 

such an appeal is made to the 

Department of Veterans Affairs, then the 

review will be conducted at the 

Department of Veterans Affairs office of 

jurisdiction by an individual who was 

not involved in the original disapproval 

decision. If the application for 

assumption is approved and the transfer 

of security is completed, then the holder 

(or its authorized servicing agent) shall 

provide the notice required in paragraph 

(l)(l)(i)(A) of this section. 

(2) If the seller fails to notify the 

holder before disposing of property 

securing the loan, the holder shall notify 

the Secretary within 60 days after 

learning of the transfer. Such notice 

shall advise whether or not the holder 

intends to exercise its option to 

immediately accelerate the loan and 

whether or not an opportunity will be 

extended to the transferor and transferee 

to apply for retroactive approval of the 

assumption under the terms of this 

paragraph (l). 

(Authority: 38 U.S.C. 3714) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0516.) 

§ 36.4804 Deviations; changes of identity. 

A deviation of more than 5 percent 

between the estimates upon which a 

certificate of commitment has been 

issued and the report of final payment 

of the proceeds of the loan, or a change 

in the identity of the property upon 

which the original appraisal was based, 

will invalidate the certificate of 

commitment unless such deviation or 

change be approved by the Secretary. 

Any deviation in excess of 5 percent or 

change in the identity of the property 

upon which the original appraisal was 

based must be supported by a new or 

supplemental appraisal of reasonable 

value: Provided, That substitution of 

materials of equal or better quality and 

value approved by the veteran and the 

designated appraiser shall not be 

deemed a ‘‘change in the identity of the 

property’’ within the purview of this 

section. A deviation not in excess of 5 

percent will not require the prior 

approval of the Secretary. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4805 Partial disbursement. 

In cases where intervening 

circumstances make it impracticable to 

complete the actual paying out of the 

loan originally proposed, or justify the 

lender in declining to make further 

disbursements on a construction loan, 

evidence of guaranty or of insurance of 

the loan or the proper pro rata part 

thereof will be issuable if the loan is 

otherwise eligible for automatic 

guaranty or a certificate of commitment 

was issued thereon: Provided, 

(a) A report of the loan is submitted 

to the Secretary within a reasonable 

time subsequent to the last 

disbursement, but in no event more than 

90 days thereafter, unless report of the 

facts and circumstances is made and an 

extension of time obtained from the 

Secretary. 

(b) There has been no default on the 

loan, except that the existence of a 

default shall not preclude issuance of a 

guaranty certificate or insurance advice 

if a certificate of commitment was 

issued with respect to the loan. 

(c) The Secretary determines that a 

person of reasonable prudence similarly 

situated would not make further 

disbursements in the situation 

presented. 

(d) There has been full compliance 

with the provisions of 38 U.S.C. chapter 

37 and of the applicable regulations up 

to the time of the last disbursement. 

(e) In the case of a construction loan 

when the construction is not fully 

completed, the amount and percentage 

of the guaranty and the amount of the 

loan for the purposes of insurance or 

accounting to the Secretary shall be 

based upon such portion of the amount 

disbursed out of the proceeds of the 

loan which, when added to any other 

payments made by or on behalf of the 

veteran to the builder or the contractor, 

does not exceed 80 percent of the value 

of that portion of the construction 

performed (basing value on the contract 

price) plus the sum, if any, disbursed by 

the lender out of the proceeds of the 

loan for the land on which the 

construction is situated: And provided 


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further, That the lender shall certify as 

follows: 

(1) Any amount advanced for land is 

protected by title or lien as provided in 

the regulations concerning guaranty or 

insurance of loans to veterans; and 

(2) No enforceable liens, for any work 

done or material furnished for that part 

of the construction completed and for 

which payment has been made out of 

the proceeds of the loan, exist or can 

come into existence. 

(Authority: 38 U.S.C. 3703(c)(1) and (d)) 

§ 36.4806 Refinancing of mortgage or 

other lien indebtedness. 

(a) Any loan for the purpose of 

refinancing (38 U.S.C. 3710(a)(5)) an 

existing mortgage loan or other 

indebtedness secured by a lien of record 

on a dwelling or farm residence owned 

and occupied or to be reoccupied if the 

refinancing loan is for the completion of 

major alterations, repairs or 

improvements to the property, by an 

eligible veteran as the veteran’s home, 

or in the case of an eligible veteran 

unable to occupy the property because 

of active duty status in the Armed 

Forces, occupied or to be reoccupied by 

the veteran’s spouse as the spouse’s 

home, shall be eligible for guaranty in 

an amount as computed under 

§ 36.4802(a) provided that—

(1) The amount of the loan may not 

exceed an amount equal to 90 percent 

of the reasonable value of the dwelling 

or farm residence which will secure the 

loan, as determined by the Secretary. 

(Authority: 38 U.S.C. 3710(e)(1)) 

(2) The dollar amount of discount, if 

any, to be paid by the veteran is 

reasonable in amount as determined by 

the Secretary in accordance with 

§ 36.4813(d)(7)(i), 

(3) The loan is otherwise eligible for 

guaranty. 

(b) [Reserved] 

(c) Nothing shall preclude guaranty of 

a loan to an eligible veteran having 

home loan guaranty entitlement to 

refinance under the provisions of 38 

U.S.C. 3710(a)(5) a VA guaranteed or 

insured (or direct) mortgage loan made 

to him or her which is outstanding on 

the dwelling or farm residence owned 

and occupied or to be reoccupied after 

the completion of major alterations, 

repairs, or improvements to the 

property, by the veteran as a home, or 

in the case of an eligible veteran unable 

to occupy the property because of active 

duty status in the Armed Forces, 

occupied or to be reoccupied by the 

veteran’s spouse as the spouse’s home. 

(Authority: 38 U.S.C. 3710(e)(1)) 

(d) A refinancing loan may include 

contractual prepayment penalties, if 

any, due the holder of the mortgage or 

other lien indebtedness to be 

refinanced. 

(e) [Reserved] 

(f) Nothing in this section shall 

preclude the refinancing of the balance 

due for the purchase of land on which 

new construction is to be financed 

through the proceeds of the loan, or the 

refinancing of the balance due on an 

existing land sale contract relating to a 

veteran’s dwelling or farm residence. 

(g) A veteran may refinance (38 U.S.C. 

3710(a)(9)(B)(ii)) an existing loan that 

was for the purchase of, and is secured 

by, a manufactured home in order to 

purchase the lot on which the 

manufactured home is or will be 

permanently affixed, provided the 

following requirements are met: 

(1) The refinancing of a manufactured 

home and the purchase of a lot must be 

considered as one loan; 

(2) The manufactured home upon 

being permanently affixed to the lot will 

be considered real property under the 

laws of the State where it is located; 

(3) The loan must be secured by the 

same manufactured home which is 

being refinanced and the real property 

on which the manufactured home is or 

will be located; 

(4) The amount of the loan may not 

exceed an amount equal to the sum of 

the balance of the loan being refinanced; 

the purchase price, not to exceed the 

reasonable value of the lot; the costs of 

the necessary site preparation of the lot 

as determined by the Secretary; a 

reasonable discount as authorized in 

§ 36.4813(d)(6) with respect to that 

portion of the loan used to refinance the 

existing purchase money lien on the 

manufactured home, and closing costs 

as authorized in § 36.4813; and 

(5) If the loan being refinanced was 

guaranteed by VA, the portion of the 

loan made for the purpose of 

refinancing an existing purchase money 

manufactured home loan may be, 

guaranteed without regard to the 

outstanding guaranty entitlement 

available for use by the veteran, and the 

veteran’s guaranty entitlement shall not 

be charged as a result of any guaranty 

provided for the refinancing portion of 

the loan. For the purposes enumerated 

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

portion of the loan shall be considered 

to have been obtained with the guaranty 

entitlement used to obtain VAguaranteed loan being refinanced. The 

total guaranty for the new loan shall be 

the sum of the guaranty entitlement 

used to obtain VA-guaranteed loan 

being refinanced and any additional 

guaranty entitlement available to the 

veteran. However, the total guaranty 

may not exceed the guaranty amount as 

calculated under § 36.4802(a). 

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

§ 36.4807 Interest rate reduction 

refinancing loan. 

(a) Pursuant to 38 U.S.C. 3710(a)(8), 

(a)(9)(B)(i), and (a)(11), a veteran may 

refinance an existing VA guaranteed, 

insured, or direct loan to reduce the 

interest rate payable on the existing loan 

provided that all of the following 

requirements are met: 

(1) The new loan must be secured by 

the same dwelling or farm residence as 

the loan being refinanced. 

(2) The veteran owns the dwelling or 

farm residence securing the loan and 

(i) Occupies the dwelling or residence 

as his or her home; or 

(ii) Previously occupied the dwelling 

or residence as his or her home and 

certifies, in such form as the Secretary 

shall require, that he or she has 

previously occupied the dwelling or 

residence as a home; or 

(iii) In a case in which the veteran is 

or was unable to occupy the residence 

or dwelling as a home because the 

veteran was on active duty status as a 

member of the Armed Forces, the 

spouse of the veteran occupies, or 

previously occupied, the dwelling or 

residence as the spouse’s home and 

certifies to that occupancy in such form 

as the Secretary shall require. 

(Authority: 38 U.S.C. 3710(e)(1)) 

(3) The monthly principal and interest 

payment on the new loan is lower than 

the principal and interest payment on 

the loan being refinanced; or 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 

§ 36.4839(a)(4); or the Secretary 

approves the loan 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 § 36.4840. 

(4) The amount of the refinancing 

loan does not exceed: 

(i) An amount equal to the balance of 

the loan being refinanced, which is not 

delinquent, except as provided in 

paragraph (a)(5) of this section, plus 

closing costs authorized by § 36.4813(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 


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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 

§ 36.4839(a)(4). 

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

(5) If the loan being refinanced is 

delinquent (delinquent means that a 

scheduled monthly payment of 

principal and interest is more than 30 

days past due), the new loan will be 

guaranteed only if the Secretary 

approves it 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 § 36.4840. 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 does not exceed the greater of the 

original guaranty amount of the loan 

being refinanced or 25 percent of the 

new loan. 

(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 

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)) 

(b) Notwithstanding any other 

regulatory provision, the interest rate 

reduction refinancing loan may be 

guaranteed without regard to the 

amount of guaranty entitlement 

available for use by the veteran, and the 

amount of the veteran’s remaining 

guaranty entitlement, if any, shall not be 

charged for an interest rate reduction 

refinancing loan. The interest rate 

reduction refinancing loan will be 

guaranteed with the lesser of the 

entitlement used by the veteran to 

obtain the loan being refinanced or the 

amount of the guaranty as calculated 

under § 36.4802(a). The veteran’s loan 

guaranty entitlement originally used for 

a purpose as enumerated in 38 U.S.C. 

3710(a)(1) through (7) and (a)(9)(A)(i) 

and (ii) and subsequently transferred to 

an interest rate reduction refinancing 

loan (38 U.S.C. 3710(a)(8) or (a)(9)(B)(i)) 

shall be eligible for restoration when the 

interest rate reduction refinancing loan 

or subsequent interest rate reduction 

refinancing loans on the same property 

meets the requirements of § 36.4802(h). 

(Authority: 38 U.S.C. 3703(a)) 

(c) Title to the estate which is 

refinanced for the purpose of an interest 

rate reduction must be in conformity 

with § 36.4854. 

(Authority: 38 U.S.C. 3710(a)(8), (a)(9)(B)(i) 

and (e)) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0601.) 

§ 36.4808 Joint loans. 

(a) Except as provided in paragraph 

(b) of this section, the prior approval of 

the Secretary is required in respect to 

any loan to be made to two or more 

borrowers who become jointly and 

severally liable, or jointly liable 

therefor, and who will acquire an 

undivided interest in the property to be 

purchased or who will otherwise share 

in the proceeds of the loan, or in respect 

to any loan to be made to an eligible 

veteran whose interest in the property 

owned, or to be acquired with the loan 

proceeds, is an undivided interest only, 

unless such interest is at least a 50 

percent interest in a partnership. The 

amount of the guaranty or insurance 

credit shall be computed in such cases 

only on that portion of the loan 

allocable to the eligible veteran which, 

taking into consideration all relevant 

factors, represents the proper 

contribution of the veteran to the 

transaction. Such loans shall be secured 

to the extent required by 38 U.S.C. 

chapter 37 and the regulations 

concerning guaranty or insurance of 

loans to veterans. 

(b) Notwithstanding the provisions of 

paragraph (a) of this section, the joinder 

of the spouse of a veteran-borrower in 

the ownership of residential property 

shall not require prior approval or 

preclude the issuance of a guaranty or 

insurance credit based upon the entire 

amount of the loan. If both spouses be 

eligible veterans, either or both may, 

within permissible maxima, utilize 

available guaranty or insurance 

entitlement. 

(c) For the purpose of determining the 

rights and the liabilities of the Secretary 

with respect to a loan subject to 

paragraph (a) of this section, credits 

legally applicable to the entire loan 

shall be applied as follows: 

(1) Prepayments made expressly for 

credit to that portion of the 

indebtedness allocable to the veteran 

(including the gratuity paid pursuant to 

former provisions of law), shall be 

applied to such portion of the 

indebtedness. All other payments shall 

be applied ratably to those portions of 

the loan allocable respectively to the 

veteran and to the other debtors. 

(2) Proceeds of the sale or other 

liquidation of the security shall be 

applied ratably to the respective 

portions of the loan, such portion of the 

proceeds as represents the interest of the 

veteran being applied to that portion of 

the loan allocable to such veteran. 

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

§ 36.4809 Transfer of title by borrower or 

maturity by demand or acceleration. 

(a) Except as provided by paragraphs 

(b) or (c) of this section the conveyance 

of or other transfer of title to property 

by operation of law or otherwise, after 

the creation of a lien thereon to secure 

a loan which is guaranteed or insured in 

whole or in part by the Secretary, shall 

not constitute an event of default, or 

acceleration of maturity, elective or 

otherwise, and shall not of itself 

terminate or otherwise affect the 

guaranty or insurance. 

(b)(1) The Secretary may issue 

guaranty on loans in which a State, 

Territorial, or local governmental 

agency provides assistance to a veteran 

for the acquisition of a dwelling. Such 

loans will not be considered ineligible 

for guaranty if the State, Territorial, or 

local authority, by virtue of its laws or 

regulations or by virtue of Federal law, 

requires the acceleration of maturity of 

the loan upon the sale or conveyance of 

the security property to a person 

ineligible for assistance from such 

authority. 

(2) At the time of application for a 

loan assisted by a State, Territorial, or 

local governmental agency, the veteranapplicant must be fully informed and 

consent in writing to the housing 

authority restrictions. A copy of the 

veteran’s consent statement must be 

forwarded with the loan application or 

the report of a loan processed on the 

automatic basis. 

(Authority: 38 U.S.C. 3703(c)) 

(c) Any housing loan which is 

financed under 38 U.S.C. chapter 37, 

and to which section 3714 of that 

chapter applies, shall include a 

provision in the security instrument that 

the holder may declare the loan 

immediately due and payable upon 

transfer of the property securing such 

loan to any transferee unless the 

acceptability of the assumption of the 

loan is established pursuant to section 

3714. 

(1) A holder may not exercise its 

option to accelerate a loan upon: 


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6320 Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 

(i) The creation of a lien or other 

encumbrance subordinate to the 

lender’s security instrument which does 

not relate to the transfer of rights of 

occupancy in the property; 

(ii) The creation of a purchase money 

security interest for household 

appliances; 

(iii) A transfer by devise, descent, or 

operation of law on the death of a joint 

tenant or tenant by the entirety; 

(iv) The granting of a leasehold 

interest of three years or less not 

containing an option to purchase; 

(v) A transfer to a relative resulting 

from the death of a borrower; 

(vi) A transfer where the spouse or 

children of the borrower become joint 

owners of the property with the 

borrower; 

(vii) A transfer resulting from a decree 

of a dissolution of marriage, legal 

separation agreement, or from an 

incidental property settlement 

agreement by which the spouse of the 

borrower becomes the sole owner of the 

property. In such a case the borrower 

shall have the option of applying 

directly to the Department of Veterans 

Affairs regional office of jurisdiction for 

a release of liability in accordance with 

§ 36.4826; or 

(viii) A transfer into an inter vivos 

trust in which the borrower is and 

remains a beneficiary and which does 

not relate to a transfer of rights of 

occupancy in the property. 

(2) With respect to each such loan at 

least one of the instruments used in the 

transaction shall contain the following 

statement: ‘‘This loan is not assumable 

without the approval of the Department 

of Veterans Affairs or its authorized 

agent.’’ This statement must be: 

(i) Printed in a font size which is the 

larger of: 

(A) Two times the largest font size 

contained in the body of the instrument; 

or 

(B) 18 points; and 

(ii) Contained in at least one of the 

following: 

(A) The note; 

(B) The mortgage or deed of trust; or 

(C) A rider to either the note, the 

mortgage, or the deed of trust. 

(Authority: (38 U.S.C. 3714(d)) 

(d) The term of payment of any 

guaranteed or insured obligation shall 

bear a proper relation to the borrower’s 

present and anticipated income and 

expenses, (except loans pursuant to 38 

U.S.C. 3710(a)(8) or (a)(9)(B)(i)). In 

addition the terms of payment of any 

guaranteed or insured obligation shall 

provide for discharge of the obligation at 

a definite date or dates or intervals, in 

amount specified on or computable 

from the face of the instrument. A loan 

which is payable on demand, or at sight, 

or on presentation, or at a time not 

specified or computable from the 

language in the note, mortgage, or other 

loan instrument, or which contemplates 

periodic renewals at the option of the 

holder to satisfy the repayment 

requirements of this section, is not 

eligible for guaranty or insurance, 

except as provided in paragraph (f) of 

this section. 

(e) No guaranteed or insured 

obligation shall contain a provision to 

the effect that the holder shall have the 

right to declare the indebtedness due, or 

to pursue one or more legal or equitable 

remedies, if holder ‘‘shall feel insecure,’’

or upon the occurrence of one or more 

such conditions optional to the holder, 

without regard to an act or omission by 

the debtor, which condition by the 

terms of the note, mortgage, or other 

loan instrument would at the option of 

the holder afford a basis for declaring a 

default. 

(f) Notwithstanding the inclusion in 

the guaranteed or insured obligation of 

a provision contrary to the provisions of 

this section, the right of the holder to 

payment of the guaranty or insurance 

shall not be thereby impaired: Provided, 

(1) Default was declared or maturity 

was accelerated under some other 

provision of the note, mortgage, or other 

loan instrument, or 

(2) Activation or enforcement of such 

provision is warranted under 

§ 36.4850(i)(2), or if there exist 

conditions justifying the appointment of 

a receiver for the property (without 

reference to any contractual provisions 

for such appointment), or 

(3) The prior approval of the Secretary 

was obtained. 

(Authority: 38 U.S.C. 3703(c)) 

(g) The holder of any guaranteed or 

insured obligation shall have the right, 

notwithstanding the absence of express 

provision therefor in the instruments 

evidencing the indebtedness, to 

accelerate the maturity of such 

obligation at any time after the 

continuance of any default for the 

period of three months. 

(h) If sufficient funds are tendered to 

bring a delinquency current at any time 

prior to a judicial or statutory sale or 

other public sale under power of sale 

provisions contained in the loan 

instruments to liquidate any security for 

a guaranteed loan, the holder shall be 

obligated to accept the funds in 

payment of the delinquency unless the 

prior approval of the Secretary is 

obtained to do otherwise, or unless 

reinstatement of the loan would 

adversely affect the dignity of the lien 

or be otherwise precluded by law. A 

delinquency will include all installment 

payments (principal, interest, taxes, 

insurance, advances, etc.) due and 

unpaid and any accumulated late 

charges plus any reasonable expenses 

incurred and paid by the holder if 

termination proceedings have begun 

(e.g., advertising costs, foreclosure costs, 

attorney or trustee fees, recording fees, 

etc.). 

(Authority: 38 U.S.C. 3703(c)) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0516.) 

§ 36.4810 Amortization. 

(a) All loans, the maturity date of 

which is beyond 5 years from date of 

loan or date of assumption by the 

veteran, shall be amortized. Except as 

provided in paragraph (e) of this 

section, the schedule of payments 

thereon shall be in accordance with any 

generally recognized plan of 

amortization requiring approximately 

equal periodic payments and shall 

require a principal reduction not less 

often than annually during the life of 

the loan. The final installment on any 

loan shall not be in excess of two times 

the average of the preceding 

installments, except that on a 

construction loan such installment may 

be for an amount not in excess of 5 

percent of the original principal amount 

of the loan. The limitations imposed 

herein on the amount of the final 

installment shall not apply in the case 

of any loan extended pursuant to 

§ 36.4815. 

(b) Any plan of repayment on loans 

required to be amortized which does not 

provide for approximately equal 

periodic payments shall not be eligible 

unless the plan conforms with the 

provisions of paragraph (e) of this 

section, or is otherwise approved by the 

Secretary. 

(c) Every guaranteed or insured loan 

shall be repayable within the estimated 

economic life of the property securing 

the loan. 

(d) Subject to paragraph (a) of this 

section, any amounts which under the 

terms of a loan do not become due and 

payable on or before the last maturity 

date permissible for loans of its class 

under the limitations contained in 38 

U.S.C. chapter 37 shall automatically 

fall due on such date. See § 36.4837. 

(e) A graduated payment mortgage 

loan, providing for deferrals of interest 

during the first 5 years of the loan and 

addition of the deferred amounts to 

principal shall be eligible, Provided: 

(1) The loan is for the purpose of 

acquiring a single-family dwelling unit, 


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including a condominium unit or 

simultaneously acquiring and 

improving a previously occupied, 

existing single-family dwelling unit. 

(2)(i) For proposed construction or 

existing homes not previously occupied 

(new homes), the maximum loan 

amount cannot exceed 97.5 percent of 

the lesser of the reasonable value of the 

property as of the time the loan is made 

or the purchase price. 

(ii) For previously occupied, existing 

homes the maximum loan amount must 

be computed to assure that the principal 

amount of the loan, including all 

interest scheduled to be deferred and 

added to the loan principal, will not 

exceed the purchase price or reasonable 

value of the property, whichever is less, 

as of the time the loan is made; 

(3) The increases in the monthly 

periodic payment amount occur 

annually on each of the first five annual 

anniversary dates of the first loan 

installment due date, at a rate of 7.5 

percent over the preceding year’s 

monthly payment amount; 

(4) Beginning with the payment due 

on the fifth annual anniversary date of 

the first loan installment due date, all 

remaining monthly periodic payments 

are approximately equal in amount and 

amortize the loan fully in accordance 

with the requirements of this section, 

and 

(5) The plan is otherwise acceptable 

to the Secretary. 

(Authority: 38 U.S.C. 3703(d)) 

§ 36.4811 Prepayment. 

The debtor shall have the right to 

prepay at any time, without premium or 

fee, the entire indebtedness or any part 

thereof not less than the amount of one 

installment, or $100, whichever is less. 

Any prepayment in full of the 

indebtedness shall be credited on the 

date received, and no interest may be 

charged thereafter. Any partial 

prepayment made on other than an 

installment due date need not be 

credited until the next following 

installment due date or 30 days after 

such prepayment, whichever is earlier. 

The holder and the debtor may agree at 

any time that any prepayment not 

previously applied in satisfaction of 

matured installments shall be reapplied 

for the purpose of curing or preventing 

any subsequent default. 

(Authority: 38 U.S.C. 3703(d)) 

§ 36.4812 Interest rates. 

(a) In guaranteeing or insuring loans 

under 38 U.S.C. chapter 37, the 

Secretary may elect to require that such 

loans either bear interest at a rate that 

is agreed upon by the veteran and the 

lender, or bear interest at a rate not in 

excess of a rate established by the 

Secretary. The Secretary may, from time 

to time, change that election by 

publishing a notice in the Federal 

Register. However, the interest rate of a 

loan for the purpose of an interest rate 

reduction under 38 U.S.C. 3710(a)(8), 

(a)(9)(B)(i), or (a)(11) must be less than 

the interest rate of the VA loan being 

refinanced. This paragraph does not 

apply in the case of an adjustable rate 

mortgage being refinanced under 38 

U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) 

with a fixed rate loan. 

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

(b) For loans bearing an interest rate 

agreed upon by the veteran and the 

lender, the veteran may pay reasonable 

discount points in connection with the 

loan. The discount points may not be 

included in the loan amount, except for 

interest rate reduction refinancing loans 

under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), 

and (a)(11). For loans bearing an interest 

rate agreed upon by the veteran and the 

lender, the provisions of § 36.4813(d)(6) 

and (d)(7) do not apply. 

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

(c) Except as provided in § 36.4815, 

interest in excess of the rate reported by 

the lender when requesting evidence of 

guaranty or insurance shall not be 

payable on any advance, or in the event 

of any delinquency or default: Provided, 

that a late charge not in excess of an 

amount equal to 4 percent on any 

installment paid more than 15 days after 

due date shall not be considered a 

violation of this limitation. 

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

(d) Effective October 1, 2003, 

adjustable rate mortgage loans which 

comply with the requirements of this 

paragraph (d) are eligible for guaranty. 

(1) Interest rate index. Changes in the 

interest rate charged on an adjustable 

rate mortgage must correspond to 

changes in the weekly average yield on 

one year (52 weeks) Treasury bills 

adjusted to a constant maturity. Yields 

on one year Treasury bills at ‘‘constant 

maturity’’ are interpolated by the United 

States Treasury from the daily yield 

curve. This curve, which relates the 

yield on the security to its time to 

maturity, is based on the closing market 

bid yields on actively traded one year 

Treasury bills in the over-the-counter 

market. The weekly average one year 

constant maturity Treasury bill yields 

are published by the Federal Reserve 

Board of the Federal Reserve System. 

The Federal Reserve Statistical Release 

Report H. 15 (519) is released each 

Monday. These one year constant 

maturity Treasury bill yields are also 

published monthly in the Federal 

Reserve Bulletin, published by the 

Federal Reserve Board of the Federal 

Reserve System, as well as quarterly in 

the Treasury Bulletin, published by the 

Department of the Treasury. 

(2) Frequency of interest rate changes. 

Interest rate adjustments must occur on 

an annual basis, except that the first 

adjustment may occur no sooner than 36 

months from the date of the borrower’s 

first mortgage payment. The adjusted 

rate will become effective the first day 

of the month following the adjustment 

date; the first monthly payment at the 

new rate will be due on the first day of 

the following month. To set the new 

interest rate, the lender will determine 

the change between the initial (i.e., 

base) index figure and the current index 

figure. The initial index figure shall be 

the most recent figure available before 

the date of mortgage loan origination. 

The current index figure shall be the 

most recent index figure available 30 

days before the date of each interest rate 

adjustment. 

(3) Method of rate changes. Interest 

rate changes may only be implemented 

through adjustments to the borrower’s 

monthly payments. 

(4) Initial rate and magnitude of 

changes. The initial contract interest 

rate of an adjustable rate mortgage shall 

be agreed upon by the lender and the 

veteran. Annual adjustments in the 

interest rate shall correspond to annual 

changes in the interest rate index, 

subject to the following conditions and 

limitations: 

(i) No single adjustment to the interest 

rate may result in a change in either 

direction of more than one percentage 

point from the interest rate in effect for 

the period immediately preceding that 

adjustment. Index changes in excess of 

one percentage point may not be carried 

over for inclusion in an adjustment in 

a subsequent year. Adjustments in the 

effective rate of interest over the entire 

term of the mortgage may not result in 

a change in either direction of more 

than five percentage points from the 

initial contract interest rate. 

(ii) At each adjustment date, changes 

in the index interest rate, whether 

increases or decreases, must be 

translated into the adjusted mortgage 

interest rate, rounded to the nearest oneeighth of one percent, up or down. For 

example, if the margin is 2 percent and 

the new index figure is 6.06 percent, the 

adjusted mortgage interest rate will be 8 

percent. If the margin is 2 percent and 

the new index figure is 6.07 percent, the 

adjusted mortgage interest rate will be 8 

1/8 percent. 

(5) Pre-loan disclosure. The lender 

shall explain fully and in writing to the 


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borrower, at the time of loan 

application, the nature of the obligation 

taken. The borrower shall certify in 

writing that he or she fully understands 

the obligation and a copy of the signed 

certification shall be placed in the loan 

folder and furnished to VA upon 

request. 

(i) The fact that the mortgage interest 

rate may change, and an explanation of 

how changes correspond to changes in 

the interest rate index; 

(ii) Identification of the interest rate 

index, its source of publication and 

availability; 

(iii) The frequency (i.e., annually) 

with which interest rate levels and 

monthly payments will be adjusted, and 

the length of the interval that will 

precede the initial adjustment; and 

(iv) A hypothetical monthly payment 

schedule that displays the maximum 

potential increases in monthly 

payments to the borrower over the first 

five years of the mortgage, subject to the 

provisions of the mortgage instrument. 

(6) Annual disclosure. At least 25 

days before any adjustment to a 

borrower’s monthly payment may occur, 

the lender must provide a notice to the 

borrower which sets forth the date of the 

notice, the effective date of the change, 

the old interest rate, the new interest 

rate, the new monthly payment amount, 

the current index and the date it was 

published, and a description of how the 

payment adjustment was calculated. A 

copy of the annual disclosure shall be 

made a part of the lender’s permanent 

record on the loan. 

(Authority: 38 U.S.C. 3707A) 

§ 36.4813 Charges and fees. 

(a) No charge shall be made against, 

or paid by, the borrower incident to the 

making of a guaranteed or insured loan 

other than those expressly permitted 

under paragraph (d) or (e) of this 

section, and no loan shall be guaranteed 

or insured unless the lender certifies to 

the Secretary that it has not imposed 

and will not impose any charges or fees 

against the borrower in excess of those 

permissible under paragraph (d) or (e) of 

this section. Any charge which is proper 

to make against the borrower under the 

provisions of this paragraph may be 

paid out of the proceeds of the loan: 

Provided, That if the purpose of the loan 

is to finance the purchase or 

construction of residential property the 

costs of closing the loan including the 

pro rata portion of the ground rents, 

hazard insurance premiums, current 

year’s taxes, and other prepaid items 

normally involved in financing such 

transaction may not be included in the 

loan. 

(b) Except as provided in this subpart, 

no brokerage or service charge or their 

equivalent may be charged against the 

debtor or the proceeds of the loan either 

initially, periodically, or otherwise. 

(c) Brokerage or other charges shall 

not be made against the veteran for 

obtaining any guaranty or insurance 

under 38 U.S.C. chapter 37, nor shall 

any premiums for insurance on the life 

of the borrower be paid out of the 

proceeds of a loan. 

(d) The following schedule of 

permissible fees and charges shall be 

applicable to all Department of Veterans 

Affairs guaranteed or insured loans. 

(1) The veteran may pay reasonable 

and customary amounts for any of the 

following items: 

(i) Fees of Department of Veterans 

Affairs appraiser and of compliance 

inspectors designated by the 

Department of Veterans Affairs except 

appraisal fees incurred for the 

predetermination of reasonable value 

requested by others than veteran or 

lender. 

(ii) Recording fees and recording taxes 

or other charges incident to recordation. 

(iii) Credit report. 

(iv) That portion of taxes, 

assessments, and other similar items for 

the current year chargeable to the 

borrower and an initial deposit (lumpsum payment) for the tax and insurance 

account. 

(v) Hazard insurance required by 

§ 36.4829. 

(vi) Survey, if required by lender or 

veteran; except that any charge for a 

survey in connection with a loan under 

§§ 36.4860 through 36.4865 

(Condominium Loans) must have the 

prior approval of the Secretary. 

(vii) Title examination and title 

insurance, if any. 

(viii) The actual amount charged for 

flood zone determinations, including a 

charge for a life-of-the-loan flood zone 

determination service purchased at the 

time of loan origination, if made by a 

third party who guarantees the accuracy 

of the determination. A fee may not be 

charged for a flood zone determination 

made by a Department of Veterans 

Affairs appraiser or for the lender’s own 

determination. 

(ix) Such other items as may be 

authorized in advance by the Under 

Secretary for Benefits as appropriate for 

inclusion under this paragraph (d) as 

proper local variances. 

(2) A lender may charge and the 

veteran may pay a flat charge not 

exceeding 1 percent of the amount of 

the loan, provided that such flat charge 

shall be in lieu of all other charges 

relating to costs of origination not 

expressly specified and allowed in this 

schedule. 

(3) In cases where a lender makes 

advances to a veteran during the 

progress of construction, alteration, 

improvement, or repair, either under a 

commitment of the Department of 

Veterans Affairs to issue a guaranty 

certificate or insurance credit upon 

completion, or where the lender would 

be entitled to guaranty or insurance on 

such advances when reported under 

automatic procedure, the lender may 

make a charge against the veteran of not 

exceeding 2 percent of the amount of 

the loan for its services in supervising 

the making of advances and the progress 

of construction notwithstanding that the 

‘‘holdback’’ or final advance is not 

actually paid out until after the 

construction, alteration, improvement, 

or repair is fully completed: Provided, 

That the major portion (51 percent or 

more) of the loan proceeds is paid out 

during the actual progress of the 

construction, alteration, improvement, 

or repair. Such charge may be in 

addition to the 1 percent charge allowed 

under paragraph (d)(2) of this section. 

(4) In consideration, alteration, 

improvement or repair loans, including 

supplemental loans made pursuant to 

§ 36.4859, where no charge is 

permissible under the provisions of 

paragraph (d)(3) of this section the 

lender may charge and the veteran may 

pay a flat sum not exceeding 1 percent 

of the amount of the loan. Such charge 

may be in addition to the 1 percent 

allowed under paragraph (d)(2) of this 

section. 

(5) The fees and charges permitted 

under this paragraph are maximums and 

are not intended to preclude a lender 

from making alternative charges against 

the veteran which are not specifically 

authorized in the schedule provided the 

imposition of such alternative charges 

would not result in an aggregate charge 

or payment in excess of the prescribed 

maximum. 

(6) The veteran borrower subject to 

the limitations set forth in paragraphs 

(d)(6) and (7) of this section may pay a 

discount required by a lender when the 

proceeds of the loan will be used for any 

of the following purposes: 

(i) To refinance existing indebtedness 

pursuant to 38 U.S.C. 3710(a)(5), (a)(8), 

(a)(9)(B)(i) or (a)(9)(B)(ii); 

(ii) To repair, alter or improve a 

dwelling owned by the veteran pursuant 

to 38 U.S.C. 3710(a)(4) or (7) if such 

loan is to be secured by a first lien; 

(iii) To construct a dwelling or farm 

residence on land already owned or to 

be acquired by the veteran, provided 

that the veteran did not or will not 

acquire the land directly or indirectly 


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from a builder or developer who will be 

constructing such dwelling or farm 

residence; 

(iv) To purchase a dwelling from a 

class of sellers which the Secretary 

determines are legally precluded under 

all circumstances from paying such a 

discount if the best interest of the 

veteran would be so served. 

(7) Discounts shall be computed as 

follows: 

(i) Unless otherwise approved by the 

Secretary, the discount, if any, to be 

paid by the borrower on a loan secured 

by a first lien may not exceed the 

difference between the bid price, 

rounded to the lower whole number, 

and par value for GNMA (Government 

National Mortgage Association) 90-day 

forward bid closing price for pass 

through securities 1⁄2 percent less than 

the face note rate of the loan. Unless the 

lender and borrower negotiate a firm 

written commitment for a maximum 

amount of discount to be paid, the bid 

price to be used in the computation 

must be the GNMA 90-day forward bid 

closing quote for any day 1 to 4 business 

days prior to loan closing. ‘‘Loan 

closing’’ is defined for this purpose as 

the date on which the borrower’s 3-day 

right of rescission commences pursuant 

to the Truth in Lending Act. If the 

lender and borrower choose to negotiate 

a firm discount commitment for a 

maximum amount of discount to be 

paid, the bid price to be used in 

establishing the maximum discount 

must be the closing quote for the 

business day prior to the date of the 

commitment. Lenders negotiating firm 

commitments must close that loan at a 

discount no higher than the firm 

commitment regardless of changes in 

the maximum allowable Department of 

Veterans Affairs interest rate. If a 

lender’s commitment expires prior to 

loan closing, the lender and borrower 

may negotiate a new firm commitment 

based on the procedure outlined in this 

paragraph (d)(7)(i) or may use the 

procedure for determining the discount 

based on the GNMA 90-day forward bid 

closing quote for any day 1 to 4 business 

days prior to loan closing. 

(ii) The borrower, subject to the 

limitations set forth in paragraphs (d)(6) 

and (7) of this section, may pay a 

discount required by the lender when 

the proceeds of the loan will be used to 

repair, alter, or improve a dwelling 

owned by the veteran pursuant to 38 

U.S.C. 3710(a)(4) or (7) if such loan is 

unsecured or secured by less than a first 

lien. No such discount may be charged 

unless: 

(A) The loan is submitted to the 

Secretary for prior approval; 

(B) The dollar amount of the discount 

is disclosed to the Secretary and the 

veteran prior to the issuance by the 

Secretary of the certificate of 

commitment. Said certificate of 

commitment shall specify the discount 

to be paid by the veteran, and this 

discount may not be increased once the 

commitment is issued without the 

approval of the Secretary; and 

(C) The discount has been determined 

by the Secretary to be reasonable in 

amount. 

(iii) A veteran may pay the discount 

on an acquisition and improvement loan 

(as defined in § 36.4801) provided: 

(A) The veteran pays no discount on 

the acquisition portion of the loan 

except in accordance with paragraph 

(d)(6)(iv) of this section; and 

(B) The discount paid on the 

improvements portion of the loan does 

not exceed the percentage of discount 

paid on the acquisition portion of the 

loan. 

Note to paragraph (d)(7)(iii): 

Acquisition and improvement loans 

may be closed either on the automatic 

or prior approval basis. 

(iv) Unless the Under Secretary for 

Benefits otherwise directs, all powers of 

the Secretary under paragraphs (d)(6) 

and (7) of this section are hereby 

delegated to the officials designated by 

§ 36.4845(b). 

(Authority: 38 U.S.C. 3703, 3710; 42 U.S.C. 

4001 note, 4012a) 

(8) On any loan to which 38 U.S.C. 

3714 applies, the holder may charge a 

reasonable fee, not to exceed the lesser 

of $300 and the actual cost of any credit 

report required, or any maximum 

prescribed by applicable State law, for 

processing an application for 

assumption and changing its records. 

(Authority: 38 U.S.C. 3714) 

(e) Subject to the limitations set out in 

paragraph (e)(4) of this section, a fee 

must be paid to the Secretary. 

(1) The fee on loans to veterans shall 

be as follows: 

(i) On all interest rate reduction 

refinancing loans guaranteed under 38 

U.S.C. 3710(a)(8), (a)(9)(B)(i), and 

(a)(11), the fee shall be 0.50 percent of 

the total loan amount. 

(ii) On all refinancing loans other than 

those described in paragraph (e)(1)(i) of 

this section, the funding fee shall be 

2.75 percent of the loan amount for 

loans to veterans whose entitlement is 

based on service in the Selected Reserve 

under the provisions of 38 U.S.C. 

3701(b)(5), and 2 percent of the loan 

amount for loans to all other veterans; 

provided, however, that if the veteran is 

using entitlement for a second or 

subsequent time, the fee shall be 3 

percent of the loan amount. 

(iii) Except for loans to veterans 

whose entitlement is based on service in 

the Selected Reserve under the 

provisions of 38 U.S.C. 3701(b)(5), the 

funding fee shall be 2 percent of the 

total loan amount for all loans for the 

purchase or construction of a home on 

which the veteran does not make a 

down payment, unless the veteran is 

using entitlement for a second or 

subsequent time, in which case the fee 

shall be 3 percent. On purchase or 

construction loans on which the veteran 

makes a down payment of 5 percent or 

more, but less than 10 percent, the 

amount of the funding fee shall be 1.50 

percent of the total loan amount. On 

purchase or construction loans on 

which the veteran makes a down 

payment of 10 percent or more, the 

amount of the funding fee shall be 1.25 

percent of the total loan amount. 

(iv) On loans to veterans whose 

entitlement is based on service in the 

Selected Reserve under the provisions 

of 38 U.S.C. 3701(b)(5), the funding fee 

shall be 2.75 percent of the total loan 

amount on loans for the purchase or 

construction of a home on which the 

veteran does not make a down payment, 

unless the veteran is using entitlement 

for a second or subsequent time, in 

which case the fee shall be 3 percent. 

On purchase or construction loans on 

which veterans whose entitlement is 

based on service in the Selected Reserve 

make a down payment of 5 percent or 

more, but less than 10 percent, the 

amount of the funding fee shall be 2.25 

percent of the total loan amount. On 

purchase or construction loans on 

which such veterans make a down 

payment of 10 percent or more, the 

amount of the funding fee shall be 2 

percent of the total loan amount. 

(v) All or part of the fee may be paid 

in cash at loan closing or all or part of 

the fee may be included in the loan 

without regard to the reasonable value 

of the property or the computed 

maximum loan amount, as appropriate. 

In computing the fee, the lender will 

disregard any amount included in the 

loan to enable the borrower to pay such 

fee. 

(Authority: 38 U.S.C. 3729) 

(2) Subject to the limitations set out 

in this section, a fee of one-half of one 

percent of the loan balance must be paid 

to the Secretary in a manner prescribed 

by the Secretary by a person assuming 

a loan to which 38 U.S.C. 3714 applies. 

The instrument securing such a loan 

shall contain a provision describing the 

right of the holder to collect this fee as 

trustee for the Department of Veterans 


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Affairs. The loan holder shall list the 

amount of this fee in every assumption 

statement provided and include a notice 

that the fee must be paid to the holder 

immediately following loan settlement. 

The fee must be transmitted to the 

Secretary within 15 days of the receipt 

by the holder of the notice of transfer. 

(Authority: 38 U.S.C. 3714, 3729) 

(3) The lender is required to pay to 

the Secretary the fee described in 

paragraph (e)(1) of this section within 

15 days after loan closing. Any lender 

closing a loan, subject to the limitations 

set out in paragraph (e)(4) of this section 

who fails to submit timely payment of 

this fee will be subject to a late charge 

equal to 4 percent of the total fee due. 

If payment of the fee described in 

paragraph (e)(1) of this section is made 

more than 30 days after loan closing, 

interest will be assessed at a rate set in 

conformity with the Department of 

Treasury’s Fiscal Requirements Manual. 

This interest charge is in addition to the 

4 percent late charge, but the late charge 

is not included in the amount on which 

interest is computed. This interest 

charge is to be calculated on a daily 

basis beginning on the date of closing, 

although the interest will be assessed 

only on funding fee payments received 

more than 30 days after closing. 

(4) The lender is required to pay to 

the Secretary electronically through the 

Automated Clearing House (ACH) 

system the fees described in paragraphs 

(e)(1) and (e)(2) of this section and any 

late fees and interest due on them. This 

shall be paid to a collection agent by 

operator-assisted telephone, terminal 

entry, or CPU-to-CPU transmission. The 

collection agent will be identified by the 

Secretary. The lender shall provide the 

collection agent with the following: 

authorization for payment of the 

funding fee (including late fees and 

interest) along with the following 

information: VA lender ID number; fourdigit personal identification number; 

dollar amount of debit; VA loan 

number; OJ (office of jurisdiction) code; 

closing date; loan amount; information 

about whether the payment includes a 

shortage, late charge, or interest; veteran 

name; loan type; sale amount; down 

payment; whether the veteran is a 

reservist; and whether this is a 

subsequent use of entitlement. For all 

transactions received prior to 8:15 p.m. 

on a workday, VA will be credited with 

the amount paid to the collection agent 

at the opening of business the next 

banking day. 

(Authority: 38 U.S.C. 3729(a)) 

(5) The fees described in paragraph 

(e)(1) and (e)(2) of this section shall not 

be collected from a veteran who is 

receiving compensation (or who but for 

the receipt of retirement pay would be 

entitled to receive compensation) or 

from a surviving spouse described in 

section 3701(b) of title 38, United States 

Code. 

(Authority: 38 U.S.C. 3729) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

numbers 2900–0474 and 2900–0516.) 

§ 36.4814 Advances and other charges. 

(a) A holder may advance any amount 

reasonably necessary and proper for the 

maintenance or repair of the security, or 

for the payment of accrued taxes, 

special assessments, ground or water 

rents, or premiums on fire or other 

casualty insurance against loss of or 

damage to such property and any such 

advance so made may be added to the 

guaranteed or insured indebtedness. A 

holder may also advance the one-half of 

one percent funding fee due on a 

transfer under 38 U.S.C. 3714 when this 

is not paid at the time of transfer. All 

security instruments for loans to which 

38 U.S.C. 3714 applies must include a 

clause authorizing the collection of an 

assumption funding fee and an advance 

for this fee if it is not paid at the time 

of transfer. 

(Authority: 38 U.S.C. 3703, 3714, 3732) 

(b) In addition to advances allowable 

under paragraph (a) of this section, the 

holder may charge against the proceeds 

of the sale of the security; may charge 

against gross amounts collected; may 

include in any accounting to the 

Secretary after payment of a claim under 

the guaranty; may include in the 

computation of a claim under the 

guaranty, if lawfully authorized by the 

loan agreement and subject to 

§ 36.4824(a); or, may include in the 

computation of an insurance loss, any of 

the following items actually paid: 

(1) Any expense which is reasonably 

necessary for preservation of the 

security; 

(2) Court costs in a foreclosure or 

other proper judicial proceeding 

involving the security; 

(3) Other expenses reasonably 

necessary for collecting the debt, or 

repossession or liquidation of the 

security; 

(4) Reasonable trustee’s fees or 

commissions not in excess of those 

allowed by statute and in no event in 

excess of 5 percent of the unpaid 

indebtedness; 

(5)(i) Fees for legal services actually 

performed, not to exceed the reasonable 

and customary fees for such services in 

the State where the property is located, 

as determined by the Secretary. 

(ii) In determining what constitutes 

the reasonable and customary fees for 

legal services, the Secretary shall review 

allowances for legal fees in connection 

with the foreclosure of single-family 

housing loans, including bankruptcyrelated services, issued by HUD, Fannie 

Mae, and Freddie Mac. The Secretary 

will review such fees annually and, as 

the Secretary deems necessary, publish 

in the Federal Register a table setting 

forth the amounts the Secretary 

determines to be reasonable and 

customary. The table will reflect the 

primary method for foreclosing in each 

state, either judicial or non-judicial, 

with the exception of those States where 

either judicial or non-judicial is 

acceptable. The use of a method not 

authorized in the table will require prior 

approval from VA. This table will be 

available throughout the year on a VA 

controlled Web site, such as at http:// 

www.homeloans.va.gov. 

(iii) If the foreclosure attorney has the 

discretion to conduct the sale or to 

name a substitute trustee to conduct the 

sale, the combined total paid for legal 

fees under paragraph (b)(5)(i) of this 

section and trustee’s fees pursuant to 

paragraph (b)(4) of this section shall not 

exceed the applicable maximum 

allowance for legal fees established 

under paragraph (b)(5)(ii) of this section. 

If the trustee conducting the sale must 

be a Government official under local 

law, or if an individual other than the 

foreclosing attorney (or any employee of 

that attorney) is appointed as part of 

judicial proceedings, and local law also 

establishes the fees payable for the 

services of the public or judicially 

appointed trustee, then those fees will 

not be subject to the maximum 

established for legal fees under 

paragraph (b)(5)(ii) of this section and 

may be included in the total 

indebtedness. 

(6) The cost of a credit report(s) on the 

debtor(s), which is (are) to be forwarded 

to the Secretary in connection with the 

claim; 

(7) Reasonable and customary costs of 

property inspections; 

(8) Any other expense or fee that is 

approved in advance by the Secretary. 

(Authority: 38 U.S.C. 3720(a)(3), 3732) 

(c) Any advances or charges 

enumerated in paragraph (a) or (b) of 

this section may be included as 

specified in the holder’s accounting to 

the Secretary, but they are not 

chargeable to the debtor unless he or she 

otherwise be liable therefor. 

(d) Advances of the type enumerated 

in paragraph (a) of this section and any 


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other advances determined by VA to be 

necessary and proper in order to 

preserve or protect the security may be 

authorized by employees designated in 

§ 36.4845(b) in the case of any property 

constituting the security for a loan 

acquired by the Secretary or constituting 

the security for the unpaid balance of 

the purchase price owing to the 

Secretary on account of the sale of such 

property. Such advances shall be 

secured to the extent legal and 

practicable by a lien on the property. 

(e) Notwithstanding the provisions of 

paragraph (a) or (b) of this section, 

holders of condominium loans 

guaranteed or insured under 38 U.S.C. 

3710(a)(6) shall not pay those 

assessments or charges allocable to the 

condominium unit which are provided 

for in the instruments establishing the 

condominium form of ownership in the 

absence of the prior approval of the 

Secretary. 

(f)(1) Fees and charges otherwise 

allowable by this section that accrue 

after the date specified in paragraph 

(f)(2) of this section may not be included 

in a claim under the guaranty. 

(2) The date referenced in paragraph 

(f)(1) of this section will be computed by 

adding 210 calendar days to the due 

date of the last paid installment, plus 

the reasonable period that the Secretary 

has determined, pursuant to 

§ 36.4822(a), it should have taken to 

complete the foreclosure. There will 

also be added to the time period 

specified in the previous sentence such 

additional time as the Secretary 

determines was reasonably necessary to 

complete the foreclosure if the Secretary 

determines the holder was unable to 

complete the foreclosure within the 

time specified in that section due to 

Bankruptcy proceedings, appeal of the 

foreclosure by the debtor, the holder 

granting forbearance in excess of 30 

days at the request of the Secretary, or 

other factors beyond the control of the 

holder. 

(Authority: 38 U.S.C. 3703(c), 3720, 3732) 

§ 36.4815 Loan modifications. 

(a) Subject to the provisions of this 

section, the terms of any guaranteed 

loan may be modified by written 

agreement between the holder and the 

borrower, without prior approval of the 

Secretary, if all of the following 

conditions are met: 

(1) The loan is in default; 

(2) The event or circumstances that 

caused the default has been or will be 

resolved and it is not expected to reoccur; 

(3) The obligor is considered to be a 

reasonable credit risk, based on a review 

by the holder of the obligor’s 

creditworthiness under the criteria 

specified in § 36.4840, including a 

current credit report. The fact of the 

recent default will not preclude the 

holder from determining the obligor is 

now a satisfactory credit risk provided 

the holder determines that the obligor is 

able to resume regular mortgage 

installments when the modification 

becomes effective based upon a review 

of the obligor’s current and anticipated 

income, expenses, and other obligations 

as provided in § 36.4840; 

(4) At least 12 monthly payments 

have been paid since the closing date of 

the loan; 

(5) The current owner(s) is obligated 

to repay the loan, and is party to the 

loan modification agreement; and 

(6) The loan will be reinstated to 

performing status by virtue of the loan 

modification. 

(b) Without the prior approval of the 

Secretary, a loan can be modified no 

more than once in a 3-year period and 

no more than three times during the life 

of the loan. 

(c) All modified loans must bear a 

fixed-rate of interest, which may not 

exceed the Government National 

Mortgage Association (GNMA) current 

month coupon rate that is closest to par 

(100) plus 50 basis points. The rate shall 

be determined as of the close of 

business the last business day of the 

month preceding the date the holder 

approved the loan modification. 

(d) The unpaid balance of the 

modified loan may be re-amortized over 

the remaining life of the loan. The loan 

term may extend the maturity date to 

the shorter of: 

(1) 360 months from the due date of 

the first installment required under the 

modification, or 

(2) 120 months after the original 

maturity date of the loan. 

(e) Only unpaid principal; accrued 

interest; deficits in the taxes and 

insurance impound accounts; and 

advances required to preserve the lien 

position, such as homeowner 

association fees, special assessments, 

water and sewer liens, etc., may be 

included in the modified indebtedness. 

Late fees and other charges may not be 

capitalized. 

(f) Holders shall not charge a 

processing fee under any circumstances 

to complete a loan modification. 

However, late fees and any other actual 

costs incurred and legally chargeable, 

including but not limited to the cost of 

a title insurance policy for the modified 

loan, but which cannot be capitalized in 

the modified indebtedness, may be 

collected directly from the borrower as 

part of the modification process. 

(g) Holders will ensure the first lien 

status of the modified loan. 

(h) The dollar amount of the guaranty 

may not exceed the greater of: 

(1) The original guaranty amount of 

the loan being modified (but if the 

modified loan amount is less than the 

original loan amount, then the amount 

of guaranty will be equal to the original 

guaranty percentage applied to the 

modified loan), or 

(2) 25 percent of the loan being 

modified subject to the statutory 

maximum specified at 38 U.S.C. 

3703(a)(1)(B). 

(i) The obligor may not receive any 

cash back from the modification. 

(j) This section does not create a right 

of a borrower to have a loan modified, 

but simply authorizes the loan holder to 

modify a loan in certain situations 

without the prior approval of the 

Secretary. 

(Authority: 38 U.S.C. 3703(c)(1), 3720) 

§ 36.4816 Acceptability of partial 

payments. 

A partial payment is a remittance by 

or on behalf of the borrower on a loan 

in default (as defined in § 36.4801) of 

any amount less than the full amount 

due under the terms of the loan and 

security instruments at the time the 

remittance is tendered. 

(a) Except as provided in paragraph 

(b) of this section, or upon the express 

waiver of the Secretary, the mortgage 

holder shall accept any partial payment 

and either apply it to the mortgagor’s 

account or identify it with the 

mortgagor’s account and hold it in a 

special account pending disposition. 

When partial payments held for 

disposition aggregate a full monthly 

installment, including escrow, they 

shall be applied to the mortgagor’s 

account. 

(b) A partial payment may be returned 

to the mortgagor, within 10 calendar 

days from date of receipt of such 

payment, with a letter of explanation 

only if one or more of the following 

conditions exist: 

(1) The property is wholly or partially 

tenant-occupied and rental payments 

are not being remitted to the holder for 

application to the loan account; 

(2) The payment is less than one full 

monthly installment, including escrows 

and late charge, if applicable, unless the 

lesser payment amount has been agreed 

to under a documented repayment plan; 

(3) The payment is less than 50 

percent of the total amount then due, 

unless the lesser payment amount has 

been agreed to under a documented 

repayment plan; 


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(4) The payment is less than the 

amount agreed to in a documented 

repayment plan; 

(5) The amount tendered is in the 

form of a personal check and the holder 

has previously notified the mortgagor in 

writing that only cash or certified 

remittances are acceptable; 

(6) A delinquency of any amount has 

continued for at least 6 months since the 

account first became delinquent and no 

written repayment plan has been 

arranged; 

(7) Foreclosure has been commenced 

by the taking of the first action required 

for foreclosure under local law; or 

(8) The holder’s lien position would 

be jeopardized by acceptance of the 

partial payment. 

(c) A failure by the holder to comply 

with the provisions of this paragraph 

may result in a partial or total loss of 

guaranty or insurance pursuant to 

§ 36.4828(b), but such failure shall not 

constitute a defense to any legal action 

to terminate the loan. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4817 Servicer reporting requirements. 

(a) Servicers of loans guaranteed by 

the Secretary shall report the 

information required by this section to 

the Secretary electronically. The 

Secretary shall accept electronic 

submission from each entity servicing 

loans guaranteed under 38 U.S.C. 

chapter 37 not later than the effective 

date of this rule. 

(b) Not later than the seventh calendar 

day of each month each servicer shall 

report to the Secretary basic information 

(loan identification information, 

payment due date, and unpaid principal 

balance) for every loan guaranteed by 

the Secretary currently being serviced 

by that entity, unless previously 

reported under paragraph (c)(7) of this 

section and has not reinstated, 

terminated, or paid in full. 

(c) Servicers shall report to the 

Secretary the following specific loan 

events in accordance with the 

timeframes described for each event. 

Unless otherwise specified herein, the 

servicer shall report these events on a 

monthly basis (i.e., no later than the 7th 

calendar day of the month following the 

month in which the event occurred) 

only for delinquent loans in its 

portfolio. 

(1) Loan paid in full—when the loan 

obligation has been fully satisfied by 

receipt of funds and not a servicing 

transfer. The servicer shall report this 

event regardless of delinquency status. 

(2) Authorized transfer of 

ownership—when the servicer learns 

that an authorized transfer of ownership 

has been completed. The servicer shall 

report this event regardless of 

delinquency status. 

(3) Release of liability—when an 

obligor has been released from liability. 

The servicer shall report this event 

regardless of delinquency status. 

(4) Partial release of security—when 

the holder has released the lien on a 

part of the security for the loan pursuant 

to § 36.4827. The servicer shall report 

this event regardless of delinquency 

status. 

(5) Servicing transfer (transferring 

servicer)—when a holder transfers the 

loan to another servicer. 

(6) Servicing transfer (receiving 

servicer)—when a servicer boards the 

loan. 

(7) Electronic Default Notification 

(EDN)—when the loan becomes at least 

61 days delinquent. The servicer shall 

report this event no later than the 7th 

calendar day from when the event 

occurred. The servicer shall report this 

event only once per default for 

delinquent loans in its portfolio. 

(8) Delinquency status—when the 

servicer notifies VA of any updates to 

the delinquency information on loans 

for which an EDN has been submitted. 

The servicer shall report this event 

monthly (i.e., no later than the 7th 

calendar day of the month following the 

month for which the reported 

information applies) until the default 

cures or the loan terminates. 

(9) Contact information change—

when there is a change to the contact 

information for current owners or a 

property or mailing address change. 

(10) Occupancy status change—when 

there is a change in property occupancy 

status. 

(11) Bankruptcy filed—when any 

owner files a petition under the 

Bankruptcy Code. The servicer shall 

report this event no later than the 7th 

calendar day from when the event 

occurred. The servicer shall report this 

event only on delinquent loans in its 

portfolio, if appropriate, or with the 

EDN when it is reported. 

(12) Bankruptcy update—when a 

significant event related to the 

bankruptcy has occurred. The servicer 

shall report this event no later than the 

7th calendar day from when the event 

occurred. The servicer shall report this 

event only on delinquent loans in its 

portfolio, if appropriate, or with the 

EDN when it is reported. 

(13) Loss mitigation letter sent—when 

the servicer sends the loss mitigation 

letter to the borrower as required by 

§ 36.4850(g)(1)(iv). 

(14) Partial payment returned—when 

the servicer returns a partial payment to 

the borrower. 

(15) Default cured/loan reinstated—

when a previously reported default (i.e. 

an EDN was filed) has cured/loan 

reinstated. 

(16) Default reported to credit 

bureau—when the servicer notifies the 

credit bureaus of a defaulted loan or 

loan termination. The servicer shall 

report this event only on delinquent 

loans in its portfolio, and shall report 

the first occurrence only. 

(17) Repayment plan approved—

when the servicer approves a repayment 

plan. 

(18) Special forbearance approved—

when the servicer approves a special 

forbearance agreement. 

(19) Loan modification approved—

when the servicer approves a loan 

modification. 

(20) Loan modification complete—

when both the servicer (and/or the 

holder, where necessary) and the 

owner(s) have executed the 

modification agreement. 

(21) Compromise sale complete—

when a compromise sale closes. 

(22) Deed-in-lieu of foreclosure 

complete—when the servicer records 

the deed-in-lieu of foreclosure. The 

servicer shall report this no later than 

the 7th calendar day from when the 

event occurred. 

(23) Foreclosure referral—when the 

loan is referred to legal counsel for 

foreclosure. The servicer shall report 

this no later than the 7th calendar day 

from when the event occurred. 

(24) Foreclosure sale scheduled—

when the foreclosure sale is scheduled. 

The servicer shall report this no later 

than the 7th calendar day from when 

the event occurred. 

(25) Results of sale—when the 

foreclosure sale is complete, the servicer 

reports the results of the foreclosure 

sale. The servicer shall report this no 

later than the 7th calendar day from 

when the event occurred. 

(26) Transfer of custody—when the 

servicer notifies VA of the holder’s 

intent to convey the property. The 

servicer shall report this no later than 

the 15th calendar day from the date of 

liquidation sale (such as the date of 

foreclosure sale, date of recordation of a 

deed-in-lieu of foreclosure, or 

confirmation/ratification of sale date 

when required under local practice). 

(27) Improper transfer of custody—

when the servicer discovers that the 

conveyance of the property to VA was 

improper. The servicer shall report this 

no later than the 7th calendar day from 

when the error is discovered. 

(28) Invalid sale results—when the 

foreclosure sale is invalid. The servicer 

shall report this no later than the 7th 


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calendar day from discovery of the 

event that invalidated the sale. 

(29) Confirmed sale date with no 

transfer of custody—when the loan is 

terminated, the property is not 

conveyed, and the property is located in 

a confirmation/ratification of sale state. 

(30) Basic claim information—when 

the servicer files a claim under 

guaranty. The servicer shall report this 

event within 365 calendar days of loan 

termination for non-refund claims, and 

within 60 calendar days of the refund 

approval date for refund claims. 

(31) Refunding Settlement—when VA 

refunds a loan and the servicer reports 

the tax and insurance information. The 

servicer shall report this event within 60 

calendar days of the refund approval 

date. 

(Authority: 38 U.S.C. 3703(c), 3732) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0021.) 

§ 36.4818 Servicer tier ranking—temporary 

procedures. 

(a) The Secretary shall assign to each 

servicer a ‘‘Tier Ranking’’ based upon 

the servicer’s performance in servicing 

guaranteed loans. There shall be four 

tiers, known as tier one, tier two, tier 

three, and tier four, with tier one being 

the highest rated and tier four the 

lowest. Upon the effective date of this 

regulation, every servicer of loans 

guaranteed by the Secretary shall be 

presumed to be in servicer tier two, and 

shall remain in tier two until the date 

specified in paragraph (c)(2) of this 

section. 

(b) For purposes of this section, the 

term ‘‘calendar quarter’’ shall mean the 

3-month periods ending on March 31, 

June 30, September 30, and December 

31. 

(c)(1) No later than 30 calendar days 

after the last business day of the first 

calendar quarter occurring after the 

rules for determining tier rankings take 

effect, and then not later than 30 

calendar days after the last business day 

of each subsequent calendar quarter, the 

Secretary shall provide each servicer 

with an evaluation of their performance 

under such rules. 

(2) No later than 45 calendar days 

after the last business day of the fourth 

calendar quarter during which the 

Secretary evaluates the performance of 

servicers, and then annually thereafter, 

VA shall advise each servicer of its tier 

ranking. 

(3) Any entity which begins servicing 

guaranteed loans after the first calendar 

quarter occurring after rules for 

determining tier rankings take effect 

shall be presumed to be in tier two. The 

Secretary will evaluate the performance 

of such servicer as provided in 

paragraph (c)(1) of this section. The 

Secretary will advise such servicer of its 

tier ranking at the time other servicers 

are advised of their tier rankings 

pursuant to paragraph (c)(2) of this 

section, provided the servicer has 

received evaluations for at least four 

continuous calendar quarters. 

(d) The quarterly evaluation and tier 

ranking of a servicer shall be deemed to 

be confidential and privileged and shall 

not be disclosed by the Secretary to any 

other party. 

(Authority: 38 U.S.C. 3703(c)) 

§ 36.4819 Servicer loss-mitigation options 

and incentives. 

(a) The Secretary will pay a servicer 

in tiers one, two, or three an incentive 

payment for each of the following 

successful loss-mitigation options or 

alternatives to foreclosure completed: 

repayment plans, special forbearance 

agreements, loan modifications, 

compromise sales, and deeds-in-lieu of 

foreclosure. Only one incentive 

payment will be made with respect to 

any default required to be reported to 

the Secretary pursuant to § 36.4817(c). 

No incentive payment will be made to 

a servicer in tier four. The options and 

alternatives are listed in paragraph (b) of 

this section from top to bottom in their 

preferred order of consideration (i.e., a 

hierarchy for review), but VA recognizes 

that individual circumstances may lead 

to ‘‘out of the ordinary’’ considerations. 

(b) The amount of the incentive 

payment is as follows: 

Tier ranking One Two Three Four 

Repayment Plan .............................................................................................................. $200 $160 $120 $0 

Special Forbearance ........................................................................................................ 200 160 120 0 

Loan Modification ............................................................................................................. 700 500 300 0 

Compromise Sale ............................................................................................................ 1,000 800 600 0 

Deed in Lieu of Foreclosure ............................................................................................ 350 250 150 0 

(c) For purposes of this section, a lossmitigation option or alternative to 

foreclosure will be deemed successfully 

completed as follows: 

(1) With respect to a repayment plan 

(as defined in § 36.4801), when the loan 

reinstates; 

(2) With respect to special forbearance 

(as defined in § 36.4801), when the loan 

reinstates. If a repayment plan is 

developed at the end of the forbearance 

period, then the special forbearance is 

not eligible for an incentive payment, 

although the subsequent repayment 

plan may be eligible upon loan 

reinstatement; 

(3) With respect to a loan 

modification, when the modification is 

executed and the loan reinstates; 

(4) With respect to a compromise sale, 

when the claim under guaranty is filed; 

or 

(5) With respect to a deed-in-lieu of 

foreclosure, when the claim under 

guaranty is filed. 

(d) Incentive payments with respect to 

repayment plans, special forbearances 

and loan modifications shall be made no 

less frequently than monthly. For all 

other successful loss-mitigation options, 

incentives shall be paid in the final 

claim payment. 

(e) The Secretary shall reserve the 

right to stop an incentive payment to a 

servicer if the servicer fails to perform 

adequate servicing. 

(Authority: 38 U.S.C. 3703(c), 3720, 3722) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0021.) 

§ 36.4820 Refunding of loans in default. 

(a) Upon receiving a notice of default 

or a notice under § 36.4817, the 

Secretary may require the holder upon 

penalty of otherwise losing the guaranty 

or insurance to transfer and assign the 

loan and the security therefore to the 

Secretary or to another designated by 

the Secretary upon receipt of payment 

in full of the balance of the 

indebtedness remaining unpaid to the 

date of such assignment. Such 

assignment may be made without 

recourse but the transferor shall not 

thereby be relieved from the provisions 

of § 36.4828. 

(b) If the obligation is assigned or 

transferred to a third party pursuant to 

paragraph (a) of this section the 

Secretary may continue in effect the 

guaranty or insurance issued with 

respect to the previous loan in such 


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manner as to cover the assignee or 

transferee. 

(c) Servicers must deliver to the 

Secretary all legal documents, including 

but not limited to proper loan 

assignments, required as evidence of 

proper loan transfer within 60 calendar 

days from the date that VA sends notice 

to the servicer that VA has decided to 

refund a loan under this section. 

Servicers exhibiting a continued failure 

to provide timely loan transfer 

documentation may, at the discretion of 

the Secretary and following advance 

notice to the servicer, be subject to 

temporary suspension of all property 

acquisition and claim payments until all 

deficiencies identified in the notice 

provided to the servicer have been 

corrected. 

(Authority: 38 U.S.C. 3703(c) and 3732(a)) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0362.) 

§ 36.4821 Service of process. 

(a) In any legal or equitable 

proceeding to which the Secretary is a 

party (including probate and bankruptcy 

proceedings) arising from a loan 

guaranteed, insured, or made, or a 

property acquired by the Secretary 

pursuant to title 38, U.S.C. chapter 37, 

original process and any other process 

prior to appearance that may be served 

on the Secretary must be delivered to 

the VA Regional Counsel located in the 

jurisdiction in which the proceeding is 

docketed. Copies of such process will 

also be served on the Attorney General 

of the United States and the United 

States Attorney having jurisdiction over 

that area. Within the time required by 

applicable law, or rule of court, the 

Secretary will cause appropriate special 

or general appearance to be entered in 

the case by an authorized attorney. 

(Authority: 38 U.S.C. 3703(c) and 3720(a)) 

(b) After appearance of the Secretary 

by attorney all process and notice 

otherwise proper to serve on the 

Secretary before or after judgment, if 

served on the attorney of record, shall 

have the same effect as if the Secretary 

were personally served within the 

jurisdiction of the court. 

(Authority: 38 U.S.C. 3720, 3732) 

§ 36.4822 Loan termination. 

(a) For purposes of this part, a holder, 

using reasonable diligence must 

complete a foreclosure within the 

timeframe and in the manner 

determined by the Secretary. In 

determining what constitutes allowable 

time and method for foreclosure, the 

Secretary shall review allowances for 

time and method in connection with the 

foreclosure of single-family housing 

loans issued by HUD, Fannie Mae, and 

Freddie Mac, as well as State statutory 

requirements. The Secretary will review 

such timeframes annually and, as the 

Secretary deems necessary, publish in 

the Federal Register a table setting forth 

the timeframes and methods the 

Secretary determines to be reasonable. 

The schedule will reflect the timeframe 

allowed for the standard, acceptable 

method for foreclosure proceedings in 

each State. The use of another method 

will require prior approval from VA. VA 

will maintain the loan termination time 

allowable timeframes on a Web site 

under VA’s control, such as at 

http://www.homeloans.va.gov. 

(b)(1) At least 30 days prior to the 

scheduled or anticipated date of the 

liquidation sale, the holder must request 

that VA assign an appraiser to conduct 

a liquidation appraisal. 

(2) If the holder (or its authorized 

servicing agent) has been approved by 

the Secretary to process liquidation 

appraisals under 38 CFR 36.4848, the 

appraiser shall forward the liquidation 

appraisal report directly to the holder 

for a determination of the fair market 

value of the property pursuant to 

§ 36.4848. 

(3) If the holder (or its authorized 

servicing agent) has not been approved 

by the Secretary to process liquidations 

appraisals under 38 CFR 36.4848, the 

Secretary shall review the appraisal and 

determine the fair market value of the 

property. The Secretary will provide the 

holder with a statement of the fair 

market value. 

(4)(i) Except as provided in paragraph 

(b)(4)(ii) of this section, a liquidation 

appraisal or statement of fair market 

value issued pursuant to paragraph 

(b)(3) of this section will be valid for 

180 calendar days. 

(ii) The Secretary may specify in 

writing a shorter validity period, not 

less than 90 calendar days, for a 

liquidation appraisal or statement of fair 

market value if rapidly-changing market 

conditions in the area where the 

property is located make such shorter 

validity period in the best fiscal 

interests of the United States. 

(c) Prior to the liquidation sale, the 

holder shall compute the net value of 

the property securing the guaranteed 

loan by subtracting the estimated costs 

to the Secretary for the acquisition and 

disposition of the property from the fair 

market value, as determined under 

paragraph (b) of this section. Those 

costs will be calculated using the 

percentage derived by the Secretary and 

published in the Federal Register 

pursuant to § 36.4801. 

(d) If the holder learns of any material 

damage to the property occurring after 

the appraisal and prior to the 

liquidation sale, the impact of such 

damage on the fair market value must be 

determined in consultation with the fee 

appraiser, and the net value adjusted 

accordingly. 

(e)(1) A holder may approve a 

compromise sale of the property 

securing the loan without the prior 

approval of the Secretary provided that: 

(i) The holder has determined the 

loan is insoluble; 

(ii) The credit to the indebtedness 

(consisting of the net proceeds from the 

compromise sale and any waiver of 

indebtedness by the holder) must equal 

or exceed the net value of the property 

securing the loan; and 

(iii) The current owner of the property 

securing the loan will not receive any 

proceeds from the sale of the property. 

(2) A holder may request advance 

approval from the Secretary for a 

compromise sale notwithstanding that 

all of the conditions specified in 

paragraph (e)(1) of this section cannot 

be met if the holder believes such 

compromise sale would be in the best 

interests of the veteran and the 

Secretary. 

(f)(1) A holder may accept a deed 

voluntarily tendered by the current 

owner of the property securing the loan 

in lieu of conducting a foreclosure 

without the prior approval of the 

Secretary provided that: 

(i) The holder has determined the 

loan is insoluble; 

(ii) The holder has computed the net 

value of the property securing the loan 

pursuant to paragraph (c) of this section; 

(iii) The holder has considered a 

compromise sale pursuant to paragraph 

(e) of this section and determined such 

compromise sale is not practical; and, 

(iv) The holder has determined the 

current owner of the property can 

convey clear and marketable title to the 

property that would meet the standard 

stated in paragraph (d)(5) of § 36.4823. 

(2) A holder may request advance 

approval from the Secretary for a deedin-lieu of foreclosure notwithstanding 

that all of the conditions specified in 

paragraph (f)(1) of this section cannot be 

met if the holder believes such deed-inlieu would be in the best interests of the 

veteran and the Secretary. 

(Authority: 38 U.S.C. 3703(c), 3732) 

§ 36.4823 Election to convey security. 

(a) If the holder acquires the property 

that secured the guaranteed loan at the 

liquidation sale or through acceptance 

of a deed-in-lieu of foreclosure and if, 

under 38 U.S.C. 3732(c), the Secretary 

may accept conveyance of the property, 


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the holder must notify the Secretary by 

electronic means no later than 15 

calendar days after the date of 

liquidation sale (i.e., the event which 

fixes the rights of the parties in the 

property, such as the date of foreclosure 

sale, date of recordation of a deed-inlieu of foreclosure, or confirmation/ 

ratification of sale date when required 

under local practice) that the holder 

elects to convey the property to the 

Secretary. The Secretary will not accept 

conveyance of the property if the holder 

fails to notify the Secretary of its 

election within such 15 calendar days. 

In computing the eligible indebtedness 

under 38 U.S.C. 3732(c), the holder may 

follow the alternative procedure 

described in paragraph (b) of this 

section. 

(b) If the calculation by the holder 

shows that the net value is equal to or 

less than the unguaranteed portion of 

the loan (i.e., the total indebtedness 

minus VA’s maximum claim payable 

under the guaranty), this would 

preclude conveyance under 38 U.S.C. 

3732(c). However, the holder may desire 

to convey the property to VA and may 

decide to waive a portion of the 

indebtedness to the extent that the 

property may be conveyed under 38 

U.S.C. 3732(c). In such a case, the 

holder must provide the notice 

described in paragraph (a) of this 

section, and must subsequently waive 

that portion of the total indebtedness 

remaining after application of the net 

value amount and VA’s guaranty claim 

payment. The holder must send the 

borrower(s) a notice describing the 

amount of indebtedness that has been 

waived no later than 15 calendar days 

after receipt of the guaranty claim. 

(c) The holder, in accounting to the 

Secretary in connection with the 

conveyance of any property pursuant to 

this section, may include as a part of the 

indebtedness all actual expenses or 

costs of the proceedings, paid by the 

holder, within the limits defined in 

§ 36.4814. In connection with the 

conveyance or transfer of property to the 

Secretary the holder may include in 

accounting to the Secretary the 

following expense items if actually paid 

by the holder, in addition to the 

consideration payable for the property 

under 38 U.S.C. 3732(c): 

(1) State and documentary stamp 

taxes as may be required. 

(2) Amount expended for taxes, 

special assessments, including such 

payments which are specified in 

paragraph (d)(4) of this section. 

(3) Recording fees. 

(4) Any other expenditures in 

connection with the property which are 

approved by the Secretary, including, 

but not limited to, the cost of a title 

policy insuring title in the name of the 

Secretary of Veterans Affairs. 

(d) The conveyance or transfer of any 

property to the Secretary pursuant to 

this section shall be subject to the 

following provisions: 

(1) The notice of the holder’s election 

to convey the property to the Secretary 

shall state the amount of the holder’s 

successful bid and shall state the 

insurance coverage then in force, 

specifying for each policy, the name of 

the insurance company, the hazard 

covered, the amount, and the expiration 

date. With respect to a voluntary 

conveyance to the holder in lieu of 

foreclosure, the amount of the holder’s 

successful bid shall be deemed to be the 

lesser of the net value of the property or 

the total indebtedness. 

(2) Coincident with the notice of 

election to convey or transfer the 

property to the Secretary or with the 

acquisition of the property by the 

holder, following such notice, 

whichever is later, the holder shall 

request endorsements on all insurance 

policies naming the Secretary as an 

assured, as his/her interest may appear. 

Such insurance policies shall be 

forwarded to the Secretary at the time of 

the conveyance or transfer of the 

property to the Secretary or as soon after 

that time as feasible. If insurers cancel 

policies, holders must properly account 

for any unearned premiums refunded by 

the insurer. 

(3) Occupancy of the property by 

anyone properly in possession by virtue 

of and during a period of redemption, or 

by anyone else unless under a claim of 

title which makes the title sought to be 

conveyed by the holder of less dignity 

or quality than that required by this 

section, shall not preclude the holder 

from conveying or transferring the 

property to the Secretary. Except with 

the prior approval of the Secretary, the 

holder shall not rent the property to a 

new tenant, nor extend the term of an 

existing tenancy on other than a monthto-month basis. 

(4) The notice shall provide property 

tax information to include all taxing 

authority property identification 

numbers. Any taxes, special 

assessments or ground rents due and 

payable within 30 days after date of 

conveyance or transfer to the Secretary 

must be paid by the holder. 

(5)(i) Each conveyance or transfer of 

real property to the Secretary pursuant 

to this section shall be acceptable if: 

(A) The holder thereby covenants or 

warrants against the acts of the holder 

and those claiming under the holder 

(e.g., by special warranty deed); and 

(B) It vests in the Secretary or will 

entitle the Secretary to such title as is 

or would be acceptable to prudent 

lending institutions, informed buyers, 

title companies, and attorneys, 

generally, in the community in which 

the property is situated. 

(ii) Any title will not be unacceptable 

to the Secretary by reason of any of the 

limitations on the quantum or quality of 

the property or title stated in 

§ 36.4854(b), Provided, that: 

(A) At the time of conveyance or 

transfer to the Secretary there has been 

no breach of any conditions affording a 

right to the exercise of any reverter. 

(B) With respect to any such 

limitations which came into existence 

subsequent to the making of the loan, 

full compliance was had with the 

requirements of § 36.4827. 

(iii) The acceptability of a conveyance 

or transfer pursuant to the requirements 

of this paragraph will generally be 

established by delivery to the Secretary 

of the following evidence of title 

showing that title to the property of the 

quality specified in this paragraph (d)(5) 

is or will be vested in the Secretary: 

(A) A copy of the deed or document 

evidencing transfer of interest and title 

at the liquidation sale; 

(B) A special warranty deed 

conveying the property to the Secretary; 

(C) Origination Deed of Trust or 

Mortgage; 

(D) Original or Copy of Mortgagee’s 

Title Insurance Policy from Loan 

Origination (except in Iowa, where a 

title abstract is required); 

(E) Owner’s Title Insurance Policy 

issued after loan termination in the 

name of the Secretary (except in Iowa, 

where a title abstract is required); 

(F) Loan Assignments; 

(G) Appointment of Substitute Trustee 

(where required as part of the 

termination process); 

(H) Estoppel Affidavit for deed in lieu 

of foreclosure, if required by State law 

and appropriate language cannot be 

included in the deed in lieu of 

foreclosure; and/or 

(I) Any evidence that the Secretary 

may reasonably require. 

(iv) In lieu of such title evidence 

listed in paragraph (d)(5)(iii) of this 

section, the Secretary will accept a 

conveyance or transfer with general 

warranty with respect to the title from 

a holder described in 38 U.S.C. 3702(d) 

or from a holder of financial 

responsibility satisfactory to the 

Secretary. 

(6) Except with respect to matters 

covered by any covenants or warranties 

of the holder, the acceptance by the 

Secretary of a conveyance or transfer by 

the holder shall conclude the 


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responsibility of the holder to the 

Secretary under the regulations of this 

subpart with respect to the title. In the 

event of the subsequent discovery of 

title defects, the Secretary shall have no 

recourse against the holder with respect 

to such title other than by reason of 

such covenants or warranties. 

(7) As between the holder and the 

Secretary, the responsibility for any loss 

due to damage to or destruction of the 

property or due to personal injury 

sustained in respect to such property 

shall be governed by the provisions of 

this paragraph and paragraph (d)(11) of 

this section. Ordinary wear and tear 

excepted, the holder shall bear such risk 

of loss from the date of acquisition by 

the holder to the date such risk of loss 

is assumed by the Secretary. Such risk 

of loss is assumed by the Secretary from 

the date of receipt of the holder’s 

election to convey or transfer the 

property to the Secretary. The amount of 

any loss chargeable to the holder may be 

deducted from the amount payable by 

the Secretary at the time the property is 

transferred. In any case where pursuant 

to the VA regulations rejection of the 

title is legally proper, the Secretary may 

surrender custody of the property as of 

the date specified in the Secretary’s 

notice to the holder. The Secretary’s 

assumption of such risk shall terminate 

upon such surrender. 

(8) The conveyance should be made to 

‘‘Secretary of Veterans Affairs, an 

Officer of the United States.’’ The name 

of the incumbent Secretary should not 

be included unless State law requires 

naming a real person. 

(9) The holder shall not be liable to 

the Secretary for any portion of the paid 

or unpaid taxes, special assessments, 

ground rents, insurance premiums, or 

other similar items. The holder shall be 

liable to the Secretary for all penalties 

and interest associated with taxes not 

timely paid by the holder prior to 

conveyance. 

(10) The Secretary shall be entitled to 

all rentals and other income collected 

from the property and to any insurance 

proceeds or refunds subsequent to the 

date of acquisition by the holder. 

(11) In respect to a property which 

was the security for a condominium 

loan guaranteed or insured under 38 

U.S.C. 3710(a)(6) the responsibility for 

any loss due to damage to or destruction 

of the property or due to personal injury 

sustained in respect to such property 

shall in no event pass to the Secretary 

until the Secretary expressly assumes 

such responsibility or until conveyance 

of the property to the Secretary, 

whichever first occurs. The holder shall 

have the right to convey such property 

to the Secretary only if the property 

(including elements of the development 

or project owned in common with other 

unit owners) is undamaged by fire, 

earthquake, windstorm, flooding or 

boiler explosion. The absence of a right 

in the holder to convey such property 

which is so damaged shall not preclude 

a conveyance, if the Secretary agrees in 

a given case to such a conveyance upon 

completion of repairs within a specified 

period of time and such repairs are so 

completed and the conveyance is 

otherwise in order. 

(e) Except as provided in paragraph 

(d)(6) of this section, the provisions of 

this section shall not be in derogation of 

any rights which the Secretary may have 

under § 36.4828. The Under Secretary 

for Benefits, or the Director, Loan 

Guaranty Service, may authorize any 

deviation from the provisions of this 

section, within the limitations 

prescribed in 38 U.S.C. chapter 37, 

which may be necessary or desirable to 

accomplish the objectives of this section 

if such deviation is made necessary by 

reason of any laws or practice in any 

State or Territory or the District of 

Columbia, Provided, that no such 

deviation shall impair the rights of any 

holder not consenting to the deviation 

with respect to loans made or approved 

prior to the date the holder is notified 

of such action. 

(Authority: 38 U.S.C. 3720, 3732) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0381.) 

§ 36.4824 Guaranty claims; subsequent 

accounting. 

(a) Subject to the limitation that the 

total amounts payable shall in no event 

exceed the amount originally 

guaranteed, or in the case of a modified 

loan, such amount as may have been 

increased under the provisions of 

§ 36.4815(h)(2), the amount payable on 

a claim for the guaranty shall be the 

percentage of the loan originally 

guaranteed, or the percentage as 

adjusted under § 36. 4815(h)(2), 

whichever is applicable, applied to the 

sum of: 

(1) The unpaid principal as of the date 

of the liquidation sale; 

(2) Allowable expenses/advances as 

described in § 36.4814; and 

(3) The lesser of: 

(i) The unpaid interest as of the date 

of the liquidation sale; or 

(ii) The unpaid interest for the 

reasonable period that the Secretary has 

determined, pursuant to § 36.4822(a), it 

should have taken to complete the 

foreclosure, plus 210 days from the due 

date of the last paid installment. This 

amount will be increased if the 

Secretary determines the holder was 

unable to complete the foreclosure 

within the time specified in this 

paragraph due to Bankruptcy 

proceedings, appeal of the foreclosure 

by the debtor, the holder granting 

forbearance in excess of 30 days at the 

request of the Secretary, or other factors 

beyond the control of the holder. 

(b) Deposits or other credits or setoffs 

legally applicable to the indebtedness 

shall be applied in reduction of the 

indebtedness on which the claim is 

based. Any escrowed or earmarked 

funds not subject to superior claims of 

third persons must likewise be so 

applied. 

(c)(1) Credits accruing from the 

proceeds of a liquidation sale shall be 

reported to the Secretary incident to 

claim submission, and the amount 

payable on the claim shall in no event 

exceed the remaining balance of the 

indebtedness. 

(2) The amount payable under the 

guaranty shall be computed applying 

the formulae in 38 U.S.C. 3732(c). With 

respect to a voluntary conveyance to the 

holder in lieu of foreclosure, the holder 

shall be deemed to have acquired the 

property at the liquidation sale for the 

lesser of the net value of the property or 

the total indebtedness. 

(d)(1)(i) Except as provided in 

paragraph (d)(1)(ii) of this section, 

holders shall file a claim for payment 

under the guaranty electronically no 

later than 1 year after the completion of 

the liquidation sale. For purposes of this 

section, the liquidation sale will be 

considered completed when: 

(A) The last act required under State 

law is taken to make the liquidation sale 

final, but excluding any redemption 

period permitted under State law; 

(B) If a holder accepts a voluntary 

conveyance of the property in lieu of 

foreclosure, the date of recordation of 

the deed to the holder or the holder’s 

designee; or 

(C) In the case of a sale of the property 

to a third party for an amount less than 

is sufficient to repay the unpaid balance 

on the loan where the holder has agreed 

in advance to release the lien in 

exchange for the proceeds of such sale, 

the date of settlement of such sale. 

(ii) With respect to any liquidation 

sale completed prior to February 1, 

2008, all claims must be submitted no 

later than February 2, 2009. 

(2) If additional information becomes 

known to a holder after the filing of a 

guaranty claim, the holder may file a 

supplemental claim provided that such 

supplemental claim is filed within the 

time period specified in paragraph (d)(1) 

of this section. 


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(3) No claim under a guaranty shall be 

payable unless it is submitted within 

the time period specified in paragraph 

(d)(1) of this section. 

(4) A claim shall be submitted to VA 

electronically on the VA Loan 

Electronic Reporting Interface system. 

(5) Supporting documents will not be 

submitted with the claim, but must be 

retained by the servicer and are subject 

to inspection as provided in § 36.4833 of 

this title. 

(e) In the event that VA does not 

approve payment of any item submitted 

under a guaranty claim, VA shall notify 

the holder electronically what items are 

being denied and the reasons for such 

denial. The holder may, within 30 days 

after the date of such denial notification, 

submit an electronic request to VA that 

one or more items that were denied be 

reconsidered. The holder must present 

any additional information justifying 

payment of items denied. 

(Authority: 38 U.S.C. 3703(c), 3720, 3732) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0362.) 

§ 36.4825 Computation of indebtedness. 

In computing the indebtedness for the 

purpose of filing a claim for payment of 

a guaranty or for payment of an insured 

loss, or in the event of a transfer of the 

loan under § 36.4820(a), or other 

accounting to the Secretary, the holder 

shall not be entitled to treat repayments 

theretofore made as liquidated damages, 

or rentals, or otherwise than as 

payments on the indebtedness, 

notwithstanding any provision in the 

note, or mortgage, or otherwise, to the 

contrary. 

(Authority: 38 U.S.C. 3703(c), 3720, 3732) 

§ 36.4826 Subrogation and indemnity. 

(a) The Secretary shall be subrogated 

to the contract and the lien or other 

rights of the holder to the extent of any 

sum paid on a guaranty or on account 

of an insured loss, which right shall be 

junior to the holder’s rights as against 

the debtor or the encumbered property 

until the holder shall have received the 

full amount payable under the contract 

with the debtor. No partial or complete 

release by a creditor shall impair the 

rights of the Secretary with respect to 

the debtor’s obligation. 

(b) The holder, upon request, shall 

execute, acknowledge and deliver an 

appropriate instrument tendered for that 

purpose, evidencing any payment 

received from the Secretary and the 

Secretary’s resulting right of 

subrogation. 

(c) The Secretary shall cause the 

instrument required by paragraph (b) of 

this section to be filed for record in the 

office of the recorder of deeds, or other 

appropriate office of the proper county, 

town or State, in accordance with the 

applicable State law. The filing or 

failure to file such instrument for record 

shall have the legal results prescribed by 

the applicable law of the State where 

the real or personal property is situated, 

with respect to filing or failure to so file 

mortgages and other lien instruments 

and assignments thereof. The references 

herein to ‘‘filing for record’’ include 

‘‘registration’’ or any similar transaction, 

by whatever name designated when title 

to the encumbered property has been 

‘‘registered’’ pursuant to a Torrens or 

other similar title registration system 

provided by law. 

(d) As a condition to paying a claim 

for an insured loss the Secretary may 

require that the loan, including any 

security or judgment held therefor, be 

assigned to the extent of such payment, 

and if any claim has been filed in 

bankruptcy, insolvency, probate, or 

similar proceedings such claim may 

likewise be required to be so assigned. 

(e) Any amounts paid by the Secretary 

on account of the liabilities of any 

veteran guaranteed or insured under the 

provisions of 38 U.S.C. chapter 37 shall 

constitute a debt owing to the United 

States by such veteran. Before a 

liquidation sale, an official authorized 

to act for the Secretary under provisions 

of § 36.4845 may approve a complete or 

partial release of the Secretary’s right to 

collect a debt owing to the United States 

under this paragraph and/or under 

paragraph (a) of this section as follows: 

(1) Complete release. VA will approve 

a complete release if an official 

authorized to act for the Secretary under 

§ 36.4845 determines that all of the 

following are true: 

(i) The loan default was caused by 

circumstances beyond the control of the 

obligor; and 

(ii) There are no indications of fraud, 

misrepresentation or bad faith on the 

part of the obligor in obtaining the loan 

or in connection with the loan default; 

and 

(iii) The obligor cooperated with VA 

in exploring all realistic alternatives to 

termination of the loan through 

foreclosure, and, either: 

(A) Review of the obligor’s current 

financial situation and prospective 

earning potential and obligations 

indicates there are no realistic prospects 

that the obligor could repay all or part 

of the anticipated debt within six years 

after the liquidation sale and still 

provide the necessities of life for 

himself or herself and his or her family; 

or, 

(B) In consideration for a release of 

the Secretary’s collection rights the 

obligor completes, or VA is enabled to 

authorize, an action which reduces the 

Government’s claim liability sufficiently 

to offset the amount of the anticipated 

indebtedness which would otherwise be 

established pursuant to this paragraph 

and likely be collectable by VA after 

foreclosure in view of the obligor’s 

financial situation. Such actions would 

include termination of the loan by 

means of a deed-in-lieu of foreclosure, 

private sale of the property for less than 

the indebtedness with a reduced claim 

paid by VA for the balance due the loan 

holder, or enabling VA to authorize the 

holder to elect a more expeditious 

foreclosure procedure when such an 

election would result in the legal release 

of the obligor’s liability; or 

(C) The obligor being released is not 

the current titleholder to the property 

and there are no indications of fraud, 

misrepresentation, or bad faith on the 

obligor’s part in disposing of the 

property. 

(2) Partial release. In the event of a 

partial release, the amount of 

indebtedness established will be such 

that the obligor’s financial situation 

permits repayment of the debt to the 

Government in regular monthly 

installments of principal plus interest 

over a five year period commencing 

within one year after the date the 

promissory note is executed, except in 

those cases in which a lump sum 

settlement appears to be in the best 

interest of the Government or in which 

it appears the obligor may reasonably 

expect significant changes in his or her 

financial situation which would permit 

higher payments to be made during later 

periods of the life of the note. VA may 

authorize a partial release if an official 

authorized to act for the Secretary under 

§ 36.4845 determines that all of the 

following are true: 

(i) The loan default was caused by 

circumstances beyond the control of the 

obligor; and, 

(ii) There are no indications of fraud, 

misrepresentation or bad faith on the 

part of the obligor in obtaining the loan 

or in connection with the loan default; 

and, 

(iii) The obligor cooperated with VA 

in exploring all realistic alternatives to 

termination of the loan through 

foreclosure; and, 

(iv) Review of the obligor’s current 

financial situation and prospective 

earning potential and obligations 

indicates there are no realistic prospects 

that the obligor could repay all of the 

anticipated debt within six years of the 

liquidation sale while providing the 


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necessities of life for himself or herself 

and his or her family; and, 

(v) The obligor executes a written 

agreement acknowledging his or her 

liability to VA under this paragraph and 

executes a promissory note which 

provides for regular amortized monthly 

payments of an amount determined by 

VA in accordance with paragraph (e)(3) 

of this section including interest on the 

total amount payable at the rate in effect 

for Loan Guaranty liability accounts at 

the time of execution, or, the obligor 

agrees to other terms of repayment 

acceptable to VA including payment of 

a lump sum in settlement of his or her 

obligation under this paragraph. 

(3) Review of obligor’s financial 

situation. For purposes of authorizing a 

complete or partial release under this 

paragraph, a VA official reviewing an 

obligor’s financial situation will 

consider all of the following: 

(i) The obligor’s current and 

anticipated family income based on 

employment skills and experience; 

(ii) The obligor’s current short-term 

and long-term financial obligations, 

including the obligation to repay the 

Government which must be afforded 

consideration at least equal to his or her 

consumer debt obligations; 

(iii) A current credit report on the 

obligor; 

(iv) The obligor’s assets and net 

worth; and 

(v) The required balance available for 

family support used in underwriting VA 

guaranteed loans in the area. 

(4) Determinations made under 

paragraphs (e)(1) and (2) of this section 

are intended for the benefit of the 

Government in reducing the amount of 

claim payable by VA and/or avoiding 

the establishment of uncollectible debts 

owing to the United States. Such 

determinations are discretionary on the 

part of VA and shall not constitute a 

defense to any legal action to terminate 

the loan nor vest any appellate right in 

an obligor which would require further 

review of the case. 

(Authority: 38 U.S.C. 501, 3703(c)(1), 5302) 

(f) Whenever any veteran disposes of 

residential property securing a 

guaranteed or insured loan obtained by 

him or her under 38 U.S.C. chapter 37, 

and for which the commitment to make 

the loan was made prior to March 1, 

1988, the Secretary, upon application 

made by such veteran, shall issue to the 

veteran a release relieving him or her of 

all further liability to the Secretary on 

account of such loan (including liability 

for any loss resulting from any default 

of the transferee or any subsequent 

purchaser of such property) if the 

Secretary has determined, after such 

investigation as may be deemed 

appropriate, that there has been 

compliance with the conditions 

prescribed in 38 U.S.C. 3713. The 

assumption of full liability for 

repayment of the loan by the transferee 

of the property must be evidenced by an 

agreement in writing in such form as the 

Secretary may require. Release of the 

veteran from liability to the Secretary 

will not impair or otherwise affect the 

Secretary’s guaranty or insurance 

liability on the loan, or the liability of 

the veteran to the holder. Any release of 

liability granted to a veteran by the 

Secretary shall inure to the spouse of 

such veteran. The release of the veteran 

from liability to the Secretary will 

constitute the Secretary’s prior approval 

to a release of the veteran from liability 

on the loan by the holder thereof. 

(Authority: 38 U.S.C. 3713) 

(g) If any veteran disposes of 

residential property securing a 

guaranteed or insured loan obtained 

under 38 U.S.C. chapter 37, without 

receiving a release from liability with 

respect to such loan under 38 U.S.C. 

3713 and a default subsequently occurs 

which results in liability of the veteran 

to the Secretary on account of the loan, 

the Secretary may relieve the veteran of 

such liability if he determines that: 

(1) A transferee either immediate or 

remote is legally liable to the Secretary 

for the debt of the original veteranborrower established after the 

termination of the loan, and 

(2) The original loan was current at 

the time such transferee acquired the 

property, and 

(3) The transferee who is liable to the 

Secretary is found to have been a 

satisfactory credit risk at the time he or 

she acquired the property. 

(h)(1) If a veteran or any other person 

disposes of residential property securing 

a guaranteed or insured loan for which 

a commitment was made on or after 

March 1, 1988, and the veteran or other 

person notifies the loan holder in 

writing before disposing of the property, 

the veteran or other person shall be 

relieved of all further liability to the 

Secretary with respect to the loan 

(including liability for any loss resulting 

from any default of the purchaser or any 

subsequent owner of the property) and 

the application for assumption shall be 

approved if the holder determines that: 

(i) The proposed purchaser is 

creditworthy; 

(ii) The proposed purchaser is 

contractually obligated to assume the 

loan and the liability to indemnify the 

Department of Veterans Affairs for the 

amount of any claim paid under the 

guaranty as a result of a default on the 

loan, or has already done so; and 

(iii) The payments on the loan are 

current. 

(2) Should these requirements be 

satisfied, the holder may also release the 

veteran or other person from liability on 

the loan. This does not apply if the 

approval for the assumption is granted 

upon special appeal to avoid immediate 

foreclosure. 

(i) If a veteran requests a release of 

liability under paragraph (f) of this 

section, or if a borrower requests a 

release of liability pursuant to 

§ 36.4809(c)(1)(vii), a holder described 

in the first sentence of § 36.4803(l)(1)(i) 

is authorized to and must make all 

decisions regarding the creditworthiness of the transferee, subject to 

the right of a transferee to appeal any 

denial to the Secretary within 30 days 

of being notified in writing of the denial 

by the holder or servicer. The 

procedures and fees specified in 

§§ 36.4803(l)(1)(i) and 36.4813(d)(8) 

applicable to decisions under 38 U.S.C. 

3714 shall also apply to decisions 

specified in this paragraph. 

(Authority: 38 U.S.C. 3703(c), 3713 and 3714) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0112.) 

§ 36.4827 Release of security. 

(a)(1) Except upon full payment of the 

indebtedness, or except as provided in 

paragraph (a)(2) of this section or in 

paragraphs (e) and (f) of § 36.4822, the 

holder shall not release a lien or other 

right in or to real property held as 

security for a guaranteed or insured 

loan, or grant a fee or other interest in 

such property, without prior approval of 

the Secretary. 

(2) The holder may, without the prior 

approval of the Secretary, release the 

lien on a portion of the property 

securing the loan provided: 

(i) The holder has obtained an 

appraisal from the Secretary showing 

the value of the security prior to the 

partial release of the lien and the value 

of the security on which the lien will 

remain; 

(ii) The portion of the property still 

subject to the lien is fit for dwelling 

purposes; and 

(iii) The loan-to-value ratio after the 

partial release of the lien: 

(A) Will be not more than 80 percent; 

or 

(B) If the loan-to-value ratio after the 

partial release of the lien is 80 percent 

or higher, any proceeds received as 

consideration from the partial release of 

the lien shall be applied to the unpaid 

loan balance. 


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(b) A holder may release from the lien 

personal property including crops 

without the prior approval of the 

Secretary. 

(c) Failure of the holder to comply 

with the provisions of this section shall 

not in itself affect the validity of the title 

of a purchaser to the property released. 

(d) The release of the personal 

liability of any obligor on a guaranteed 

or insured obligation resultant from the 

act or omission of any holder without 

the prior approval of the Secretary shall 

release the obligation of the Secretary as 

guarantor or insurer, except when such 

act or omission consists of: 

(1) Failure to establish the debt as a 

valid claim against the assets of the 

estate of any deceased obligor, provided 

no lien for the guaranteed or insured 

debt is thereby impaired or destroyed; 

or 

(2) An election and appropriate 

prosecution of legally available effective 

remedies with respect to the 

repossession or the liquidation of the 

security in any case, irrespective of the 

identity or the survival of the original or 

of any subsequent debtor, if holder shall 

have given such notice as required by 

§ 36.4817 and if, after receiving such 

notice, the Secretary shall have failed to 

notify the holder within 15 days to 

proceed in such manner as to effectively 

preserve the personal liability of the 

parties liable, or such of them as the 

Secretary indicates in such notice to the 

holder; or 

(3) The release of an obligor, or 

obligors, from liability on an obligation 

secured by a lien on property, which 

release is an incident of and 

contemporaneous with the sale of such 

property to an eligible veteran who 

assumed such obligation, which 

assumed obligation is guaranteed on the 

assuming veteran’s account pursuant to 

38 U.S.C. chapter 37; or 

(4) The release of an obligor or 

obligors as provided in § 36.4815; or, the 

release of an obligor, or obligors, 

incident to the sale of property securing 

the loan which the holder is authorized 

to approve under the provisions of 38 

U.S.C. 3714. 

(Authority: 38 U.S.C. 3714) 

§ 36.4828 Partial or total loss of guaranty 

or insurance. 

(a) Subject to the incontestable 

provisions of 38 U.S.C. 3721 as to loans 

guaranteed or insured on or subsequent 

to July 1, 1948, there shall be no liability 

on account of a guaranty or insurance, 

or any certificate or other evidence 

thereof, with respect to a transaction in 

which a signature to the note, the 

mortgage, or any other loan papers, or 

the application for guaranty or 

insurance is a forgery; or in which the 

certificate of discharge or the certificate 

of eligibility is counterfeited, or 

falsified, or is not issued by the 

Government. 

(1) Except as to a holder who acquired 

the loan instrument before maturity, for 

value, and without notice, and who has 

not directly or by agent participated in 

the fraud, or in the misrepresentation 

hereinafter specified, any willful and 

material misrepresentation or fraud by 

the lender, or by a holder, or the agent 

of either, in procuring the guaranty or 

the insurance credit, shall relieve the 

Secretary of liability, or, as to loans 

guaranteed or insured on, or subsequent 

to July 1, 1948, shall constitute a 

defense against liability on account of 

the guaranty or insurance of the loan in 

respect to which the willful 

misrepresentation, or the fraud, is 

practiced: Provided, that if a 

misrepresentation, although material, is 

not made willfully, or with fraudulent 

intent, it shall have only the 

consequences prescribed in paragraphs 

(b) and (c) of this section. 

(2) [Reserved] 

(b) In taking security required by 38 

U.S.C. chapter 37 and the regulations 

concerning guaranty or insurance of 

loans to veterans, a holder shall obtain 

the required lien on property the title to 

which is such as to be acceptable to 

prudent lending institutions, informed 

buyers, title companies, and attorneys, 

generally, in the community in which 

the property is situated: Provided, that 

a title will not be unacceptable by 

reason of any of the limitations on the 

quantum or quality of the property or 

title stated in § 36.4854(b) and if such 

holder fails in this respect or fails to 

comply with 38 U.S.C. chapter 37 and 

the regulations concerning guaranty or 

insurance of loans to veterans, then no 

claim on the guaranty or insurance shall 

be paid on account of the loan with 

respect to which such failure occurred, 

or in respect to which an unwillful 

misrepresentation occurred, until the 

amount by which the ultimate liability 

of the Secretary would thereby be 

increased has been ascertained. The 

burden of proof shall be upon the holder 

to establish that no increase of ultimate 

liability is attributable to such failure or 

misrepresentation. The amount of 

increased liability of the Secretary shall 

be offset by deduction from the amount 

of the guaranty or insurance otherwise 

payable, or if consequent upon loss of 

security shall be offset by crediting to 

the indebtedness the amount of the 

impairment as proceeds of the sale of 

security in the final accounting to the 

Secretary. To the extent the loss 

resultant from the failure or 

misrepresentation prejudices the 

Secretary’s right of subrogation 

acceptance by the holder of the guaranty 

or insurance payment shall subordinate 

the holder’s right to those of the 

Secretary. Adjustments under this 

section may be made for failure to 

comply with: 

(1) Obtaining and retaining a lien of 

the dignity prescribed on all property 

upon which a lien is required by 38 

U.S.C. chapter 37 or the regulations 

concerning guaranty or insurance of 

loans to veterans, 

(2) Inclusion of power to substitute 

trustees (§ 36.4830), 

(3) The procurement and maintenance 

of insurance coverage (§ 36.4829), 

(4) Any notice required by § 36.4817, 

(5) The release, conveyance, 

substitution, or exchange of security 

(§ 36.4827), 

(6) Lack of legal capacity of a party to 

the transaction incident to which the 

guaranty or the insurance is granted 

(§ 36.4831), 

(7) Failure of the lender to see that 

any escrowed or earmarked account is 

expended in accordance with the 

agreement, 

(8) The taking into consideration of 

limitations upon the quantum or quality 

of the estate or property (§ 36.4854(b)), 

(9) Any other requirement of 38 

U.S.C. chapter 37 or the regulations 

concerning guaranty or insurance of 

loans to veterans which does not by the 

terms of said chapter or the regulations 

concerning guaranty or insurance of 

loans to veterans result in relieving the 

Secretary of all liability with respect to 

the loan, 

(c) If after the payment of a guaranty 

or an insurance loss, or after a loan is 

transferred pursuant to § 36.4820(a), the 

fraud, misrepresentation or failure to 

comply with the regulations in this 

subpart as provided in this section is 

discovered and the Secretary determines 

that an increased loss to the government 

resulted therefrom the transferor or 

person to whom such payment was 

made shall be liable to the Secretary for 

the amount of the loss caused by such 

misrepresentation or failure. 

(Authority: 38 U.S.C. 3703 and 3720) 

§ 36.4829 Hazard insurance. 

The holder shall require insurance 

policies to be procured and maintained 

in an amount sufficient to protect the 

security against the risks or hazards to 

which it may be subjected to the extent 

customary in the locality. All moneys 

received under such policies covering 

payment of insured losses shall be 

applied to restoration of the security or 

to the loan balance. Flood insurance 

will be required on any building or 


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personal property securing a loan at any 

time during the term of the loan that 

such security is located in an area 

identified by the Federal Emergency 

Management Agency as having special 

flood hazards and in which flood 

insurance has been made available 

under the National Flood Insurance Act, 

as amended. The amount of flood 

insurance must be at least equal to the 

lesser of the outstanding principal 

balance of the loan or the maximum 

limit of coverage available for the 

particular type of property under the 

National Flood Insurance Act, as 

amended. The Secretary cannot 

guarantee a loan for the acquisition or 

construction of property located in an 

area identified by the Federal 

Emergency Management Agency as 

having special flood hazards unless the 

community in which such area is 

situated is then participating in the 

National Flood Insurance Program. 

(Authority: 38 U.S.C. 3703(c)(1), 42 U.S.C. 

4106(a)) 

§ 36.4830 Substitution of trustees. 

In jurisdictions in which valid, any 

deed of trust or mortgage securing a 

guaranteed or insured loan, if it names 

trustees, or confers a power of sale 

otherwise, shall contain a provision 

empowering any holder of the 

indebtedness to appoint substitute 

trustees, or other person with such 

power to sell, who shall succeed to all 

the rights, powers and duties of the 

trustees, or other person, originally 

designated. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4831 Capacity of parties to contract. 

Nothing in §§ 36.4800 through 

36.4880 shall be construed to relieve 

any lender of responsibility otherwise 

existing, for any loss caused by the lack 

of legal capacity of any person to 

contract, convey, or encumber, or 

caused by the existence of other legal 

disability or defects invalidating, or 

rendering unenforceable in whole or in 

part, either the loan obligation or the 

security therefor. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4832 Geographical limits. 

Any real property purchased, 

constructed, altered, improved, or 

repaired with the proceeds of a 

guaranteed or insured loan shall be 

situated within the United States which 

for purposes of 38 U.S.C. chapter 37 is 

here defined as the several States, 

Territories and possessions, and the 

District of Columbia, the 

Commonwealth of Puerto Rico, and the 

Commonwealth of the Northern Mariana 

Islands. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4833 Maintenance of records. 

(a)(1) The holder shall maintain a 

record of the amounts of payments 

received on the obligation and 

disbursements chargeable thereto and 

the dates thereof, including copies of 

bills and receipts for such 

disbursements. These records shall be 

maintained until the Secretary ceases to 

be liable as guarantor or insurer of the 

loan, or, if the Secretary has paid a 

claim on the guaranty, until 3 years after 

such claim was paid. For the purpose of 

any accounting with the Secretary or 

computation of a claim, any holder who 

fails to maintain such record and, upon 

request, make it available to the 

Secretary for review shall be presumed 

to have received on the dates due all 

sums which by the terms of the contract 

are payable prior to date of claim for 

default, or to have not made the 

disbursement for which reimbursement 

is claimed, and the burden of going 

forward with evidence and of ultimate 

proof of the contrary shall be on such 

holder. 

(2) The holder shall maintain records 

supporting their decision to approve 

any loss mitigation option for which an 

incentive is paid in accordance with 

§ 36.4819(a). Such records shall be 

retained a minimum of 3 years from the 

date of such incentive payment and 

shall include, but not be limited to, 

credit reports, verifications of income, 

employment, assets, liabilities, and 

other factors affecting the obligor’s 

credit worthiness, work sheets, and 

other documents supporting the 

holder’s decision. 

(3) For any loan where the claim on 

the guaranty was paid on or after 

February 1, 2008, or action described in 

paragraph (a)(2) of this section was 

taken after February 1, 2008, holders 

shall submit any documents described 

in paragraph (a)(1) or (a)(2) of this 

section to the Secretary in electronic 

form; i.e., an image of the original 

document in .jpg, .gif, .pdf, or a similar 

widely accepted format. 

(b) The lender shall retain copies of 

all loan origination records on a VAguaranteed loan for at least two years 

from the date of loan closing. Loan 

origination records include the loan 

application, including any preliminary 

application, verifications of 

employment and deposit, all credit 

reports, including preliminary credit 

reports, copies of each sales contract 

and addendums, letters of explanation 

for adverse credit items, discrepancies 

and the like, direct references from 

creditors, correspondence with 

employers, appraisal and compliance 

inspection reports, reports on termite 

and other inspections of the property, 

builder change orders, and all closing 

papers and documents. 

(Authority: 38 U.S.C. 501, 3703(c)(1)) 

(c) The Secretary has the right to 

inspect, examine, or audit, at a 

reasonable time and place, the records 

or accounts of a lender or holder 

pertaining to loans guaranteed or 

insured by the Secretary. 

(Authority: 38 U.S.C. 3703(c)(1)) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0515.) 

§ 36.4835 Delivery of notice. 

Except where otherwise specified in 

this part, any notice required by 

§§ 36.4800 to 36.4880 to be given the 

Secretary must be in writing or such 

other communications medium as may 

be approved by an official designated in 

§ 36.4845 and delivered, by mail or 

otherwise, to the VA office at which the 

guaranty or insurance was issued, or to 

any changed address of which the 

holder has been given notice. Such 

notice must plainly identify the case by 

setting forth the name of the original 

veteran-obligor and the file number 

assigned to the case by the Secretary, if 

available, or otherwise the name and 

serial number of the veteran. If mailed, 

the notice shall be by certified mail 

when so provided by §§ 36.4800 to 

36.4880. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4836 [Reserved] 

§ 36.4837 Conformance of loan 

instruments. 

Regulations issued under 38 U.S.C. 

chapter 37 and in effect on the date of 

any loan which is submitted and 

accepted or approved for a guaranty or 

for insurance thereunder, shall govern 

the rights, duties, and liabilities of the 

parties to such loan and any provisions 

of the loan instruments inconsistent 

with such regulations are hereby 

amended and supplemented to conform 

thereto. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4838 Supplementary administrative 

action. 

(a) Notwithstanding any requirement, 

condition, or limitation stated in or 

imposed by the regulations concerning 

the guaranty or insurance of loans to 

veterans, the Under Secretary for 

Benefits, or the Director, Loan Guaranty 

Service, within the limitations and 

conditions prescribed by the Secretary, 


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is hereby authorized, if he or she finds 

the interests of the Government are not 

adversely affected, to relieve undue 

prejudice to a debtor, holder, or other 

person, which might otherwise result, 

provided no such action may be taken 

which would impair the vested rights of 

any person affected thereby. If such 

requirement, condition, or limitation is 

of an administrative or procedural (not 

substantive) nature, any employee 

designated in § 36.4845 is hereby 

authorized to grant similar relief if he or 

she finds the failure or error of the 

lender was due to misunderstanding or 

mistake and that the interests of the 

Government are not adversely affected. 

Provisions of the regulations considered 

to be of an administrative or procedural 

(nonsubstantive) nature are limited to 

the following: 

(1) The requirement in § 36.4808(a) 

that a lender obtain in prior approval of 

the Secretary before closing a joint loan 

if the lender or class of lenders is 

eligible or has been approved by the 

Secretary to close loans on the 

automatic basis pursuant to 38 U.S.C. 

3702(d); 

(2) The requirements in § 36.4803(l) 

concerning the giving of notice in 

assumption cases under 38 U.S.C. 3714; 

(3) The requirement in § 36.4824(d)(3) 

that no claim is payable unless it is 

submitted within 1 year after the 

liquidation sale; 

(4) The requirement in § 36.4823(a) to 

submit notice of election to convey a 

property to VA within 15 days of the 

date of liquidation sale; 

(5) The determination by the holder in 

§ 36.4823(b) of the amount of 

indebtedness that must be waived in 

order to make a property eligible for 

conveyance; 

(6) The determination in 

§ 36.4814(f)(2) of the date beyond which 

no additional fees or charges will be 

allowed; 

(7) The determination in 

§ 36.4824(a)(3) of the interest payable on 

a claim under guaranty; and 

(8) The reconsideration in 

§ 36.4824(e) of the holder’s electronic 

request for review of any denied items 

within the claim; 

(b) Authority is hereby granted to the 

Loan Guaranty Officer to redelegate 

authority to make any determinations 

under this section. 

(Authority: 38 U.S.C. 3714 and 3720) 

§ 36.4839 Eligibility of loans; reasonable 

value requirements. 

(a) Evidence of guaranty or insurance 

shall be issued in respect to a loan for 

any of the purposes specified in 38 

U.S.C. 3710(a) only if all of the 

following conditions are met: 

(1) The proceeds of such loan have 

been used to pay for the property 

purchased, constructed, repaired, 

refinanced, altered, or improved. 

(2) Except as to refinancing loans 

pursuant to 38 U.S.C. 3710(a)(8), 

(a)(9)(B)(i), (a)(11), or (b)(7) and energy 

efficient mortgages pursuant to 38 

U.S.C. 3710(d), the loan (including any 

scheduled deferred interest added to 

principal) does not exceed the 

reasonable value of the property or 

projected reasonable value of a new 

home which is security for a graduated 

payment mortgage loan, as appropriate, 

as determined by the Secretary. For the 

purpose of determining the reasonable 

value of a graduated payment mortgage 

loan to purchase a new home, the 

reasonable value of the property as of 

the time the loan is made shall be 

calculated to increase at a rate not in 

excess of 2.5 percent per year, but in no 

event may the projected value of the 

property exceed 115 percent of the 

initially established reasonable value. 

(Authority: 38 U.S.C. 3703(d)(2)) 

(3) The veteran has certified, in such 

form as the Secretary may prescribe, 

that the veteran has paid in cash from 

his or her own resources on account of 

such purchase, construction, alteration, 

repair, or improvement a sum equal to 

the difference, if any, between the 

purchase price or cost of the property 

and its reasonable value. 

(b) A loan guaranteed under 38 U.S.C. 

3710(d) which includes the cost of 

energy efficient improvements may 

exceed the reasonable value of the 

property. The cost of the energy efficient 

improvements that may be financed 

may not exceed $3,000; provided, 

however, that up to $6,000 in energy 

efficient improvements may be financed 

if the increase in the monthly payment 

for principal and interest does not 

exceed the likely reduction in monthly 

utility costs resulting from the energy 

efficient improvements. 

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

(c) Notwithstanding that the aggregate 

of the loan amount in the case of loans 

for the purposes specified in paragraph 

(a) of this section, and the amount 

remaining unpaid on taxes, special 

assessments, prior mortgage 

indebtedness, or other obligations of any 

character secured by enforceable 

superior liens or a right to such lien 

existing as of the date the loan is closed 

exceeds the reasonable value of such 

property as of said date and that 

evidence of guaranty or insurance credit 

is issued in respect thereof, as between 

the holder and Secretary (for the 

purpose of computing the claim on the 

guaranty or insurance and for the 

purposes of § 36.4823, and all 

accounting), the indebtedness which is 

the subject of the guaranty or insurance 

shall be deemed to have been reduced 

as of the date of the loan by a sum equal 

to such excess, less any amounts 

secured by liens released or paid on the 

obligations secured by such superior 

liens or rights by a holder or others 

without expense to or obligation on the 

debtor resulting from such payment, or 

release of lien or right; and all payments 

made on the loan shall be applied to the 

indebtedness as so reduced. Nothing in 

this paragraph affects any right or 

liability resulting from fraud or willful 

misrepresentation. 

(Authority: 38 U.S.C. 3703(c)(1), 3710, 3712) 

§ 36.4840 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 

whether 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 § 36.4807. 

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

(b) Waiver of standards. Use of the 

standards in paragraphs (c) through (j) 

of this section for underwriting home 

loans will be waived only in 

extraordinary circumstances when the 

Secretary determines, considering the 

totality of circumstances, that the 

veteran is a satisfactory credit risk. 

(c) Methods. The two primary 

underwriting standards 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 

exceptions 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 


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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) Down payment 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 

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): 


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TABLE OF RESIDUAL INCOMES BY REGION

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

Family size 1 Northeast Midwest 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 

1For 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 1 Northeast Midwest 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 

1For 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 


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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 

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 down 

payment 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 (12 CFR part 202)), 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 


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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 

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 


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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 

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 


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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 

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 


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6342 Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 

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 

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 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 


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Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules and Regulations 6343 

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 

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 § 36.4839(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. 

(i) Estimated monthly shelter 

expenses. It is important that monthly 

expenses such as taxes, insurance, 

assessments and maintenance and 

utilities be estimated accurately based 

on property location and type of house; 

e.g., old or new, large or small, rather 

than using or applying a ‘‘rule of 

thumb’’ to all properties alike. 

Maintenance and utility amounts for 

various types of property should be 

realistically estimated. Local utility 

companies should be consulted for 

current rates. The age and type of 

construction of a house may well affect 

these expenses. In the case of 

condominiums or houses in a planned 

unit development (PUD), the monthly 

amount of the maintenance assessment 

payable to a homeowners association 

should be added. If the amount 

currently assessed is less than the 

maximum provided in the covenants or 

master deed, and it appears likely that 

the amount will be insufficient for 

operation of the condominium or PUD, 

the amount used will be the maximum 

the veteran could be charged. If it is 

expected that real estate taxes will be 

raised, or if any special assessments are 

expected, the increased or additional 

amounts should be used. In special 

flood hazard areas, include the premium 

for any required flood insurance. 

(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 (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 chapter 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. Complaint includes 

the assessment of liability served 

pursuant to this section. 

(iii) Defendant. Defendant means a 

lender named in the complaint. 

(iv) Lender. 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 


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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) Penalty. Any lender who 

knowingly and willfully makes a false 

certification required pursuant to 

§ 36.4840(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. 

(m) Hearing procedures. A lender 

hearing on an assessment established 

pursuant to this section shall be 

governed by the procedures recited at 38 

CFR 42.8 through 42.47. 

(n) Additional remedies. Any 

assessment under this section may be in 

addition to other remedies available to 

VA, such as debarment and suspension 

pursuant to 38 U.S.C. 3704 and 2 CFR 

parts 180 and 801 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. 

(Authority 38 U.S.C. 3703(c)(1), 3710(g)) 

(The Office of Management and Budget has 

approved the information collection 

requirements of this section under control 

number 2900–0521.) 

§ 36.4841 Death or insolvency of holder. 

(a) Immediately upon the death of the 

holder and without the necessity of 

request or other action by the debtor or 

the Secretary, all sums then standing as 

a credit balance in a trust, or deposit, or 

other account to cover taxes, insurance 

accruals, or other items in connection 

with the loan secured by the 

encumbered property, whether stated to 

be such or otherwise designated, and 

which have not been credited on the 

note shall, nevertheless, be treated as a 

setoff and shall be deemed to have been 

credited thereon as of the date of the last 

debit to such account, so that the 

unpaid balance of the note as of that 

date will be reduced by the amount of 

such credit balance: Provided, that any 

unpaid taxes, insurance premiums, 

ground rents, or advances may be paid 

by the holder of the indebtedness, at the 

holder’s option, and the amount which 

otherwise would have been deemed to 

have been credited on the note reduced 

accordingly. This paragraph shall be 

applicable whether the estate of the 

deceased holder is solvent or insolvent. 

(b) The provisions of paragraph (a) of 

this section shall also be applicable in 

the event of: 

(1) Insolvency of holder; 

(2) Initiation of any bankruptcy or 

reorganization, or liquidation 

proceedings as to the holder, whether 

voluntary or involuntary; 

(3) Appointment of a general or 

ancillary receiver for the holder’s 

property; or in any case; or 

(4) Upon the written request of the 

debtor if all secured and due insurance 

premiums, taxes, and ground rents have 

been paid, and appropriate provisions 

made for future accruals. 

(c) Upon the occurrence of any of the 

events enumerated in paragraph (a) or 

(b) of this section, interest on the note 

and on the credit balance of the deposits 

mentioned in paragraph (a) shall be set 

off against each other at the rate payable 

on the principal of the note, as of the 

date of last debit to the deposit account. 

Any excess credit of interest shall be 

treated as a set-off against the unpaid 

advances, if any, and the unpaid 

balance of the note. 

(d) The provisions of paragraphs (a), 

(b) and (c) of this section shall apply 

also to corporations. The dissolution 

thereof by expiration of charter, by 

forfeiture, or otherwise shall be treated 

as is the death of an individual as 

provided in paragraph (a) of this 

section. 

(Authority 38 U.S.C. 3703(c)(1), 3720) 

§ 36.4842 Qualification for designated fee 

appraisers. 

To qualify for approval as a 

designated fee appraiser, an applicant 

must show to the satisfaction of the 

Secretary that his or her character, 

experience, and the type of work in 

which he or she has had experience for 

at least 5 years qualifies the applicant to 

competently appraise and value within 

a prescribed area the type of property to 

which the approval relates. 

(Authority 38 U.S.C. 3703(c)(1), 3731) 

§ 36.4843 Restriction on designated fee 

appraisers. 

(a) A designated fee appraiser shall 

not make an appraisal, excepting of 

alterations, improvements, or repairs to 

real property entailing a cost of not 

more than $3,500, if such appraiser is an 

officer, director, trustee, employer, or 

employee of the lender, contractor, or 

vendor. 

(b) An appraisal made by a designated 

fee appraiser shall be subject to review 

and adjustment by the Secretary. The 

amount determined to be proper upon 

any such review or adjustment shall 

constitute the ‘‘reasonable value’’ for the 

purpose of determining the eligibility of 

the related loan. 

(Authority 38 U.S.C. 3703(c)(1), 3731) 

§ 36.4845 Delegation of authority. 

(a) Except as hereinafter provided, 

each employee of the Department of 

Veterans Affairs heretofore or hereafter 

appointed to, or lawfully filling, any 

position designated in paragraph (b) of 

this section is hereby delegated 

authority, within the limitations and 

conditions prescribed by law, to 

exercise the powers and functions of the 

Secretary with respect to the guaranty or 

insurance of loans and the rights and 

liabilities arising therefrom, including 

but not limited to the adjudication and 

allowance, disallowance, and 

compromise of claims; the collection or 

compromise of amounts due, in money 


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or other property; the extension, 

rearrangement, or acquisition of loans; 

the management and disposition of 

secured and unsecured notes and other 

property; and those functions expressly 

or impliedly embraced within 

paragraphs (2) through (6) of 38 U.S.C. 

3720(a). Incidental to the exercise and 

performance of the powers and 

functions hereby delegated, each such 

employee is authorized to execute and 

deliver (with or without 

acknowledgment) for, and on behalf of, 

the Secretary, evidence of guaranty or of 

insurance credits and such certificates, 

forms, conveyances, and other 

instruments as may be appropriate in 

connection with the acquisition, 

ownership, management, sale, transfer, 

assignment, encumbrance, rental, or 

other disposition of real or personal 

property, or, of any right, title, or 

interest therein, including, but not 

limited to, contracts of sale, installment 

contracts, deeds, leases, bills of sale, 

assignments, and releases; and to 

approve disbursements to be made for 

any purpose authorized by 38 U.S.C. 

chapter 37. 

(b)(1) Designated positions are as 

follows: 

(i) Under Secretary for Benefits. 

(ii) Director, Loan Guaranty Service. 

(iii) Director, Medical and Regional 

Office Center. 

(iv) Director, VA Regional Office and 

Insurance Center. 

(v) Director, Regional Office. 

(vi) Loan Guaranty Officer. 

(vii) Assistant Loan Guaranty Officer. 

(2) The authority hereby delegated to 

employees of the positions designated 

in paragraph (b)(1) of this section may, 

with the approval of the Under 

Secretary for Benefits, be redelegated. 

(c) Nothing in this section shall be 

construed—

(1) To authorize any such employee to 

exercise the authority vested in the 

Secretary under 38 U.S.C. 501 or 

3703(a)(2) or to sue, or enter appearance 

for and on behalf of the Secretary, or 

confess judgment against the Secretary 

in any court without the Secretary’s 

prior authorization; or 

(2) To include the authority to 

exercise those powers delegated to the 

Under Secretary for Benefits, or the 

Director, Loan Guaranty Service, under 

§§ 36.4823(e), 36.4838 or 36.4846, 

Provided, that, anything in the 

regulations concerning guaranty or 

insurance of loans to veterans to the 

contrary notwithstanding, any evidence 

of guaranty or insurance issued on or 

after July 1, 1948, by any of the 

employees designated in paragraph (b) 

of this section or by any employee 

designated an authorized agent or a loan 

guaranty agent shall be deemed to have 

been issued by the Secretary, subject to 

the defenses reserved in 38 U.S.C. 3721. 

(d) Each Regional Office, Regional 

Office and Insurance Center, and 

Medical and Regional Office Center 

shall maintain and keep current a 

cumulative list of all employees of that 

Office or Center who, since May 1, 1980, 

have occupied the positions of Director, 

Loan Guaranty Officer, and Assistant 

Loan Guaranty Officer. This list will 

include each employee’s name, title, 

date the employee assumed the 

position, and the termination date, if 

applicable, of the employee’s tenure in 

such position. The list shall be available 

for public inspection and copying at the 

Regional Office, or Center, during 

normal business hours. 

(e)(1) Authority is hereby delegated to 

the officers, designated in paragraph 

(e)(2) of this section, of the entity 

performing loan servicing functions 

under a contract with the Secretary to 

execute on behalf of the Secretary all 

documents necessary for the servicing 

and termination of a loan made or 

acquired by the Secretary pursuant to 38 

U.S.C. chapter 37 (other than under 

subchapter vi of that chapter). 

Documents executed under this 

paragraph include but are not limited to: 

Loan modification agreements, notices 

of default and other documents 

necessary for loan foreclosure or 

termination, notices of appointment or 

substitution of trustees under mortgages 

or deeds of trust, releases or 

satisfactions of mortgages or deeds of 

trust, acceptance of deeds-in-lieu of 

foreclosure, loan assumption 

agreements, loan assignments, deeds 

tendered upon satisfaction or 

conversion of an installment land sales 

contract, and documents related to 

filing, pursuing and settling claims with 

insurance companies relating to hazard 

coverage on properties securing loans 

being serviced. 

(2) The designated officers are: 

(i) Vice President; 

(ii) Assistant Vice President; and 

(iii) Assistant Secretary. 

(3) The Director, Loan Guaranty 

Service, Washington, DC, shall maintain 

a log listing all persons authorized to 

execute documents pursuant to 

paragraph (e) of this section and the 

dates such persons held such authority, 

together with certified copies of 

resolutions of the board of directors of 

the entity authorizing such individuals 

to perform the functions specified in 

paragraph (e)(1) of this section. These 

records shall be available for public 

inspection and copying at the Office of 

the Director of VA Loan Guaranty 

Service, Washington, DC 20420. 

(f)(1) Authority is hereby delegated to 

the officers, designated in paragraph 

(f)(2) of this section, of the entity 

performing property management and 

sales functions under a contract with 

the Secretary to execute on behalf of the 

Secretary all documents necessary for 

the management and sales of residential 

real property acquired by the Secretary 

pursuant to 38 U.S.C. chapter 37. 

Documents executed under this 

paragraph include but are not limited to: 

Sales contracts, deeds, documents 

relating to removing adverse occupants, 

and any documents relating to sales 

closings. The authorization to execute 

deeds is limited to deeds other than 

general warranty deeds. 

(2) The designated officers are: 

(i) Senior Vice President; 

(ii) Vice President; 

(iii) Assistant Vice President; 

(iv) Assistant Secretary; 

(v) Director; 

(vi) Senior Manager; and 

(vii) Regional Manager. 

(3) The Director, Loan Guaranty 

Service, Washington, DC, shall maintain 

a log listing all persons authorized to 

execute documents pursuant to 

paragraph (f) of this section and the 

dates such persons held such authority, 

together with certified copies of 

resolutions of the board of directors of 

the entity authorizing such individuals 

to perform the functions specified in 

paragraph (f)(1) of this section. These 

records shall be available for public 

inspection and copying at the Office of 

the Director of VA Loan Guaranty 

Service, Washington, DC 20420. 

(Authority: 38 U.S.C. 3720(a)(5)) 

§ 36.4846 Cooperative loans. 

(a) To be eligible for guaranty or 

insurance, any loan of the following 

types shall require prior approval of the 

Under Secretary for Benefits, or the 

Director, Loan Guaranty Service, who 

may issue such approval upon such 

conditions and limitations deemed 

appropriate, not inconsistent with the 

provisions of 38 U.S.C. chapter 37 and 

this subpart: 

(1) Any loan which is related to an 

enterprise in which more than 10 

individuals will participate; or 

(2) Any loan to be made for the 

purchase or construction of residential 

units in any housing development, 

cooperative or otherwise, the title to 

which development or to the individual 

units therein is not to be held directly 

by the veteran-participants, or which 

contemplates the ownership or 

maintenance of more than three units or 

of their major appurtenances in 

common. 


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(b) The issuance of such approval 

with respect to a residential 

development under paragraph (a)(2) of 

this section also shall be subject to such 

conditions and stipulation as in the 

judgment of the approving officer are 

possible and proper to: 

(1) Afford reasonable and feasible 

protection to the rights of the 

Government as guarantor or insurer, and 

as subrogee, and to each veteranparticipant against loss of his or her 

respective equity consequent upon the 

failure of other participants to discharge 

their obligations; 

(2) Provide for a reasonable and 

workable plan for the operation and 

management of the project; 

(3) Limit the personal liability of each 

veteran-participant to those sums 

allocable on a proper ratable basis to the 

purchase, cost, and maintenance of his 

or her individual unit or participating 

interest; and 

(4) Limit commercial features to those 

reasonably calculated to promote the 

economic soundness of the project and 

the living convenience of the 

participants, retaining the essential 

character of a residential project. 

(c) No such project, development, or 

enterprise may be approved which 

involves an initial grouping of more 

than 500 veterans, or a cost of more than 

five million dollars, unless it is 

conclusively shown to the satisfaction 

of the approving officer that a greater 

number of veterans or dollar amount 

will assure substantial advantages to the 

veteran-participants which could not be 

achieved in a smaller project. 

(d) When approved as in this section 

provided, and upon performance of the 

conditions indicated in the prior 

approval, proper guaranty certificate or 

certificates may be issued in connection 

with the loan or loans to be guaranteed 

on behalf of eligible veterans 

participating in the project, 

development or enterprise not to exceed 

in total amount the sum of the 

guaranties applied for by the individual 

participants and for which guaranty 

each participant is then eligible. 

(e) In lieu of guaranty as authorized in 

paragraph (d) of this section, insurance 

shall be available on application by the 

lender and all veterans concerned. In 

such case the insurance credit shall be 

limited to 15 percent of the obligation 

of the veteran applicant (subject to 

available eligibility) and the total 

insurance credit in respect to the 

veterans’ loans involved in the project 

shall not exceed 15 percent of the 

aggregate of the principal sums of the 

individual indebtedness incurred by the 

veterans participating in the project for 

the purpose of acquiring their respective 

interests therein. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4847 Lender appraisal processing 

program. 

(a) Delegation of authority to lenders 

to review appraisals and determine 

reasonable value. 

(1) To be eligible for delegation of 

authority to review VA appraisals and 

determine the reasonable value of 

properties to be purchased with VA 

guaranteed loans, a lender must—

(i) Have automatic processing 

authority under 38 U.S.C. 3702(d), and 

(ii) Employ one or more staff appraisal 

reviewers acceptable to the Secretary. 

(2) To qualify as a lender’s staff 

appraisal reviewer an applicant must be 

a full-time member of the lender’s 

permanent staff and may not be 

employed by, or perform services for, 

any other mortgagee. The individual 

must not engage in any private pursuits 

in which there will be, or appear to be, 

any conflict of interest between those 

pursuits and his/her duties, 

responsibilities, and performance as a 

Lender Appraisal Processing Program 

(LAPP) staff appraisal reviewer. Three 

years of experience is necessary to 

qualify as a lender’s staff appraisal 

reviewer. That experience must 

demonstrate a knowledge of, and the 

ability to apply industry-accepted 

principles, methods, practices and 

techniques of appraising, and the ability 

to competently determine the value of 

property within a prescribed 

geographical area. The individual must 

demonstrate the ability to review the 

work of others and to recognize 

deviations from accepted appraisal 

principles, practices, and techniques; 

errors in computations, and 

unjustifiable and unsupportable 

conclusions. 

(3) Lenders that meet the 

requirements of 38 U.S.C. 3702(d), and 

have a staff appraisal reviewer 

determined acceptable by VA, will be 

authorized to review appraisals and 

make reasonable value determinations 

on properties that will be security for 

VA guaranteed loans. The lender’s 

authorization will be subject to a oneyear probationary period. Additionally, 

lenders must satisfy initial and 

subsequent VA office case review 

requirements prior to being allowed to 

determine reasonable value without VA 

involvement. The initial office case 

review requirement must be satisfied in 

the VA regional office in whose 

jurisdiction the lender’s staff appraisal 

reviewer is located before the LAPP 

authority may be utilized by that lender 

in any other VA office’s jurisdiction. To 

satisfy the initial office case review 

requirement, the first five cases of each 

lender staff appraisal reviewer involving 

properties in the regional office location 

where the staff appraisal reviewer is 

located will be processed by him or her 

up to the point where he or she has 

made a reasonable value determination 

and fully drafted, but not issued, the 

lender’s notification of reasonable value 

letter to the veteran. At that point, and 

prior to loan closing, each of the five 

cases will be submitted to the local VA 

office. After a staff review of each case, 

VA will issue a Certificate of Reasonable 

Value, which the lender may use in 

closing the loan automatically if it meets 

all other requirements of the VA. If 

these five cases are found to be 

acceptable by VA, the lender’s staff 

appraisal reviewer will be allowed to 

fully process subsequent appraisals for 

properties located in that VA office’s 

jurisdiction without prior submission to 

VA and issuance by VA of a Certificate 

of Reasonable Value. Lenders must also 

satisfy a subsequent VA office case 

review requirement in each additional 

VA office location in which they desire 

to extend and utilize this authority. 

Under this requirement, the lender must 

have first satisfied the initial office case 

review requirement and then must 

submit to the additional VA office(s) the 

first case each staff appraisal reviewer 

processes in the jurisdiction of that 

office. As provided under the initial 

office case review requirement, VA 

office personnel will issue a Certificate 

of Reasonable Value for this case and 

subsequently determine the 

acceptability of the lender’s staff 

appraisal reviewer’s processing. If VA 

finds this first case to be acceptable, the 

lender’s staff appraisal reviewer will be 

allowed to fully process subsequent 

cases in that additional VA office’s 

jurisdiction without prior submission to 

VA. The initial and subsequent office 

case review requirements may be 

expanded by VA if acceptable 

performance has not been demonstrated. 

After satisfaction of the initial and 

subsequent office case review 

requirements, routine reviews of LAPP 

cases will be made by VA staff based 

upon quality control procedures 

established by the Under Secretary for 

Benefits. Such review will be made on 

a random sampling or performance 

related basis. During the probationary 

period a high percentage of reviews will 

be made by VA staff. 

(4) The following certification by the 

lender’s nominated staff appraisal 

reviewer must be provided with the 

lender’s application for delegation of 

LAPP authority: 


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I hereby acknowledge and represent that by 

signing the Uniform Residential Appraisal 

Report (URAR), FHLMC (Federal Home Loan 

Mortgage Corporation) Form 70/FNMA 

(Federal Notice Mortgage Association) Form 

1004, I am certifying, in all cases, that I have 

personally reviewed the appraisal report. In 

doing so I have considered and utilized 

recognized professional appraisal techniques, 

have found the appraisal report to have been 

prepared in compliance with applicable VA 

requirements, and concur with the 

recommendations of the fee appraiser, who 

was assigned by VA to the case. Furthermore, 

in those cases where clarifications or 

corrections have been requested from the VA 

fee appraiser there has been no pressure or 

influence exerted on that appraiser to remove 

or change information that might be 

considered detrimental to the subject 

property, or VA’s interests, or to reach a 

predetermined value for that property. 

Signature of Staff Appraisal Reviewer. 

(5) Other certifications required from 

the lender will be specified with 

particularity in the separate instructions 

issued by the Secretary, as noted in 

§ 36.4847(b). 

(b) Instructions for LAPP Procedures. 

The Secretary will publish separate 

instructions for processing appraisals 

under the Lenders Appraisal Processing 

Program. Compliance with these 

regulations and the separate instructions 

issued by the Secretary is deemed by 

VA to be the minimum exercise of due 

diligence in processing LAPP cases. Due 

diligence is considered by VA to 

represent that care, as is to be properly 

expected from, and ordinarily exercised 

by, reasonable and prudent lenders who 

would be dependent on the property as 

security to protect its investment. 

(c) VA minimum property 

requirements. Lenders are responsible 

for determining that the property meets 

VA minimum property requirements. 

The separate instructions issued by the 

Secretary will set forth the lender’s 

ability to adjust, remove, or alter the fee 

appraiser’s or fee compliance 

inspector’s recommendations 

concerning VA minimum property 

requirements. Condominiums, plannedunit developments and leasehold estates 

must have been determined acceptable 

by VA. A condominium or planned-unit 

development which is acceptable to the 

Department of Housing and Urban 

Development or the Department of 

Agriculture may also be acceptable to 

VA. 

(d) Adjustment of value 

recommendations. The amount of 

authority to upwardly adjust the fee 

appraiser’s estimated market value 

during the lender staff appraisal 

reviewer’s initial review of the appraisal 

report or to subsequently process an 

appeal of the lender’s established 

reasonable value will be specified in the 

separate instructions issued by VA as 

noted in § 36.4847(b). The amount 

specified must not in any way be 

considered an administrative 

adjustment figure which may be applied 

indiscriminately and without valid basis 

or justification with the sole purpose of 

reaching an amount necessary to 

complete the sale or mortgage 

transaction. 

(1) Adjustment during initial review. 

Any adjustment during the staff 

appraisal reviewer’s initial review of the 

appraisal report must be fully and 

clearly justified in writing on the 

appraisal report form or, if necessary, on 

an addendum. The basis for the 

adjustment must be adequate and 

reasonable by professional appraisal 

standards. If real estate market or other 

valid data was utilized in arriving at the 

decision to make the adjustment, such 

data must be attached to the appraisal 

report. All adjustments, comments, 

corrections, justifications, etc., to the 

appraisal report must be made in a 

contrasting color, be clearly legible, and 

signed and dated by the staff appraisal 

reviewer. 

(2) Processing appeals. The authority 

provided under 38 U.S.C. 3731(d) which 

permits a lender to obtain a VA fee 

panel appraiser’s report which VA is 

obligated to consider in an appeal of the 

established reasonable value shall not 

apply to cases processed under the 

authority provided by this section. All 

appeals of VA fee appraisers’ estimated 

market values or lenders’ reasonable 

value determinations above the amount 

specified in the separate instructions 

issued by VA must be submitted, along 

with the lender’s recommendations, if 

any, to VA for processing and final 

determination. Unless otherwise 

authorized in the separate instructions 

lenders must also submit appeals, 

regardless of the amount, to VA in all 

cases where the staff appraisal reviewer 

has made an adjustment during their 

initial review of the appraisal report to 

the fee appraiser’s market value 

estimate. The fee appraiser’s estimated 

market value or lender’s reasonable 

value determination may be increased 

only when such increase is clearly 

warranted and fully supported by real 

estate market or other valid data 

considered adequate and reasonable by 

professional appraisal standards and the 

lender’s staff appraisal reviewer clearly 

and fully justifies the reasoning and 

basis for the increase in writing on the 

appraisal report form or an addendum. 

The staff appraisal reviewer must date 

and sign the written justification and 

must cite within it the data used in 

arriving at the decision to make the 

increase. All such data shall be attached 

to the appraisal report form and any 

addendum. 

(e) Notification. It will be the 

responsibility of the lender to notify the 

veteran borrower in writing of the 

determination of reasonable value and 

related conditions specific to the 

property and to provide the veteran 

with a copy of the appraisal report. Any 

delay in processing the notification of 

value must be documented. Any delay 

of more than five work days between the 

date of the lender’s receipt of the fee 

appraiser’s report and date of the 

notification of value to the veteran, 

without reasonable and documented 

extenuating circumstances, will not be 

acceptable. A copy of the lender 

notification letter to the veteran and the 

appraisal report must be forwarded to 

the VA office of jurisdiction at the same 

time the veteran is notified. In addition, 

the original appraisal report, related 

appraisal documentation, and a copy of 

the reasonable value determination 

notification to the veteran must be 

submitted to the VA with the request for 

loan guaranty. 

(f) Indemnification. When the 

Secretary has incurred a loss as a result 

of a payment of claim under guaranty 

and in which the Secretary determines 

an increase made by the lender under 

§ 36.4847(d) was unwarranted, or 

arbitrary and capricious, the lender 

shall indemnify the Secretary to the 

extent the Secretary determines such 

loss was caused, or increased, by the 

increase in value. 

(g) Affiliations. A lender affiliated 

with a real estate firm builder, land 

developer or escrow agent as a 

subsidiary division, investment or any 

other entity in which it has a financial 

interest or which it owns may not use 

this authority for any cases involving 

the affiliate unless the lender 

demonstrates to the Secretary’s 

satisfaction that the lender and its 

affiliate(s) are essentially separate 

entities that operate independently of 

each other, free of all cross-influences 

(e.g., a formal corporate agreement 

exists which specifically sets forth this 

fact). 

(h) Quality Control Plans. The lender 

must have an effective self-policing or 

quality control system to ensure the 

adequacy and quality of their LAPP staff 

appraisal reviewer’s processing and, 

that its activities do not deviate from 

high standards of integrity. The quality 

control system must include frequent, 

periodic audits that specifically address 

the appraisal review activity. These 

audits may be performed by an 

independent party, or by the lender’s 

independent internal audit division 

which reports directly to the firm’s chief 


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executive officer. The lender must agree 

to furnish findings and information 

under this system to VA on demand. 

While the quality control personnel 

need not be appraisers, they should 

have basic familiarity with appraisal 

theory and techniques and the ability to 

prescribe appropriate corrective 

action(s) in the appraisal review process 

when discrepancies or problems are 

identified. The basic elements of the 

system will be described in separate 

instructions issued by the Secretary. 

Copies of the lender’s quality control 

plan or self-policing system evidencing 

appraisal related matters must be 

provided to the VA office of jurisdiction 

with the lender’s application for LAPP 

authority. 

(i) Fees. The Secretary may require 

mortgagees to pay an application fee 

and/or annual fees, including additional 

fees for each branch office authorized to 

process cases under the authority 

delegated under this section, in such 

amounts and at such times as the 

Secretary may require. 

(j) Withdrawal of lender authority. 

The authority for a lender to determine 

reasonable value may be withdrawn by 

the Loan Guaranty Officer when proper 

cause exists. A lender’s authority to 

make reasonable value determinations 

shall be withdrawn when the lender no 

longer meets the basic requirements for 

delegating the authority, or when it can 

be shown that the lender’s reasonable 

value determinations have not been 

made in accordance with VA 

regulations, requirements, guidelines, 

instructions or applicable laws, or when 

there is adequate evidence to support 

reasonable belief by VA that a particular 

unacceptable act, practice, or 

performance by the lender or the 

lender’s staff has occurred. Such acts, 

practices or performance include, but 

are not limited to: Demonstrated 

technical incompetence (i.e., conduct 

which demonstrates an insufficient 

knowledge of industry accepted 

appraisal principles, techniques and 

practices; or the lack of technical 

competence to review appraisal reports 

and make value determinations in 

accordance with those requirements); 

substantive or repetitive errors (i.e., any 

error(s) of a nature that would 

materially or significantly affect the 

determination of reasonable value or 

condition of the property; or a number 

or series of errors that, considered 

individually, may not significantly 

impact the determination of reasonable 

value or property condition, but which 

when considered in the aggregate would 

establish that appraisal reviews or LAPP 

case processing are being performed in 

a careless or negligent manner), or 

continued instances of disregard for VA 

requirements after they have been called 

to the lender’s attention. 

(1) Withdrawal of authority by the 

Loan Guaranty Officer may be either for 

an indefinite or a specified period of 

time. For any withdrawal longer than 90 

days, a reapplication for lender 

authority to process appraisals under 

these regulations will be required. 

Written notice will be provided at least 

30 days in advance of withdrawal 

unless the Government’s interests are 

exposed to immediate risk from the 

lender’s activities in which case the 

withdrawal will be effected 

immediately. The notice will clearly 

and specifically set forth the basis and 

grounds for the action. There is no right 

to a formal hearing to contest the 

withdrawal of LAPP processing 

privileges. However, if within 15 days 

after receiving notice the lender requests 

an opportunity to contest the 

withdrawal, the lender may submit, in 

person, in writing, or through a 

representative, information and 

argument to the Loan Guaranty Officer 

in opposition to the withdrawal. The 

Loan Guaranty Officer will make a 

recommendation to the Regional Office 

Director who shall make the 

determination as to whether the action 

should be sustained, modified or 

rescinded. The lender will be informed 

in writing of the decision. 

(2) The lender has the right to appeal 

the Regional Office Director’s decision 

to the Under Secretary for Benefits. In 

the event of such an appeal, the Under 

Secretary for Benefits will review all 

relevant material concerning the matter 

and make a determination that shall 

constitute final agency action. If the 

lender’s submission of opposition raises 

a genuine dispute over facts material to 

the withdrawal of LAPP authority, the 

lender will be afforded an opportunity 

to appear with a representative, submit 

documentary evidence, present 

witnesses and confront any witness the 

Veterans Benefits Administration 

presents. The Under Secretary for 

Benefits will appoint a hearing officer or 

panel to conduct the hearing. When 

such additional proceedings are 

necessary, the Under Secretary for 

Benefits shall base the determination on 

the facts as found, together with any 

information and argument submitted by 

the lender. 

(3) In actions based upon a conviction 

or civil judgment, or in which there is 

no genuine dispute over material facts, 

the Under Secretary for Benefits shall 

make a decision on the basis of all the 

information in the administrative 

record, including any submission made 

by the lender. 

(4) Withdrawal of the LAPP authority 

will require that VA make subsequent 

determinations of reasonable value for 

the lender. Consequently, VA staff will 

review each appraisal report and issue 

a Certificate of Reasonable Value which 

can then be used by the lender to close 

loans on either the prior VA approval or 

automatic basis. 

(5) Withdrawal by VA of the lender’s 

LAPP authority does not prevent VA 

from also withdrawing automatic 

processing authority or taking 

debarment or suspension action based 

upon the same conduct by the lender. 

(Authority: 38 U.S.C. 3731) 

(The Office of Management and Budget has 

approved the information collections 

requirements of this section under control 

numbers 2900–0045 and 2900–0513.) 

§ 36.4848 Servicer Appraisal Processing 

Program. 

(a) Delegation of authority to servicers 

to review liquidation appraisals and 

determine reasonable value. Based on 

the reasonable value, the servicer will 

be able to determine net value. 

(1) To be eligible for delegation of 

authority to review VA liquidation 

appraisals and determine the reasonable 

value for liquidation purposes on 

properties secured by VA guaranteed or 

insured loans, a lender must: 

(i) Have automatic processing 

authority under 38 U.S.C. 3702(d), and 

(ii) Employ one or more Staff 

Appraisal Reviewers (SAR) acceptable 

to the Secretary. 

(2) To qualify as a servicer’s staff 

appraisal reviewer an applicant must be 

a full-time member of the servicer’s 

permanent staff and may not be 

employed by, or perform services for, 

any other mortgagee. The individual 

must not engage in any private pursuits 

in which there will be, or appear to be, 

any conflict of interest between those 

pursuits and his/her duties, 

responsibilities, and performance as a 

Servicer Appraisal Processing Program 

(SAPP) staff appraisal reviewer. Three 

years of appraisal related experience is 

necessary to qualify as a servicer’s staff 

appraisal reviewer. That experience 

must demonstrate knowledge of, and the 

ability to apply industry-accepted 

principles, methods, practices and 

techniques of appraising, and the ability 

to competently determine the value of 

property. The individual must 

demonstrate the ability to review the 

work of others and to recognize 

deviations from accepted appraisal 

principle, practices, and techniques, 

error in computations, and unjustifiable 

and unsupportable conclusions. 

(3) Servicers that have a staff 

appraisal reviewer determined 


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acceptable to VA, will be authorized to 

review liquidation appraisals and make 

reasonable value determinations for 

liquidation purposes on properties that 

are the security for VA guaranteed or 

insured loans. Additionally, servicers 

must satisfy initial VA office case 

review requirements prior to being 

allowed to determine reasonable value 

without VA involvement. The initial 

office case review requirement must be 

satisfied in the VA regional loan center 

in whose jurisdiction the servicer’s staff 

appraisal reviewer is located before the 

SAPP authority may be utilized by that 

servicer in any other VA office’s 

jurisdiction. To satisfy the initial office 

case review requirement, the first five 

cases of each servicer staff appraisal 

reviewer involving properties in the 

regional office location where the staff 

appraisal reviewer is located will be 

processed by him or her up to the point 

where he or she has made a reasonable 

value determination and fully drafted, 

but not issued, the servicer’s notice of 

value. At that point, and prior to loan 

termination, each of the five cases will 

be submitted to the VA regional loan 

center having jurisdiction over the 

property. After a staff review of each 

case, VA will issue a notice of value 

which the servicer may use to compute 

the net value of the property for 

liquidation purposes. If these five cases 

are found to be acceptable by VA, the 

servicer’s staff appraisal reviewer will 

be allowed to fully process subsequent 

appraisals for properties regardless of 

jurisdictional location without prior 

submission to VA and issuance by VA 

of a notice of value. Where the servicer’s 

reviewer cannot readily meet the 

jurisdictional review requirement, the 

SAR applicant may request that VA 

expand the geographic area of 

consideration. VA will accommodate 

such requests if practicable. The initial 

office case review requirement may be 

expanded by VA if acceptable 

performance has not been demonstrated. 

After satisfaction of the initial office 

case review requirement, routine 

reviews of SAPP cases will be made by 

VA staff based upon quality control 

procedures established by the 

Undersecretary for Benefits. Such 

review will be made on a random 

sampling or performance related basis. 

(4) Certifications required from the 

servicer will be specified with 

particularity in the separate instructions 

issued by the Secretary, as noted in 

§ 36.4848(b). 

(b) Instructions for SAPP Procedures. 

The Secretary will publish separate 

instructions for processing appraisals 

under the Servicer Appraisal Processing 

Program. Compliance with these 

regulations and the separate instructions 

issued by the Secretary is deemed by 

VA to be the minimum exercise of due 

diligence in processing SAPP cases. Due 

diligence is considered by VA to 

represent that care, as is to be properly 

expected from, and ordinarily exercised 

by, a reasonable and prudent servicer 

who would be dependent on the 

property as security to protect its 

investment. 

(c) Adjustment of value 

recommendations. The amount of 

authority to upwardly adjust the fee 

appraiser’s estimated market value 

during the servicer staff appraisal 

reviewer’s initial review of the appraisal 

report or to subsequently process an 

appeal of the servicer’s established 

reasonable value will be specified in the 

separate instructions issued by VA as 

noted in § 36.4848(b). The amount 

specified must not in any way be 

considered an administrative 

adjustment figure which may be applied 

indiscriminately and without valid basis 

or justification. 

(1) Adjustment during initial review. 

Any adjustment during the staff 

appraisal reviewer’s initial review of the 

appraisal report must be fully and 

clearly justified in writing on the 

appraisal report form or, if necessary, on 

an addendum. The basis for the 

adjustment must be adequate and 

reasonable by professional appraisal 

standards. If real estate market or other 

valid data was utilized in arriving at the 

decision to make the adjustment, such 

data must be attached to the appraisal 

report. All adjustments, comments, 

corrections, justifications, etc., to the 

appraisal report must be made in a 

contrasting color, be clearly legible, and 

signed and dated by the staff appraisal 

reviewer. 

(2) Processing appeals. The authority 

provided under 38 U.S.C. 3731(d) which 

permits a lender to obtain a VA fee 

panel appraiser’s report which VA is 

obligated to consider in an appeal of the 

established reasonable value shall not 

apply to cases processed under the 

authority provided by this section. All 

appeals of VA fee appraiser’s estimated 

market values or servicer’s reasonable 

value determinations above the amount 

specified in the separate instructions 

issued by VA must be submitted, along 

with the servicer’s recommendations, if 

any, to VA for processing and final 

determination. Unless otherwise 

authorized in the separate instructions 

servicers must also submit appeals, 

regardless of the amount, to VA in all 

cases where the staff appraisal reviewer 

has made an adjustment during their 

initial review of the appraisal report to 

the fee appraiser’s market value 

estimate. The fee appraiser’s estimated 

market value or servicer’s reasonable 

value determination may be increased 

only when such increase is clearly 

warranted and fully supported by real 

estate market or other valid data 

considered adequate and reasonable by 

professional appraisal standards and the 

servicer’s staff appraisal reviewer 

clearly and fully justifies the reasoning 

and basis for the increase in writing on 

the appraisal report form or an 

addendum. The staff appraisal reviewer 

must date and sign the written 

justification and must cite within it the 

data used in arriving at the decision to 

make the increase. All such data shall 

be attached to the appraisal report form 

and any addendum. 

(d) Indemnification. When the 

Secretary has incurred a loss as a result 

of a payment of claim under guaranty 

and in which the Secretary determines 

an increase made by the servicer under 

§ 36.4848(c) was unwarranted, or 

arbitrary and capricious, the lender 

shall indemnify the Secretary to the 

extent the Secretary determines such 

loss was caused or increased, by the 

increase in value. 

(e) Affiliations. A servicer affiliated 

with a real estate firm, builder, land 

developer or escrow agent as a 

subsidiary division, or in any other 

entity in which it has a financial interest 

or which it owns may not use the 

authority for any cases involving the 

affiliate unless the servicer 

demonstrates to the Secretary’s 

satisfaction that the servicer and its 

affiliate(s) are essentially separate 

entities that operate independently of 

each other, free of all cross-influences 

(e.g., a formal corporate agreement 

exists which specifically sets forth this 

fact). 

(f) Quality control plans. The servicer 

must have an effective self-policing or 

quality control system to ensure the 

adequacy and quality of their SAPP staff 

appraisal reviewer’s processing and, 

that its activities do not deviate from 

high standards of integrity. The quality 

control system must include frequent, 

periodic audits that specifically address 

the appraisal review activity. These 

audits may be performed by an 

independent party, or by the servicer’s 

independent internal audit division 

which reports directly to the firm’s chief 

executive officer. The servicer must 

agree to furnish findings and 

information under this system to VA on 

demand. While the quality control 

personnel need not be appraisers, they 

should have basic familiarity with 

appraisal theory and techniques and the 

ability to prescribe appropriate 

corrective action(s) in the appraisal 


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review process when discrepancies or 

problems are identified. The basic 

elements of the system will be described 

in separate instructions issued by the 

Secretary. Copies of the lender’s quality 

control plan or self-policing system 

evidencing appraisal related matters 

must be provided to the VA office of 

jurisdiction with the servicer’s 

application of SAPP authority. 

(g) Fees. The Secretary will require 

servicers to pay a $100.00 application 

fee for each SAR the servicer nominates 

for approval. The application fee will 

also apply if the SAR begins work for 

another servicer. 

(h) Withdrawal of servicer authority. 

The authority for a servicer to determine 

reasonable value may be withdrawn by 

the Loan Guaranty Officer when proper 

cause exists. A servicer’s authority to 

make reasonable value determinations 

shall be withdrawn when the servicer 

no longer meets the basic requirements 

for delegating the authority, or when it 

can be shown that the servicer’s 

reasonable value determinations have 

not been made in accordance with VA 

regulations, requirements, guidelines, 

instructions or applicable laws, or when 

there is adequate evidence to support 

reasonable belief by VA that a particular 

unacceptable act, practice, or 

performance by the servicer or the 

servicer’s staff has occurred. Such acts, 

practices, or performance include, but 

are not limited to: Demonstrated 

technical incompetence (i.e., conduct 

which demonstrates an insufficient 

knowledge of industry accepted 

appraisal principles, techniques and 

practices; or the lack of technical 

competence to review appraisal reports 

and make value determinations in 

accordance with those requirements); 

substantive or repetitive errors (i.e., any 

error(s) of a nature that would 

materially or significantly affect the 

determination of reasonable value or 

condition of the property; or a number 

or series of errors that, considered 

individually, may not significantly 

impact the determination of reasonable 

value or property condition, but which 

when considered in the aggregate would 

establish that appraisal reviews or SAPP 

case processing are being performed in 

a careless or negligent manner), or 

continued instances of disregard for VA 

requirements after they have been called 

to the servicer’s attention. 

(1) Withdrawal of authority by the 

Loan Guaranty Officer may be either for 

an indefinite or a specified period of 

time. For any withdrawal longer than 90 

days a reapplication for servicer 

authority to process appraisals under 

these regulations will be required. 

Written notice will be provided at least 

30 days in advance of withdrawal 

unless the Government’s interests are 

exposed to immediate risk from the 

servicer’s activities in which case the 

withdrawal will be effected 

immediately. The notice will clearly 

and specifically set forth the basis and 

grounds for the action. There is no right 

to a formal hearing to contest the 

withdrawal of SAPP processing 

privileges. However, if within 15 days 

after receiving notice the servicer 

requests an opportunity to contest the 

withdrawal, the servicer may submit, in 

person, in writing, or through a 

representative, information and 

argument to the Loan Guaranty Officer 

in opposition to the withdrawal. The 

Loan Guaranty Officer will make a 

recommendation to the Regional Loan 

Center Director who shall make the 

determination as to whether the action 

should be sustained, modified or 

rescinded. The servicer will be informed 

in writing of the decision. 

(2) The servicer has the right to appeal 

the Regional Loan Center Director’s 

decision to the Undersecretary for 

Benefits. In the event of such an appeal, 

the Undersecretary for Benefits will 

review all relevant material concerning 

the matter and make a determination 

that shall constitute final agency action. 

If the servicer’s submission of 

opposition raises a genuine dispute over 

facts material to the withdrawal of SAPP 

authority, the servicer will be afforded 

an opportunity to appear with a 

representative, submit documentary 

evidence, present witnesses and 

confront any witness the Veterans 

Benefits Administration presents. The 

Undersecretary for Benefits will appoint 

a hearing officer or panel to conduct the 

hearing. When such additional 

proceedings are necessary, the 

Undersecretary for Benefits shall base 

the determination on the facts as found, 

together with any information and 

argument submitted by the servicer. 

(3) In actions based upon a conviction 

or civil judgment, or in which there is 

no genuine dispute over material facts, 

the Undersecretary for Benefits shall 

make a decision on the basis of all the 

information in the administrative 

record, including any submission made 

by the servicer. 

(4) Withdrawal of the SAPP authority 

will require that VA make subsequent 

determinations of reasonable value for 

the servicer. Consequently, VA staff will 

review each appraisal report and issue 

a Notice of Value which can then be 

used by the servicer to compute the net 

value of properties for liquidation 

purposes. 

(5) Withdrawal by VA of the servicer’s 

SAPP authority does not prevent VA 

from also withdrawing automatic 

processing authority or taking 

debarment or suspension action based 

upon the same conduct of the servicer. 

(Authority 38 U.S.C. 3703(c)(1), 3731 and 

3732) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

numbers 2900–0045 and 2900–0513.) 

§ 36.4849 Waivers, consents, and 

approvals; when effective. 

No waiver, consent, or approval 

required or authorized by the 

regulations concerning guaranty or 

insurance of loans to veterans shall be 

valid unless in writing signed by the 

Secretary or the subordinate officer to 

whom authority has been delegated by 

the Secretary. 

(Authority 38 U.S.C. 3703(c)(1)) 

§ 36.4850 Servicing procedures for 

holders. 

(a) Establishment of loan servicing 

program. The holder of a loan 

guaranteed or insured by the Secretary 

shall develop and maintain a loan 

servicing program which follows 

accepted industry standards for 

servicing of similar type conventional 

loans. The loan servicing program 

established pursuant to this section may 

employ different servicing approaches 

to fit individual borrower circumstances 

and avoid establishing a fixed routine. 

However, it must incorporate each of 

the provisions specified in paragraphs 

(b) through (l) of this section. 

(b) Procedures for providing 

information. (1) Loan holders shall 

establish procedures to provide loan 

information to borrowers, arrange for 

individual loan consultations upon 

request and maintain controls to assure 

prompt responses to inquiries. One or 

more of the following means of making 

information readily available to 

borrowers is required. 

(i) An office staffed with trained 

servicing personnel with access to loan 

account information located within 200 

miles of the property. 

(ii) Toll-free telephone service or 

acceptance of collect telephone calls at 

an office capable of providing needed 

information. 

(2) All borrowers must be informed of 

the system available for obtaining 

answers to loan inquiries, the office 

from which the needed information may 

be obtained, and reminded of the system 

at least annually. 

(c) Statement for income tax 

purposes. Before February 1st of each 

calendar year, the holder shall furnish 

to the borrower a statement of the 

interest paid and, if applicable, a 


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statement of the taxes disbursed from 

the escrow account during the 

preceding year. At the borrower’s 

request, the holder shall furnish a 

statement of the escrow account 

sufficient to enable the borrower to 

reconcile the account. 

(d) Change of servicing. Whenever 

servicing of a loan guaranteed or 

insured by the Secretary is transferred 

from one holder to another, notice of 

such transfer by both the transferor and 

transferee, the form and content of such 

notice, the timing of such notice, the 

treatment of payments during the period 

of such transfer, and damages and costs 

for failure to comply with these 

requirements shall be governed by the 

pertinent provisions of the Real Estate 

Settlement Procedures Act as 

administered by the Department of 

Housing and Urban Development. 

(e) Escrow accounts. A holder of a 

loan guaranteed or insured by the 

Secretary may collect periodic deposits 

from the borrower for taxes and/or 

insurance on the security and maintain 

a tax and insurance escrow account 

provided such a requirement is 

authorized under the terms of the 

security instruments. In maintaining 

such accounts, the holder shall comply 

with the pertinent provisions of the Real 

Estate Settlement Procedures Act. 

(f) System for servicing delinquent 

loans. In addition to the requirements of 

the Real Estate Settlement Procedures 

Act, concerning the duties of the loan 

servicer to respond to borrower 

inquiries, to protect the borrower’s 

credit rating during a payment dispute 

period, and to pay damages and costs 

for noncompliance, holders shall 

establish a system for servicing 

delinquent loans which ensures that 

prompt action is taken to collect 

amounts due from borrowers and 

minimize the number of loans in a 

default status. The holder’s servicing 

system must include the following: 

(1) An accounting system which 

promptly alerts servicing personnel 

when a loan becomes delinquent; 

(2) A collection staff which is trained 

in techniques of loan servicing and 

counseling delinquent borrowers to 

advise borrowers how to cure 

delinquencies, protect their equity and 

credit rating and, if the default is 

insoluble, pursue alternatives to 

foreclosure; 

(3) Procedural guidelines for 

individual analysis of each delinquency; 

(4) Instructions and appropriate 

controls for sending delinquent notices, 

assessing late charges, handling partial 

payments, maintaining servicing 

histories and evaluating repayment 

proposals; 

(5) Management review procedures 

for evaluating efforts made to collect the 

delinquency and the response from the 

borrower before a decision is made to 

initiate action to liquidate a loan; 

(6) Procedures for reporting 

delinquencies of 90 days or more and 

loan terminations to major consumer 

credit bureaus as specified by the 

Secretary and for informing borrowers 

that such action will be taken; and 

(7) Controls to ensure that all notices 

required to be given to the Secretary on 

delinquent loans are provided timely 

and in such form as the Secretary shall 

require. 

(g) Collection actions. (1) Holders 

shall employ collection techniques 

which provide flexibility to adapt to the 

individual needs and circumstances of 

each borrower. A variety of collection 

techniques may be used based on the 

holder’s determination of the most 

effective means of contact with 

borrowers during various stages of 

delinquency. However, at a minimum 

the holder’s collection procedures must 

include the following actions: 

(i) An effort, concurrent with the 

initial late payment notice to establish 

contact with the borrower(s) by 

telephone. When talking with the 

borrower(s), the holder should attempt 

to determine why payment was not 

made and emphasize the importance of 

remitting loan installments as they come 

due. 

(ii) A letter to the borrower(s) if 

payment has not been received within 

30 days after it is due and telephone 

contact could not be made. This letter 

should emphasize the seriousness of the 

delinquency and the importance of 

taking prompt action to resolve the 

default. It should also notify the 

borrower(s) that the loan is in default, 

state the total amount due and advise 

the borrower(s) how to contact the 

holder to make arrangements for curing 

the default. 

(iii) In the event the holder has not 

established contact with the borrower(s) 

and has not determined the financial 

circumstances of the borrower(s) or 

established a reason for the default or 

obtained agreement to a repayment plan 

from the borrower(s), then a face-to-face 

interview with the borrower(s) or a 

reasonable effort to arrange such a 

meeting is required. 

(iv)(A) A letter to the borrower if 

payment has not been received: 

(1) In the case of a default occurring 

within the first 6 months following loan 

closing or the execution of a 

modification agreement pursuant to 

§ 36.4815, within 45 calendar days after 

such payment was due; or 

(2) In the case of any other default, 

within 75 calendar days after such 

payment was due. 

(B) The letter required by paragraph 

(g)(1)(iv)(A) must be mailed no later 

than 7 calendar days after the payment 

is delinquent for the time period stated 

in paragraph (g)(1)(iv)(A) and shall: 

(1) Provide the borrower with a tollfree telephone number and, if available, 

an e-mail address for contacting the 

servicer; 

(2) Explain loss mitigation options 

available to the borrower; 

(3) Emphasize that the intent of 

servicing is to retain home ownership 

whenever possible; and 

(4) Contain the following language: 

The delinquency of your mortgage loan is 

a serious matter that could result in the loss 

of your home. If you are the veteran whose 

entitlement was used to obtain this loan, you 

can also lose your entitlement to a future VA 

home loan guaranty. If you are not already 

working with us to resolve the delinquency, 

please call us to discuss your workout 

options. You may be able to make special 

payment arrangements that will reinstate 

your loan. You may also qualify for a 

repayment plan or loan modification. 

VA has guaranteed a portion of your loan 

and wants to ensure that you receive every 

reasonable opportunity to bring your loan 

current and retain your home. VA can also 

answer any questions you have regarding 

your entitlement. If you have access to the 

Internet and would like to obtain more 

information, you may access the VA web site 

at www.va.gov. You may also learn where to 

speak to a VA Loan Administration 

representative by calling 1–800–827–1000. 

(2) The holder must provide a valid 

explanation of any failure to perform 

these collection actions when reporting 

loan defaults to the Secretary. A pattern 

of such failure may be a basis for 

sanctions under 2 CFR parts 180 and 

801. 

(h) Conducting interviews with 

delinquent borrowers. When personal 

contact with the borrower(s) is 

established, the holder shall solicit 

sufficient information to properly 

evaluate the prospects for curing the 

default and whether the granting of 

forbearance or other relief assistance 

would be appropriate. At a minimum, 

the holder must make a reasonable effort 

to establish the following: 

(1) The reason for the default and 

whether the reason is a temporary or 

permanent condition; 

(2) The present income and 

employment of the borrower(s); 

(3) The current monthly expenses of 

the borrower(s) including household 

and debt obligations; 

(4) The current mailing address and 

telephone number of the borrower(s); 

and 


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(5) A realistic and mutually 

satisfactory arrangement for curing the 

default. 

(i) Property inspections. (1) The 

holder shall make an inspection of the 

property securing the loan whenever it 

becomes aware that the physical 

condition of the security may be in 

jeopardy. Unless a repayment agreement 

is in effect, a property inspection shall 

also be made at the following times: 

(i) Before the 60th day of delinquency 

or before initiating action to liquidate a 

loan, whichever is earlier; and 

(ii) At least once each month after 

liquidation proceedings have been 

started unless servicing information 

shows the property remains owneroccupied. 

(2) Whenever a holder obtains 

information which indicates that the 

property securing the loan is 

abandoned, it shall make appropriate 

arrangements to protect the property 

from vandalism and the elements. 

Thereafter, the holder shall schedule 

inspections at least monthly to prevent 

unnecessary deterioration due to 

vandalism, or neglect. With respect to 

any loan more than 60 calendar days 

delinquent, if the property is 

abandoned, this fact must be reported to 

the Secretary as required in 

§ 36.4817(c)(10) and immediate action 

should be initiated by the servicer to 

terminate the loan once the 

abandonment has been confirmed. 

(j) Collection records. The holder shall 

maintain individual file records of 

collection action on delinquent loans 

and make such records available to the 

Secretary for inspection on request. 

Such collection records shall show: 

(1) The dates and content of letters 

and notices which were mailed to the 

borrower(s); 

(2) Dated summaries of each personal 

servicing contact and the result of same; 

(3) The indicated reason(s) for default; 

and 

(4) The date and result of each 

property inspection. 

(k) Quality control procedures. No 

later than 180 days after the effective 

date of this regulation, each loan holder 

shall establish internal controls to 

periodically assess the quality of the 

servicing performed on loans 

guaranteed by the Secretary and assure 

that all requirements of this section are 

being met. Those procedures must 

provide for a review of the holder’s 

servicing activities at least annually and 

include an evaluation of delinquency 

and foreclosure rates on loans in its 

portfolio which are guaranteed by the 

Secretary. As part of its evaluation of 

delinquency and foreclosure rates, the 

holder shall: 

(1) Collect and maintain appropriate 

data on delinquency and foreclosure 

rates to enable the holder to evaluate 

effectiveness of its collection efforts; 

(2) Determine how its VA 

delinquency and foreclosure rates 

compare with rates in reports published 

by the industry, investors and others; 

and, 

(3) Analyze significant variances 

between its foreclosure and delinquency 

rates and those found in available 

reports and publications and take 

appropriate corrective action. 

(l) Provision of Data. Holders shall 

provide available statistical data on 

delinquency and foreclosure rates and 

their analysis of such data to the 

Secretary upon request. 

(Authority 38 U.S.C. 3703(c)(1)) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under Control 

Number 2900–0530.) 

§ 36.4851 Minimum property and 

construction requirements. 

No loan for the purchase or 

construction of residential property 

shall be eligible for guaranty or 

insurance unless such property 

complies or conforms with those 

standards of planning, construction, and 

general acceptability that may be 

applicable thereto and prescribed by the 

Secretary pursuant to 38 U.S.C. 3704(a). 

(Authority 38 U.S.C. 3703(c)(1)) 

§ 36.4852 Authority to close loans on the 

automatic basis. 

(a) Supervised lender authority. 

Supervised lenders of the classes 

described in 38 U.S.C. 3702(d)(1) and 

(2) are authorized by statute to process 

VA guaranteed home loans on the 

automatic basis. This category of lenders 

includes any Federal land bank, 

national bank, State bank, private bank, 

building and loan association, insurance 

company, credit union or mortgage and 

loan company that is subject to 

examination and supervision by an 

agency of the United States or of any 

State or by any State. 

(b) Non-supervised lender authority. 

Non-supervised lenders of the class 

described in 38 U.S.C. 3702(d)(3) must 

apply to the Secretary for authority to 

process loans on the automatic basis. 

Each of the minimum requirements 

listed below must be met by applicant 

lenders. 

(1) Experience. The applicant lender 

must meet one of the following 

experience requirements: 

(i) The applicant lender must have 

been actively engaged in originating VA 

loans for at least two years, have a VA 

Lender ID number and have originated 

and closed a minimum of ten VA loans 

within the past two years, excluding 

interest rate reduction refinance loans 

(IRRRLs), that have been properly 

documented and submitted in 

compliance with VA requirements and 

procedures; or 

(ii) The applicant lender must have a 

VA ID number and, if active for less 

than two years, have originated and 

closed at least 25 VA loans, excluding 

IRRRLs, that have been properly 

documented and submitted in 

compliance with VA requirements and 

procedures; or 

(iii) Each principal officer of the 

applicant lender, who is actively 

involved in managing origination 

functions, must have a minimum of two 

recent years’ management experience in 

the origination of VA loans. This 

experience may be with the current or 

prior employer. For the purposes of this 

requirement, principal officer is defined 

as president or vice president; or 

(iv) If the applicant lender has been 

operating as an agent for a nonsupervised automatic lender 

(sponsoring lender), the firm must 

submit documentation confirming that 

it has a VA Lender ID number and has 

originated a minimum of ten VA loans, 

excluding IRRRLs, over the past two 

years. If active for less than two years, 

the agent must have originated at least 

25 VA loans. The required 

documentation is a copy of the VA letter 

approving the applicant lender as an 

agent for the sponsoring lender; a copy 

of the corporate resolution, describing 

the functions the agent was to perform, 

submitted to VA by the sponsoring 

lender; and a letter from a senior officer 

of the sponsoring lender indicating the 

number of VA loans submitted by the 

agent each year and that the loans have 

been properly documented and 

submitted in compliance with VA 

requirements and procedures. 

(2) Underwriter. A senior officer of the 

applicant lender must nominate a fulltime qualified employee(s) to act in the 

applicant lender’s behalf as 

underwriter(s) to personally review and 

make underwriting decisions on VA 

loans to be closed on the automatic 

basis. 

(i) Nominees for underwriter must 

have a minimum of three years 

experience in processing, preunderwriting or underwriting mortgage 

loans. At least one recent year of this 

experience must have included making 

underwriting decisions on VA loans. 

(Recent is defined as within the past 

three years.) A VA nomination and 

current resume, outlining the 

underwriter’s specific experience with 


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VA loans, must be submitted for each 

underwriter nominee. 

(ii) Alternatively, if an underwriter 

does not have the experience outlined 

above, the underwriter must submit 

documentation verifying that he or she 

is a current Accredited Residential 

Underwriter (ARU) as designated by the 

Mortgage Bankers Association (MBA). 

(iii) If an underwriter is not located in 

the lender’s corporate office, then a 

senior officer must certify that the 

underwriter reports to and is supervised 

by an individual who is not a branch 

manager or other person with 

production responsibilities. 

(iv) All VA-approved underwriters 

must attend a 1-day (eight-hour) training 

course on underwriter responsibilities, 

VA underwriting requirements, and VA 

administrative requirements, including 

the usage of VA forms, within 90 days 

of approval (if VA is unable to make 

such training available within 90 days, 

the underwriter must attend the first 

available training). Immediately upon 

approval of a VA underwriter, the office 

of jurisdiction will contact the 

underwriter to schedule this training at 

a VA regional office (VARO) of the 

underwriter’s choice. This training is 

required for all newly approved VA 

underwriters, including those who 

qualified for approval based on an ARU 

designation, as well as VA-approved 

underwriters who have not 

underwritten VA-guaranteed loans in 

the past 24 months. Furthermore, and at 

the discretion of any VARO in whose 

jurisdiction the lender is originating VA 

loans, VA-approved underwriters who 

consistently approve loans that do not 

meet VA credit standards may be 

required to retake this training. 

(3) Underwriter Certification. The 

lender must certify that all underwriting 

decisions as to whether to accept or 

reject a VA loan will be made by a VAapproved underwriter. In addition each 

VA-approved underwriter will be 

required to certify on each VA loan that 

he or she approves that the loan has 

been personally reviewed and approved 

by the underwriter. 

(4) Financial Requirements. Each 

application must include the most 

recent annual financial statement 

audited and certified by a certified 

public accountant (CPA). If the date of 

the annual financial statement precedes 

that of the application by more than six 

months, the lender must also attach a 

copy of its latest internal financial 

statement. Lenders are required to meet 

either the working capital or the 

minimum net worth financial 

requirement as defined below. 

(i) Working Capital. A minimum of 

$50,000 in working capital must be 

demonstrated. 

(A) Working capital is a measure of an 

applicant lender’s liquidity, or the 

ability to pay its short-term debts. 

Working capital is defined as the excess 

of current assets over current liabilities. 

Current assets are defined as cash or 

other liquid assets convertible into cash 

within a 1-year period. Current 

liabilities are defined as debts that must 

be paid within the same 1-year time 

frame. 

(B) The VA determination of whether 

a lender has the required minimum 

working capital is based on the balance 

sheet of the lender’s annual audited 

financial statement. Therefore, either 

the balance sheet must be classified to 

distinguish between current and fixed 

assets and between current and longterm liabilities or the information must 

be provided in a footnote to the 

statement. 

(ii) Net Worth. Lenders must show 

evidence of a minimum of $ 250,000 in 

adjusted net worth. Net worth is a 

measure of an applicant lender’s 

solvency, or its ability to exist in the 

long run, quantified by the payment of 

long-term debts. Net worth as defined 

by generally accepted accounting 

principles (GAAP) is total assets minus 

total liabilities. Adjusted net worth for 

VA purposes is the same as the adjusted 

net worth required by the Department of 

Housing and Urban Development 

(HUD), net worth less certain 

unacceptable assets including: 

(A) Any assets of the lender pledged 

to secure obligations of another person 

or entity. 

(B) Any asset due from either officers 

or stockholders of the lender or related 

entities, in which the lender’s officers or 

stockholders have a personal interest, 

unrelated to their position as an officer 

or stockholder. 

(C) Any investment in related entities 

in which the lender’s officers or 

stockholders have a personal interest 

unrelated to their position as an officer 

or stockholder. 

(D) That portion of an investment in 

joint ventures, subsidiaries, affiliates 

and/or other related entities which is 

carried at a value greater than equity, as 

adjusted. ‘‘Equity as adjusted’’ means 

the book value of the related entity 

reduced by the amount of unacceptable 

assets carried by the related entity. 

(E) All intangibles, such as goodwill, 

covenants not to compete, franchisee 

fees, organization costs, etc., except 

unamortized servicing costs carried at a 

value established by an arm’s-length 

transaction and presented in accordance 

with generally accepted accounting 

principles. 

(F) That portion of an asset not readily 

marketable and for which appraised 

values are very subjective, carried at a 

value in excess of a substantially 

discounted appraised value. Assets such 

as antiques, art work and gemstones are 

subject to this provision and should be 

carried at the lower of cost or market. 

(G) Any asset that is principally used 

for the personal enjoyment of an officer 

or stockholder and not for normal 

business purposes. Adjusted net worth 

must be calculated by a CPA using an 

audited and certified balance sheet from 

the lender’s latest financial statements. 

‘‘Personal interest’’ as used in this 

section indicates a relationship between 

the lender and a person or entity in 

which that specified person (e.g., 

spouse, parent, grandparent, child, 

brother, sister, aunt, uncle or in-law) has 

a financial interest in or is employed in 

a management position by the lender. 

(5) Lines of credit. The lender 

applicant must have one or more lines 

of credit aggregating at least $ 1 million. 

The identity of the source(s) of 

warehouse lines of credit must be 

submitted to VA and the applicant must 

agree that VA may contact the named 

source(s) for the purpose of verifying the 

information. A line of credit must be 

unrestricted, that is, funds are available 

upon demand to close loans and are not 

dependent on prior investor approval. A 

letter from the company(ies) verifying 

the unrestricted line(s) of credit must be 

submitted with the application for 

automatic authority. 

(6) Permanent investors. If the lender 

customarily sells loans it originates, it 

must have a minimum of two 

permanent investors. The names, 

addresses and telephone numbers of the 

permanent investors must be submitted 

with the application. 

(7) Liaison. The lender applicant must 

designate an employee and an alternate 

to be the primary liaison with VA. The 

liaison officers should be thoroughly 

familiar with the lender’s entire 

operation and be able to respond to any 

query from VA concerning a particular 

VA loan or the firm’s automatic 

authority. 

(8) Other considerations. All 

applications will also be reviewed in 

light of the following considerations: 

(i) There must be no factors that 

indicate that the firm would not 

exercise the care and diligence required 

of a lender originating and closing VA 

loans on the automatic basis; and 

(ii) In the event the applicant lender, 

any member of the board of directors, or 

any principal officer has ever been 

debarred or suspended by any Federal 


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agency or department, or any of its 

directors or officers has been a director 

or officer of any other lender or 

corporation that was so debarred or 

suspended, or if the lender applicant 

ever had a servicing contract with an 

investor terminated for cause, a 

statement of the facts must be submitted 

with the application for automatic 

authority. 

(9) Quality Control System. In order to 

be approved as a non-supervised lender 

for automatic-processing authority, the 

lender must implement a written quality 

control system which ensures 

compliance with VA requirements. The 

lender must agree to furnish findings 

under its systems to VA on demand. 

The elements of the quality control 

system must include the following: 

(i) Underwriting policies. Each office 

of the lender shall maintain copies of 

VA credit standards and all available 

VA underwriting guidelines. 

(ii) Corrective measures. The system 

should ensure that effective corrective 

measures are taken promptly when 

deficiencies in loan originations are 

identified by either the lender or VA. 

Any cases involving major 

discrepancies which are discovered 

under the system must be reported to 

VA. 

(iii) System integrity. The quality 

control system should be independent 

of the mortgage loan production 

function. 

(iv) Scope. The review of 

underwriting decisions and 

certifications must include compliance 

with VA underwriting requirements, 

sufficiency of documentation and 

soundness of underwriting judgments. 

(v) Appraisal quality. For lenders 

approved for the Lender Appraisal 

Processing Program (LAPP), the quality 

control system must specifically contain 

provisions concerning the adequacy and 

quality of real property appraisals. 

While the lender’s quality control 

personnel need not be appraisers, they 

should have basic familiarity with 

appraisal theory and techniques so that 

they can select appropriate cases for 

review if discretionary sampling is used, 

and prescribe appropriate corrective 

action(s) in the appraisal review process 

when discrepancies or problems are 

identified. Copies of the lender’s quality 

control plan or self-policing system 

evidencing appraisal related matters 

must be provided to the VA office of 

jurisdiction. 

(10) Courtesy closing. The lender 

applicant must certify to VA that it will 

not close loans on an automatic basis as 

a courtesy or accommodation for other 

mortgage lenders, whether or not such 

lenders are themselves approved to 

close on an automatic basis without the 

express approval of VA. However, a 

lender with automatic authority may 

close loans for which information and 

supporting credit data have been 

developed on its behalf by a duly 

authorized agent. 

(11) Probation. Lenders meeting these 

requirements will be approved to close 

VA loans on an automatic basis for a 1- 

year period. At the end of this period, 

the lender’s quality of underwriting, the 

completeness of loan submissions, 

compliance with VA requirements and 

procedures, and the delinquency and 

foreclosure rates will be reviewed. 

(12) Extensions of Automatic 

Authority. When a lender wants its 

automatic authority extended to another 

State, the request must be submitted, 

with the fee designated in paragraph 

(e)(5) of this section, to the VA regional 

office having jurisdiction in the State 

where the lender’s corporate office is 

located. 

(i) When a lender wants its automatic 

authority to include loans involving a 

real estate brokerage and/or a residential 

builder or developer in which it has a 

financial interest, owns, is owned by, or 

with which it is affiliated, the following 

documentation must be submitted: 

(A) A corporate resolution from the 

lender and each affiliate indicating that 

they are separate entities operating 

independently of each other. The 

lender’s corporate resolution must 

indicate that it will not give more 

favorable underwriting consideration to 

its affiliate’s loans, and the affiliate’s 

corporate resolution must indicate that 

it will not seek to influence the lender 

to give their loans more favorable 

underwriting consideration. 

(B) Letters from permanent investors 

indicating the percentage of all VA 

loans based on the affiliate’s production 

originated by the lender over a 1-year 

period that are past due 90 days or 

more. This delinquency ratio must be no 

higher than the national average for the 

same period for all mortgage loans. 

(ii) When a lender wants its automatic 

authority extended to additional States, 

the lender must indicate how it plans to 

originate VA loans in those States. 

Unless a lender proposes a 

telemarketing plan, VA requires that a 

lender have a presence in the State, that 

is, a branch office, an agent relationship, 

or that it is a reasonable distance from 

one of its offices in an adjacent State, 

i.e., 50 miles. If the request is based on 

an agency relationship, the 

documentation outlined in paragraph 

(b)(13) must be submitted with the 

request for extension. 

(13) Use of Agents. A lender using an 

agent to perform a portion of the work 

involved in originating and closing a 

VA-guaranteed loan on an automatic 

basis must take full responsibility by 

certification for all acts, errors and 

omissions of the agent or other entity 

and its employees for the work 

performed. Any such acts, errors or 

omissions will be treated as those of the 

lender and appropriate sanctions may 

be imposed against the lender and its 

agent. Lenders requesting an agent must 

submit the following documentation to 

the VA regional office having 

jurisdiction for the lender’s corporate 

office: 

(i) A corporate resolution certifying 

that the lender takes full responsibility 

for all acts, errors and omissions of the 

agent that it is requesting. The corporate 

resolution must also identify the agent’s 

name and address, and the geographic 

area in which the agent will be 

originating and/or closing VA loans; 

whether the agent is authorized to issue 

interest rate lock-in agreements on 

behalf of the lender; and outline the 

functions the agent is to perform. 

Alternatively, the lender may submit a 

blanket corporate resolution which sets 

forth the functions of any and all agents 

and identifies individual agents by 

name, address, and geographic area in 

separate letters which refer to the 

blanket resolution. 

(ii) When the VA regional office 

having jurisdiction for the lender’s 

corporate office acknowledges receipt of 

the lender’s request in writing, the agent 

is thereby authorized to originate VA 

loans on the lender’s behalf. 

(Authority: 38 U.S.C. 501(a), 3702(d)) 

(c) Reporting responsibility. A lender 

approved to close loans on the 

automatic basis who subsequently fails 

to meet the requirements of this section 

must report to VA the circumstances 

surrounding the deficiency and the 

remedial action to be taken to cure it. 

Failure to advise VA in a timely manner 

could result in a lender’s loss of its 

approval to close VA loans on the 

automatic basis. 

(Authority: 38 U.S.C. 501(a), 3702(d)) 

(d) Annual recertification. Nonsupervised lenders of the class 

described in 38 U.S.C. 3702(d)(3) must 

be recertified annually for authority to 

process loans on the automatic basis. 

The following minimum annual 

recertification requirements must be met 

by each lender approved for automatic 

authority: 

(1) Financial requirements. A lender 

must submit, within 120 days following 

the end of its fiscal year, an audited and 

certified financial statement with a 

classified balance sheet or a separate 


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footnote for adjusted net worth to VA 

Central Office (264) for review. The 

same minimum financial requirements 

described in § 36.4852(b)(5) must be 

maintained and verified annually in 

order to be recertified for automatic 

authority. 

(2) Processing annual lender data. 

The VA regional office having 

jurisdiction for the lender’s corporate 

office will mail an annual notice to the 

lender requesting current information 

on the lender’s personnel and operation. 

The lender is required to complete the 

form and return it with the appropriate 

annual renewal fees to the VA regional 

office. 

(Authority: 38 U.S.C. 501(a), 3702(d)) 

(e) Lender fees. To participate as a VA 

automatic lender, non-supervised 

lenders of the class described in 38 

U.S.C. 3702(d)(3) shall pay fees as 

follows: 

(1) $500 for new applications; 

(2) $200 for reinstatement of lapsed or 

terminated automatic authority; 

(3) $100 for each underwriter 

approval; 

(4) $100 for each agent approval; 

(5) A minimum fee of $100 for any 

other VA administrative action 

pertaining to a lender’s status as an 

automatic lender; 

(6) $200 annually for certification of 

home offices; and 

(7) $100 annually for each agent 

renewal. 

(f) Supervised lender fees. Supervised 

lenders of the classes described in 

paragraphs (d)(1) and (d)(2) of 38 U.S. 

Code 3702 participating in VA’s Loan 

Guaranty Program shall pay fees as 

follows: 

(1) $100 fee for each agent approval; 

and 

(2) $100 annually for each agent 

renewal. 

(Authority: 38 U.S.C. 501(a) and 3703(c)(1)) 

(g) LAPP fees. Lenders participating in 

VA’s Lender Appraisal Processing 

Program shall pay a fee of $100 for 

approval of each staff appraisal 

reviewer. 

(Authority 38 U.S.C. 3703(c)(1)) 

§ 36.4853 Withdrawal of authority to close 

loans on the automatic basis. 

(a)(1) As provided in 38 U.S.C. 

3702(e), the authority of any lender to 

close loans on the automatic basis may 

be withdrawn by the Secretary at any 

time upon 30 days notice. The 

automatic processing authority of both 

supervised and non-supervised lenders 

may be withdrawn for engaging in 

practices which are imprudent from a 

lending standpoint or which are 

prejudicial to the interests of veterans or 

the Government but are of a lesser 

degree than would warrant complete 

suspension or debarment of the lender 

from participation in the program. 

(2) Automatic-processing authority 

may be withdrawn at any time for 

failure to meet basic qualifying and/or 

annual recertification criteria. 

(i) Non-supervised lenders. (A) 

Automatic authority may be withdrawn 

for lack of a VA-approved underwriter, 

failure to maintain $50,000 in working 

capital or $250,000 in adjusted net 

worth, or failure to file required 

financial information. 

(B) During the 1-year probationary 

period for newly approved lenders, 

automatic authority may be temporarily 

or permanently withdrawn for any of 

the reasons set forth in this section 

regardless of whether deficiencies 

previously have been brought to the 

attention of the probationary lender. 

(ii) Supervised lenders. Automatic 

authority will be withdrawn for loss of 

status as an entity subject to 

examination and supervision by a 

Federal or State supervisory agency as 

required by 38 U.S.C. 3702(d). 

(Authority: 38 U.S.C. 3702(d)) 

(3) Automatic processing authority 

may also be withdrawn for any of the 

causes for debarment set forth in 2 CFR 

parts 180 and 801. 

(b) Authority to close loans on the 

automatic basis may also be temporarily 

withdrawn for a period of time under 

the following schedule. 

(1) Withdrawal for 60 days may occur 

when: 

(i) Automatic loan submissions show 

deficiencies in credit underwriting, 

such as use of unstable sources of 

income to qualify the borrower, ignoring 

significant adverse credit items affecting 

the applicant’s creditworthiness, etc., 

after such deficiencies have been 

repeatedly called to the lender’s 

attention; 

(ii) Employment or deposit 

verifications are handcarried by 

applicants or otherwise improperly 

permitted to pass through the hands of 

a third party; 

(iii) Automatic loan submissions are 

consistently incomplete after such 

deficiencies have been repeatedly called 

to the lender’s attention by VA; or 

(iv) There are continued instances of 

disregard of VA requirements after they 

have been called to the lender’s 

attention. 

(2) Withdrawal for 180 days may 

occur when: 

(i) Loans are closed automatically 

which conflict with VA credit standards 

and which would not have been made 

by a lender acting prudently; 

(ii) The lender fails to disclose to VA 

significant obligations or other 

information so material to the veteran’s 

ability to repay the loan that undue risk 

to the Government results; 

(iii) Employment or deposit 

verifications are allowed to be 

handcarried by applicant or otherwise 

mishandled, resulting in the submission 

of significant misinformation to VA; 

(iv) Substantiated complaints are 

received that the lender misrepresented 

VA requirements to veterans to the 

detriment of their interests (e.g., veteran 

was dissuaded from seeking a lower 

interest rate based on lender’s incorrect 

advice that such options were precluded 

by VA requirements); 

(v) Closing documentation shows 

instances of improper charges to the 

veteran after the impropriety of such 

charges has been called to the lender’s 

attention by VA, or refusal to refund 

such charges after notification by VA; or 

(vi) There are other instances of 

lender actions which are prejudicial to 

the interests of veterans such as 

deliberate delays in scheduling loan 

closings. 

(3) Withdrawal for a period of from 

one year to three years may occur when: 

(i) The lender fails to properly 

disburse loans (e.g., loan disbursement 

checks returned due to insufficient 

funds); 

(ii) There is involvement by the 

lender in the improper use of a veteran’s 

entitlement (e.g., knowingly permitting 

the veteran to violate occupancy 

requirements, lender involvement in 

sale of veteran’s entitlement, etc.). 

(4) A continuation of actions that have 

led to previous withdrawal of automatic 

authority justifies withdrawal of 

automatic authority for the next longer 

period of time. 

(5) Withdrawal of automatic 

processing authority does not prevent a 

lender from processing VA guaranteed 

loans on the prior approval basis. 

(6) Action by VA to remove a lender’s 

automatic authority does not prevent 

VA from also taking debarment or 

suspension action based on the same 

conduct by the lender. 

(7) VA field facilities are authorized to 

withdraw automatic privileges for 60 

days, based on any of the violations set 

forth in paragraphs (b)(1) through (b)(3) 

of this section, for non-supervised 

lenders without operations in other 

stations’ jurisdictions. All 

determinations regarding withdrawal of 

automatic authority for longer periods of 

time or multi-jurisdictional lenders 

must be made in Central Office. 

(c) VA will provide 30 days notice of 

a withdrawal of automatic authority in 

order to enable the lender to either close 


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or obtain prior approval for a loan on 

which processing has begun. There is no 

right to a formal hearing to contest the 

withdrawal of automatic processing 

privileges. However, if within 15 days 

after receiving notice the lender requests 

an opportunity to contest the 

withdrawal, the lender may submit in 

person, in writing, or through a 

representative, information and 

argument in opposition to the 

withdrawal. 

(d) If the lender’s submission in 

opposition raises a dispute over facts 

material to the withdrawal of automatic 

authority, the lender will be afforded an 

opportunity to appear with a 

representative, submit documentary 

evidence, present witnesses, and 

confront any witnesses VA presents. 

The Under Secretary for Benefits will 

appoint a hearing officer or panel to 

conduct the hearing. 

(e) A transcribed record of the 

proceedings shall be made available at 

cost to the lender, upon request, unless 

the requirement for a transcript is 

waived by mutual agreement. 

(f) In actions based upon a conviction 

or civil judgment, or in which there is 

no genuine dispute over material facts, 

the Under Secretary for Benefits shall 

make a decision on the basis of all the 

information in the administrative 

record, including any submission made 

by the lender. 

(g) In actions in which additional 

proceedings are necessary to determine 

disputed material facts, written findings 

of fact will be prepared by the hearing 

officer or panel. The Under Secretary for 

Benefits shall base the decision on the 

facts as found, together with any 

information and argument submitted by 

the lender and any other information in 

the administrative record. 

(Authority: 38 U.S.C. 3703(c)(1)) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

numbers 2900–0574.) 

§ 36.4854 Estate of veteran in real 

property. 

(a) The title of the estate in the realty 

acquired by the veteran, wholly or 

partly with the proceeds of a guaranteed 

or insured loan, or owned by him and 

on which construction, or repairs, or 

alterations or improvements are to be 

made, shall be such as is acceptable to 

informed buyers, title companies, and 

attorneys, generally, in the community 

in which the property is situated, except 

as modified by paragraph (b) of this 

section. Such estate shall be not less 

than: 

(1) A fee simple estate therein, legal 

or equitable; or 

(2) A leasehold estate running or 

renewable at the option of the lessee for 

a period of not less than 14 years from 

the maturity of the loan, or to any earlier 

date at which the fee simple title will 

vest in the lessee, which is assignable or 

transferable, if the same be subjected to 

the lien; however, a leasehold estate 

which is not freely assignable and 

transferable will be considered an 

acceptable estate if it is determined by 

the Under Secretary for Benefits, or the 

Director, Loan Guaranty Service: 

(i) That such type of leasehold is 

customary in the area where the 

property is located, 

(ii) That a veteran or veterans will be 

prejudiced if the requirement for free 

assignability is adhered to; and 

(iii) That the assignability and other 

provisions applicable to the leasehold 

estate are sufficient to protect the 

interests of the veteran and the 

Government and are otherwise 

acceptable; or 

(3) A life estate, provided that the 

remainder and reversionary interests are 

subjected to the lien; or 

(4) A beneficial interest in a revocable 

Family Living Trust that ensures that 

the veteran, or veteran and spouse, have 

an equitable life estate, provided the 

lien attaches to any remainder interest 

and the trust arrangement is valid under 

State law. 

(b) Any such property or estate will 

not fail to comply with the requirements 

of paragraph (a) of this section by reason 

of the following: 

(1) Encroachments; 

(2) Easements; 

(3) Servitudes; 

(4) Reservations for water, timber, or 

subsurface rights; or 

(5) Sale and lease restrictions: 

(i) Except as to condominiums, the 

right in any grantor or cotenant in the 

chain of title, or a successor of either, 

to purchase for cash, which right was 

established by an instrument recorded 

prior to December 1, 1976, and by the 

terms thereof is exercisable only if: 

(A) An owner elects to sell; 

(B) The option price is not less than 

the price at which the then owner is 

willing to sell to another; and 

(C) Exercised within 30 days after 

notice is mailed by registered mail to 

the address of optionee last known to 

the then owner of the then owner’s 

election to sell, stating the price and the 

identity of the proposed vendee; 

(ii) A condominium estate established 

by the filing for record of the Master 

Deed, or other enabling document 

before December 1, 1976 will not fail to 

comply with the requirements of 

paragraph (a) of this section by reason 

of: 

(A) Prohibition against leasing a unit 

for a period of less than 6 months. 

(B) The existence of a right of first 

option to purchase or right to provide a 

substitute buyer reserved to the 

condominium association provided 

such option or right is exercisable only 

if: 

(1) An owner elects to sell; 

(2) The option price is not less than 

the price at which the then owner is 

willing to sell to another; 

(3) The terms and conditions under 

which the option price is to be paid are 

identical to or are not less favorable to 

the owner than the terms and conditions 

under which the owner was willing to 

sell to the owner’s prospective buyer; 

and 

(4) Notice of the association’s decision 

to exercise the option must be mailed to 

the owner by registered or certified mail 

within 30 days after notice is mailed by 

registered or certified mail to the 

address of the association last known to 

the owner of the owner’s election to sell, 

stating the price, terms of sale, and the 

identity of the proposed vendee. 

(iii) Any property subject to a 

restriction on the owner’s right to 

convey to any party of the owner’s 

choice, which restriction is established 

by a document recorded on or after 

December 1, 1976, will not qualify as 

security for a guaranteed or insured 

loan. A prohibition or restriction on 

leasing an individual unit in a 

condominium will not cause the 

condominium estate to fail to qualify as 

security for such loan, provided the 

restriction is in accordance with 

§ 36.4862(c). 

(iv) Notwithstanding the provisions of 

paragraphs (b)(5)(i), (ii), and (iii) of this 

section, a property shall not be 

considered ineligible pursuant to 

paragraph (a) of this section if: 

(A) The veteran obtained the property 

under a State or local political 

subdivision program designed to assist 

low-or moderate-income purchasers, 

and as a condition the purchaser must 

agree to one or more of the following 

restrictions: 

(1) If the property is resold within a 

time period as established by local law 

or ordinance, after the purchaser 

acquires title, the purchaser must first 

offer the property to the government 

housing agency, or a low-or moderateincome purchaser designated by such 

agency, provided the option to purchase 

is exercised within 90 days after notice 

by the purchaser to the agency of 

intention to sell. 

(2) If the property is resold within a 

time period as established by local law 

or ordinance after the purchaser 

acquires title, a governmental agency 


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may specify a maximum price which 

the veteran may receive for the property 

upon resale; or 

(3) Such other restriction approved by 

the Secretary designed to insure either 

that a property acquired under such 

program again be made available to lowor moderate-income purchasers, or to 

prevent a private purchaser from 

obtaining a windfall profit on the resale 

of such property, while assuring that the 

purchaser has a reasonable opportunity 

to dispose of the property without 

undue difficulty at a reasonable price. 

(4) The sale price of a property under 

any of the restrictions of paragraph 

(b)(5)(iv)(A) of this section shall not be 

less than the lowest of the following: 

The price designated by the owner as 

the asking price; the appraised value of 

the property; or the original purchase 

price of the property, increased by a 

factor reflecting all or a reasonable 

portion of the increased costs of housing 

or the percentage increase in median 

income in the area between the date of 

original purchase and resale, plus the 

reasonable value or actual costs of any 

capital improvements made by the 

owner plus a reasonable real estate 

commission less the cost of necessary 

repairs required to place the property in 

saleable condition; or other reasonable 

formula approved by the Secretary. The 

veteran must be fully informed and 

consent in writing to the housing 

restrictions. A copy of the veteran’s 

consent statement must be forwarded 

with the application for home loan 

guaranty or the report of a home loan 

processed on the automatic basis. 

(Authority: 38 U.S.C. 3703(c)) 

(B) A recorded restriction on title 

designed to provide housing for older 

persons, provided that the restriction is 

acceptable under the provisions of the 

Fair Housing Act, title VIII of the Civil 

Rights Act of 1968, as amended by the 

Fair Housing Amendments Act of 1988, 

42 U.S.C. 3601 et seq. The veteran must 

be fully informed and consent in writing 

to the restrictions. A copy of the 

veteran’s consent statement must be 

forwarded with the application for 

home loan guaranty or the report of a 

home loan processed on the automatic 

basis. 

(Authority: 38 U.S.C. 501, 3703(c)(1)) 

(6) Building and use restrictions 

whether or not enforceable by a reverter 

clause if there has been no breach of the 

conditions affording a right to an 

exercise of the reverter; 

(7) Any other covenant, condition, 

restriction, or limitation approved by 

the Secretary in the particular case. 

Such approval shall be a condition 

precedent to the guaranty or insurance 

of the loan; Provided, That the 

limitations on the quantum or quality of 

the estate or property that are indicated 

in this paragraph, insofar as they may 

materially affect the value of the 

property for the purpose for which it is 

used, are taken into account in the 

appraisal of reasonable value required 

by 38 U.S.C. chapter 37. 

(c) The following limitations on the 

quantum or quality of the estate or 

property shall be deemed for the 

purposes of paragraph (b) of this section 

to have been taken into account in the 

appraisal of residential property and 

determined by the Secretary as not 

materially affecting the reasonable value 

of such property: 

(1) Building or use restrictions. 

Provided: 

(i) No violation exists, 

(ii) The proposed use by a veteran 

does not presage a violation of a 

condition affording a right of reverter, 

and 

(iii) Any right of future modification 

contained in the building or use 

restrictions is not exercisable, by its 

own terms, until at least 10 years 

following the date of the loan. 

(2) Violations of racial and creed 

restrictions. Violations of a restriction 

based on race, color, creed, or national 

origin, whether or not such restriction 

provides for reversion or forfeiture of 

title or a lien for liquidated damages in 

the event of a breach. 

(3) Violations of building or use 

restrictions of record. Violations of 

building or use restrictions of record 

which have existed for more than 1 

year, are not the subject of pending or 

threatened litigation, and which do not 

provide for a reversion or termination of 

title, or condemnation by municipal 

authorities, or, a lien for liquidated 

damages which may be superior to the 

lien of the guaranteed or insured 

mortgage. 

(4) Easements. (i) Easements for 

public utilities along one or more of the 

property lines and easements for 

drainage or irrigation ditches, provided 

the exercise of the rights thereof do not 

interfere with the use of any of the 

buildings or improvements located on 

the subject property. 

(ii) Mutual easements for joint 

driveways located partly on the subject 

property and partly on adjoining 

property, provided the agreement is 

recorded in the public records. 

(iii) Easements for underground 

conduits which are in place and which 

do not extend under any buildings in 

the subject property. 

(5) Encroachments. (i) On the subject 

property by improvements on the 

adjoining property where such 

encroachments do not exceed 1 foot 

within the subject boundaries, provided 

such encroachments do not touch any 

buildings or interfere with the use or 

enjoyment of any building or 

improvement on the subject property. 

(ii) By hedges or removable fences 

belonging to subject or adjoining 

property. 

(iii) Not exceeding 1 foot on adjoining 

property by driveways belonging to 

subject property, provided there exists a 

clearance of at least 8 feet between the 

buildings on the subject property and 

the property line affected by the 

encroachment. 

(6) Variations of lot lines. Variations 

between the length of the subject 

property lines as shown on the plot plan 

or other exhibits submitted to 

Department of Veterans Affairs and as 

shown by the record or possession lines, 

provided such variations do not 

interfere with the current use of any of 

the improvements on the subject 

property and do not involve a 

deficiency of more than 2 percent with 

respect to the length of the front line or 

more than 5 percent with respect to the 

length of any other line. 

(Authority: 38 U.S.C. 3703(c)) 

§ 36.4855 Loans, first, second, or 

unsecured. 

Loans for the purchase of real 

property or a leasehold estate as limited 

in the regulations concerning guaranty 

or insurance of loans to veterans, or for 

the alteration, improvement, or repair 

thereof, and for more than $1,500 and 

more than 40 percent of the reasonable 

value of such property or estate prior 

thereto shall be secured by a first lien 

on the property or estate. Loans for such 

alteration, improvement, or repairs for 

more than $1,500 but 40 percent or less 

of the prior reasonable value of the 

property shall be secured by a lien 

reasonable and customary in the 

community for the type of alteration, 

improvement, or repair financed. Those 

for $1,500 or less need not be secured, 

and in lieu of the title examination the 

lender may accept a statement from the 

borrower that he or she has an interest 

in the property not less than that 

prescribed in § 36.4854(a). 

(Authority 38 U.S.C. 3703(c)(1)) 

§ 36.4856 Tax, special assessment and 

other liens. 

Tax liens, special assessment liens, 

and ground rents shall be disregarded 

with respect to any requirement that 

loans shall be secured by a lien of 

specified dignity. With the prior 

approval of the Secretary, Under 

Secretary for Benefits, or Director, Loan 


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Guaranty Service, liens retained by 

nongovernmental entities to secure 

assessments or charges for municipal 

type services and facilities clearly 

within the public purpose doctrine may 

be disregarded. In determining whether 

a loan for the purchase or construction 

of a home is secured by a first lien the 

Secretary may also disregard a superior 

lien created by a duly recorded 

covenant running with the realty in 

favor of a private entity to secure an 

obligation to such entity for the 

homeowner’s share of the costs of the 

management, operation, or maintenance 

of property, services or programs within 

and for the benefit of the development 

or community in which the veteran’s 

realty is located, if the Secretary 

determines that the interests of the 

veteran-borrower and of the 

Government will not be prejudiced by 

the operation of such covenant. In 

respect to any such superior lien to be 

created after June 6, 1969, the 

Secretary’s determination must have 

been made prior to the recordation of 

the covenant. 

(Authority: 38 U.S.C. 3703(d)(3)) 

§ 36.4857 Combination residential and 

business property. 

If otherwise eligible, a loan for the 

purchase or construction of a 

combination of residential property and 

business property which the veteran 

proposes to occupy in part as a home 

will be eligible under 38 U.S.C. 3710, if 

the property is primarily for residential 

purposes and no more than one 

business unit is included in the 

property. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4858 [Reserved] 

§ 36.4859 Supplemental loans. 

(a) Any loan for the alteration, repair, 

improvement, extension, replacement, 

or expansion of a home, with respect to 

which a guaranteed or insured 

obligation of the borrower is currently 

outstanding, may be reported for 

guaranty or insurance coverage, if such 

loan is made by the holder of the 

currently outstanding obligation, 

notwithstanding the fact no guaranty 

entitlement remains available to the 

borrower; Provided, that if no 

entitlement remains available the 

maximum amount payable on the 

revised guaranty shall not exceed the 

amount payable on the original guaranty 

on the date of closing the supplemental 

loan, and the percentage of guaranty 

shall be based upon the proportion the 

said maximum amount bears to the 

aggregate indebtedness, or, in the case of 

an insured loan, no additional credit to 

the holder’s insurance account may be 

made: Provided further, that the prior 

approval of the Secretary shall be 

required if: 

(1) The loan will be made by a lender 

who is not the holder of the currently 

guaranteed or insured obligation; or 

(2) The loan will be made by a lender 

not of a class specified in 38 U.S.C. 

3702(d); or 

(3) An obligor liable on the currently 

outstanding obligation will be released 

from personal liability. 

(b) In any case in which the unpaid 

balance of the prior loan currently 

outstanding is combined or 

consolidated with the amount of the 

supplemental loan, the entire aggregate 

indebtedness shall be repayable in full 

within the maximum maturity currently 

prescribed by statute for the original 

loan. No supplemental loan for the 

repair, alteration, or improvement of 

residential property will be eligible for 

guaranty or insurance unless such 

repair, alteration, or improvement 

substantially protects or improves the 

basic livability or utility of the property 

involved. 

(c) Such loans shall be secured as 

required in § 36.4855: Provided, that a 

lien of lesser dignity than therein 

specified will suffice if the lien obtained 

is immediately junior to the lien of the 

original guaranteed or insured 

obligation: Provided further, that the 

liens of successive supplemental loans 

may be of lesser dignity so long as they 

are immediately junior to the lien of the 

last previous guaranteed or insured 

obligation having a lien of required 

dignity. 

(d) Upon providing or extending 

guaranty or insurance coverage in 

respect to any such supplemental loan, 

the rights of the Secretary to the 

proceeds of the sale of security shall be 

subordinate to the right of the holder to 

satisfy therefrom the indebtedness 

outstanding on the original and 

supplemental loans. 

(Authority: 38 U.S.C. 3703(c)(1), 3710(b)(6)) 

§ 36.4860 Condominium loans—general. 

(a) Authority—applicability of other 

loan guaranty regulations, 38 CFR Part 

36. A loan to an eligible veteran to 

purchase a one-family residential unit 

in a condominium housing 

development or project shall be eligible 

for guaranty or insurance to the same 

extent and on the same terms as other 

loans under 38 U.S.C. 3710 provided the 

loan conforms to the provisions of 

chapter 37, title 38 U.S.C., except for 

sections 3711 (direct loans), and 3727 

(structural defects). The loan must also 

conform to the otherwise applicable 

provisions of the regulations concerning 

the guaranty or insurance of loans to 

veterans. Sections 36.4857, 36.4859, and 

36.4869 shall not be applicable. 

(b) Definitions. On and after July 1, 

1979, the following definitions shall be 

applicable to each condominium loan 

entitled to be guaranteed or insured, and 

shall be applicable to such loans 

previously guaranteed or insured to the 

extent that no legal rights vested 

thereunder are impaired. Whenever 

used in 38 U.S.C. chapter 37 or this 

subpart, unless the context otherwise 

requires, the terms defined in this 

paragraph shall have the meaning 

stated. 

(1) Affiliate of declarant. Affiliate of 

declarant means any person or entity 

which controls, is controlled by, or is 

under common control with, a 

declarant. 

(i) A person or entity shall be 

considered to control a declarant if that 

person or entity is a general partner, 

officer, director, or employee of the 

declarant who: 

(A) Directly or indirectly or acting in 

concert with one or more persons, or 

through one or more subsidiaries, owns, 

controls, or holds with power to vote, or 

holds proxies representing, more than 

20 percent of the voting shares of the 

declarant; 

(B) Controls in any manner the 

election of a majority of the directors of 

the declarant; or 

(C) Has contributed more than 20 

percent of the capital of the declarant. 

(ii) A person or entity shall be 

considered to be controlled by a 

declarant if the declarant is a general 

partner, officer, director, or employee of 

that person or entity who: 

(A) Directly or indirectly or acting in 

concert with one or more persons or 

through one or more subsidiaries, owns, 

controls, or holds with power to vote, or 

holds proxies representing, more than 

20 percent of the voting shares of that 

person or entity; 

(B) Controls in any manner the 

election of a majority of the directors of 

that person or entity; or 

(C) Has contributed more than 20 

percent of the capital of that person or 

entity. 

(2) Condominium. Unless otherwise 

provided by State law, a condominium 

is a form of ownership in which the 

buyer receives title to a three 

dimensional air space containing the 

individual living unit together with an 

undivided interest or share in the 

ownership of common elements 

(restatement of § 36.4801, 

Condominium). 

(3) Conversion condominium. 

Condominium projects not originally 

built and sold as condominiums but 


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subsequently converted to the 

condominium form of ownership. 

(4) Declarant. Any person who has 

executed a declaration or an amendment 

to a declaration to add additional real 

estate to the project or any successors or 

assigns of the declarant who offers to 

sell or sells units in the condominium 

project and who assumes declarant 

rights in the project including the right 

to: Add, convert or withdraw real estate 

from the condominium project; 

maintain sales offices, management 

offices and rental units; exercise 

easements through the common 

elements for the purpose of making 

improvements within the 

condominium; or exercise control of the 

owner’s association. Declarant is further 

defined as any sponsor of a project or 

affiliate of the declarant who is acting 

on behalf of or exercising the rights of 

the declarant. 

(5) Existing—declarant in control or 

marketing units. A condominium in 

which all onsite or offsite improvements 

were completed or the conversion was 

completed prior to appraisal by the 

Department of Veterans Affairs, but the 

declarant is in control of the owners’

association and/or is currently 

marketing units for initial transfer to 

individual unit owners. 

(6) Existing—resale. A condominium 

in which all onsite or offsite 

improvements were completed, or the 

conversion was completed prior to 

appraisal by the Department of Veterans 

Affairs, and the declarant is no longer in 

control of the owners’ association and/ 

or marketing units for initial transfer to 

individual unit owners. 

(7) Expandable condominium. A 

project which may be increased in size 

by the declarant. An expandable 

condominium is constructed in phases 

(or stages). After each phase is 

completed and constituted, the common 

estates are merged. Each unit owner, 

thereby, gains an individual interest in 

all of the facilities of the common estate. 

(8) Foreclosure. Foreclosure shall 

mean the termination of a lien by either 

judicial or nonjudicial procedures in 

accordance with local law or the 

voluntary transfer of property by a deedin-lieu of foreclosure or similar 

procedures. 

(9) High rise condominium. A 

condominium project which is a multistory elevator building. 

(10) Horizontal condominium. A 

condominium project in which 

generally no part of a living unit extends 

over or under another living unit. 

(11) Low rise condominium. A 

condominium project in which all or a 

part of a living unit extends over or 

under another living unit, e.g., garden 

apartment or walk-up project. 

(12) Proposed condominium. A 

condominium project that is to be 

constructed or is under construction. In 

the case of a condominium conversion, 

the declarant proposes to convert a 

building or buildings to the 

condominium form of ownership, or the 

declarant is in the process of converting 

the building or buildings to the 

condominium form of ownership. 

(13) Series condominium. A number 

of adjoining but separately constituted 

condominiums. An association of 

owners is established for each project, 

and each association is responsible for 

maintenance and upkeep of the 

common elements in its own project. 

Cross-easements between the separate 

condominiums may be created to permit 

members of the separate condominiums 

to use the common areas of the other 

condominiums. 

(c) Project approval. Prior to 

Department of Veterans Affairs guaranty 

of an individual unit loan in a 

condominium, the legal documentation 

establishing the condominium project or 

development must be approved by the 

Secretary. 

(Authority: 38 U.S.C. 3703(c)(1), (d)(3), 

3710(a)(6)) 

§ 36.4861 Acceptable ownership 

arrangements and documentation. 

(a) Types of condominium ownership. 

The following types of basic ownership 

arrangements are generally acceptable 

provided they are established in 

compliance with the applicable 

condominium law of the jurisdiction(s) 

in which the condominium is located: 

(1) Ownership of units by individual 

owners coupled with an undivided 

interest in all common elements. 

(2) Ownership of units by individual 

owners coupled with an undivided 

interest in general common elements 

and specified limited common 

elements. 

(3) Individual ownership of units 

coupled with an undivided interest in 

the general common elements and/or 

limited common elements, with title to 

additional property for common use 

vested in an association of unit owners, 

with mandatory membership by unit 

owners or owners’ associations. Any 

such arrangement must not be 

precluded by applicable State law. 

(Authority: 38 U.S.C. 3710(a)(6)) 

(b) Estate of unit owner. The legal 

estate of each unit owner must comply 

with the provisions of § 36.4854. The 

declaration or equivalent document 

shall allocate an undivided interest in 

the common elements to each unit. 

Such interest may be allocated equally 

to each unit, may be proportionate to 

that unit’s relative size or value, or may 

be allocated according to any other 

specified criteria provided that the 

method chosen is equitable and 

reasonable for that condominium. 

(Authority: 38 U.S.C. 3703(c)(1), (d)(3), 

3710(a)(6)) 

(c) Condominium documentation—(1) 

Compliance with applicable law. The 

declaration, bylaws and other enabling 

documentation shall conform to the 

laws governing the establishment and 

maintenance of condominium regimes 

within the jurisdiction in which the 

condominium is located, and to all 

other laws which apply to the 

condominium. 

(2) Recordation. The declaration and 

all amendments or modifications thereof 

shall be placed of record in the manner 

prescribed by the appropriate 

jurisdiction. If recording of plats, plans, 

or bylaws or equivalent documents and 

all amendments or modifications thereof 

is the prevailing practice or is required 

by law within the jurisdiction where the 

project is located, then such documents 

shall be placed of record. If the bylaws 

are not recorded, then covenants, 

restrictions and other matters requiring 

record notice should be contained in the 

declaration or equivalent document. 

(3) Availability. The owner’s 

association shall be required to make 

available to unit owners, lenders and 

the holders, insurers and guarantors of 

the first mortgage on any unit, current 

copies of the declaration, bylaws and 

other rules governing the condominium, 

and other books, records and financial 

statements of the owners’ association. 

The owners’ association also shall be 

required to make available to 

prospective purchasers current copies of 

the declaration, bylaws, other rules 

governing the condominium, and the 

most recent annual audited financial 

statement, if such is prepared. 

‘‘Available’’ as used in this paragraph 

(c)(3) shall at least mean available for 

inspection, upon request, during normal 

business hours or under other 

reasonable circumstances. 

(4) Amendments to documents after 

Department of Veterans Affairs project 

approval. While the declarant is in 

control of the owners’ association, 

amendments to the declaration, bylaws 

or other enabling documentation must 

be approved by the Secretary. The 

declarant should have proposed 

amendments reviewed prior to 

recordation. This provision does not 

apply to amendments which annex 

additional phases to the condominium 

regime in accordance with a general 


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plan of development (§§ 36.4864(a)(3) 

and 36.4865(b)(6)). 

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) 

(d) Real property descriptions in the 

declaration—(1) Clarity—conformity 

with the law of the jurisdiction. The 

description of the units, common 

elements, any recreational facilities and 

other related amenities, and any limited 

common elements shall be clear and in 

conformity with the law of the 

jurisdiction where the project is located. 

Responsibility for maintenance and 

repair of all portions of the 

condominium shall be set forth clearly. 

(2) Developmental plan—proposed 

condominiums. The declaration or other 

legally enforceable and binding 

document must state in a reasonable 

manner the overall development plan of 

the condominium, including building 

types, architectural style and the size of 

the units for those phases of the 

condominium which are required to be 

built. Under the applicable provisions of 

the declaration or such other legally 

enforceable and binding document, the 

development of the required portion of 

the condominium must be consistent 

with the overall plan, except that the 

declarant may reserve the right to 

change the overall plan or decide not to 

construct planned units or 

improvements to the common elements 

if the declaration sets forth the 

conditions required to be satisfied prior 

to the exercise of that right the time 

within which the right may be 

exercised, and any other limitations and 

criteria that would be necessary or 

appropriate under the particular 

circumstances. Such conditions, time 

restraints and other limitations must be 

reasonable in light of the overall plan 

for the condominium. In an expandable 

project, additional phases which are not 

required to be built may be described in 

the development plan in very general 

terms, or the declaration may provide 

that the declarant makes no assurances 

concerning the construction, building 

types, architectural style and size of the 

units, etc. of these phases. However, the 

minimum number of units to be built 

should be that which would be adequate 

to reasonably support the common 

elements. (See § 36.4864(a)(6).) 

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0448.) 

§ 36.4862 Rights and restrictions. 

(a) Declarant’s rights and 

restrictions—(1) Disclosure and 

reasonableness of reserved rights. Any 

right reserved by the declarant must be 

reasonable and set forth in the 

declaration. 

(2) Examples of reserved rights of 

declarant, sponsor, or affiliate of 

declarant which are usually 

unacceptable. Binding the owners’

association either directly or indirectly 

to any of the following agreements is not 

acceptable unless the owners’

association shall have a right of 

termination thereof which is exercisable 

without penalty at any time after 

transfer of control, upon not more than 

90 days’ notice to the other party 

thereto: 

(i) Any management contract, 

employment contract or lease of 

recreational or parking areas or 

facilities. 

(ii) Any contract or lease, including 

franchises and licenses, to which a 

declarant is a party. 

(iii) The requirements of paragraphs 

(a)(2)(i) and (ii) of this section do not 

apply to acceptable ground leases. 

(3) Examples of reserved rights which 

are usually acceptable. The following 

rights in the common elements may 

usually be reserved by the declarant for 

a reasonable period of time, subject to 

a concomitant obligation to restore: 

(i) Easement over and upon the 

common elements and upon lands 

appurtenant to the condominium for the 

purpose of completing improvements 

for which provision is made in the 

declaration, but only if access thereto is 

otherwise not reasonably available. 

(ii) Easement over and upon the 

common elements for the purpose of 

making repairs required pursuant to the 

declaration or contracts of sale made 

with unit purchasers. 

(iii) Right to maintain facilities in the 

common areas which are identified in 

the declaration and which are 

reasonably necessary to market the 

units. These may include sales and 

management offices, model units, 

parking areas, and advertising signs. 

(Authority: 38 U.S.C. 3704(c)(1), 3710(a)(6)) 

(b) Owners’ association’s rights and 

restrictions—(1) Right of entry upon 

units and limited common elements. 

The owners’ association shall be granted 

a right of entry upon unit premises and 

any limited common elements to effect 

emergency repairs, and a reasonable 

right of entry thereupon to effect other 

repairs, improvements, replacement or 

maintenance as necessary. 

(2) Power to grant rights and 

restrictions in common elements. The 

owners’ association should be granted 

other rights, such as the right to grant 

utility easements under, through or over 

the common elements, which are 

reasonably necessary to the ongoing 

development and operation of the 

project. 

(3) Responsibility for damage to 

common elements and units. A 

provision may be made in the 

declaration or bylaws for allocation of 

responsibility for damages resulting 

from the exercise of any of the above 

rights. 

(4) Assessments—(i) Levy and 

collection. The declaration or its 

equivalent shall describe the authority 

of the owners’ association to levy and 

enforce the collection of general and 

special assessments for common 

expenses and shall describe adequate 

remedies for failure to pay such 

common expenses. The common 

expenses assessed against any unit, with 

interest, late charges, costs and a 

reasonable attorney’s fee shall be a lien 

upon such unit in accordance with 

applicable law. Each such assessment, 

together with interest, late charges, 

costs, and attorney’s fee, shall also be 

the personal obligation of the person 

who was the owner of such unit at the 

time the assessment fell due. The 

personal obligation for delinquent 

assessments shall not pass to successors 

in title or interest unless assumed by 

them, or required by applicable law. 

Common expenses as used in this 

subdivision shall mean expenditures 

made or liabilities incurred by or on 

behalf of the owners’ association, 

together with any assessments for the 

creation and maintenance of reserves. 

(ii) Reserves and working capital. 

There shall be in new or proposed 

condominium projects (including 

conversions) a provision for an adequate 

reserve fund for the periodic 

maintenance, repair and replacement of 

the common elements, which fund shall 

be maintained out of regular 

assessments for common expenses. 

Additionally, a working capital fund 

must be established for the initial 

months of the project operations equal 

to at least a 2 months’ estimated 

common area charge for each unit. 

(iii) Priority of lien. Any assessment 

lien must be subordinate to any 

Department of Veterans Affairs 

guaranteed mortgage except as provided 

in § 36.4856. A lien for common 

expense charges and assessments shall 

not be affected by any sale or transfer of 

a unit except that a sale or transfer 

pursuant to a foreclosure of a first 

mortgage shall extinguish a subordinate 

lien for common expense charges and 

assessments which became payable 

prior to such sale or transfer. Any such 

sale or transfer pursuant to a foreclosure 

shall not relieve the purchaser or 

transferee of a unit from liability for, nor 

the unit so sold or transferred from the 


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lien of, any common expense charges 

thereafter becoming due. 

(Authority: 38 U.S.C. 3703(c)(1), (d)(3), 

3710(a)(6)) 

(c) Unit owners’ rights and 

restrictions—(1) Obligation to pay 

expenses. The declaration or equivalent 

document shall establish a duty on each 

unit owner, including the declarant, to 

pay a proportionate share of common 

expenses upon being assessed therefor 

by the owners’ association. Such share 

may be allocated equally to each unit, 

may be proportionate to that unit’s 

common element interest, relative size 

or value, or may be allocated according 

to any other specified criteria provided 

that the method chosen is equitable and 

reasonable for that condominium. 

(2) Voting rights. The declaration or 

equivalent document shall allocate a 

portion of the votes in the association to 

each unit. Such portion may be 

allocated equally to each unit, may be 

proportionate to that unit’s common 

expense liability, common element 

interest, relative size or value, or may be 

allocated according to any other 

specified criteria provided that the 

method is equitable and reasonable for 

that condominium. The declaration may 

provide different criteria for allocations 

of votes to the units on particular 

specified matters and may also provide 

different percentages of required unit 

owner approvals for such particular 

specified matters. 

(3) Ingress and egress of unit owners. 

There may not be any restriction upon 

any unit owner’s right of ingress and 

egress to his or her unit. 

(4) Encroachments—(i) Easements for 

encroachments. In the event any portion 

of the common elements encroaches 

upon any unit or any unit encroaches 

upon the common elements or another 

unit as a result of the construction, 

reconstruction, repair, shifting, 

settlement, or movement of any portion 

of the improvements, a valid easement 

for the encroachment and for the 

maintenance of the same shall exist so 

long as the encroachment exists. The 

declaration may provide, however, 

reasonable limits on the extent of any 

easement created by the overlap of 

units, common elements, and limited 

common elements resulting from such 

encroachments; or 

(ii) Monuments as boundaries. If 

permitted by the governing law within 

the jurisdiction where the project is 

located, the existing physical 

boundaries of a unit or a common 

element or the physical boundaries of a 

unit or a common element reconstructed 

in substantial accordance with the 

original plats and plans thereof become 

its boundaries rather than the metes and 

bounds expressed in the deed, plat or 

plan, regardless of settling or lateral 

movement of the building, or minor 

variance between boundaries shown on 

the plats, plans or in the deed and those 

of the building. The declaration should 

provide reasonable limits on the extent 

of any such revised boundary(ies) 

created by the overlap of units, common 

elements, and limited common elements 

resulting from such encroachments. 

(5) Right of first refusal. The right of 

a unit owner to sell, transfer, or 

otherwise convey his or her unit in a 

condominium shall not be subject to 

any right of first refusal or similar 

restriction if the declaration or similar 

document is recorded on or after 

December 1, 1976. If the declaration was 

recorded prior to December 1, 1976, the 

right of first refusal must comply with 

§ 36.4854(b)(5)(ii); Provided, however, 

restrictions on the basis of age or 

restrictions established by a State, 

Territorial, or local government agency 

as part of a program for providing 

assistance to low- and moderate-income 

purchasers shall be governed by 

§ 36.4854(b)(5)(iv). 

(Authority: 38 U.S.C. 3703(c)) 

(6) Leasing restrictions. Except as 

provided in this paragraph, there shall 

be no prohibition or restriction on a 

condominium unit owner’s right to 

lease his or her unit. The following 

restrictions are acceptable: 

(i) A requirement that leases have a 

minimum initial term of up to 1 year; 

or 

(ii) Age restrictions or restrictions 

imposed by State or local housing 

authorities which are allowable under 

§ 36.4809(e) or § 36.4854(b)(5)(iv). 

(d) Rights of action. The owners’

association and any aggrieved unit 

owner should be granted a right of 

action against unit owners for failure to 

comply with the provisions of the 

declaration, bylaws, or equivalent 

documents, or with decisions of the 

owners’ association which are made 

pursuant to authority granted the 

owners’ association in such documents. 

Unit owners should have similar rights 

of action against the owners’

association. 

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) 

§ 36.4863 Miscellaneous legal 

requirements. 

(a) Declarant transfer of control of 

owners’ association—(1) Standards for 

transfer of control. The declarant shall 

relinquish all special rights, expressed 

or implied, through which the declarant 

may directly or indirectly control, 

direct, modify, or veto any action of the 

owners’ association, its executive board, 

or a majority of unit owners, and control 

of the owners’ association shall pass to 

the owners of units within the project, 

not later than the earlier of the 

following: 

(i) 120 days after the date by which 75 

percent of the units have been conveyed 

to unit purchasers, 

(ii) The last date of a specified period 

of time following the first conveyance to 

a unit purchaser; such period of time is 

to be reasonable for the particular 

project. The maximum acceptable 

period usually will be from 3 to 5 years 

for single-phased condominium regimes 

and 5 to 7 years for expandable 

condominiums, or 

(iii) On a case basis, modifications or 

variations of the requirements of 

paragraphs (a)(1)(i) and (ii) of this 

section will be acceptable, particularly 

in circumstances involving very large 

condominium developments. 

(2) Declarant’s unit votes after 

transfer of control. The requirements of 

paragraph (a)(1) of this section shall not 

affect the declarant’s rights, as a unit 

owner, to exercise the votes allocated to 

units which the declarant owns. 

(3) Unit owners’ participation in 

management. Declarant should provide 

for and foster early participation of unit 

owners in the management of the 

project. 

(b) Taxes. Unless otherwise provided 

by State law, real estate taxes must be 

assessed and be lienable only against 

the individual units, together with their 

undivided interests in the common 

elements, and not against the 

multifamily structure. The owners’

association usually owns no real estate, 

so it has no obligation concerning ad 

valorem taxes. Unless taxes are assessed 

only against the individual units, a tax 

lien could amount to more than the 

value of any particular unit in the 

structure. 

(c) [Reserved] 

(d) Policies for bylaws. The bylaws of 

the condominium should be sufficiently 

detailed for the successful governance of 

the condominium by unit owners. 

Among other things, such documents 

should contain adequate provisions for 

the election and removal of directors 

and officers. 

(e) Insurance and related 

requirements—(1) Insurance. The 

holder shall require hazard and flood 

insurance policies to be procured and 

maintained in accordance with 

§ 36.4829. Because of the nature of 

condominiums, additional types of 

insurance coverages—such as tort 

liability insurance for injuries sustained 

on the premises, personal liability 

insurance for directors and officers 


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managing association affairs, boiler 

insurance, etc.—should be considered 

in appropriate circumstances. 

(2) Fidelity bond coverage. The 

securing of appropriate fidelity bond 

coverage is recommended but not 

required, for any person or entity 

handling funds of the owners’

association, including, but not limited 

to, employees of the professional 

managers. Such fidelity bonds should 

name the association as an obligee, and 

be written in an amount equal to at least 

the estimated maximum of funds, 

including reserve funds, in the custody 

of the owners’ association or the 

management agent at any given time 

during the term of the fidelity bond. 

However, the bond should not be less 

than a sum equal to 3 months’ aggregate 

assessments on all units plus reserve 

funds. 

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) 

§ 36.4864 Documentation and related 

requirements—flexible condominiums and 

condominiums with offsite facilities. 

(a) Expandable condominiums. The 

following policies apply to 

condominium regimes which may be 

increased in size by the declarant: 

(1) The declarant’s right to expand the 

regime must be fully described in the 

declaration. The declaration must 

contain provisions adequate to ensure 

that future improvements to the 

condominium will be consistent with 

initial improvements in terms of quality 

of construction. The declarant must 

build each phase in accordance with an 

approved general plan for the total 

development (§ 36.4861(d)(2)) 

supported by detailed plats and plans of 

each phase prior to the construction of 

the particular phase. 

(2) The reservation of a right to 

expand the condominium regime, the 

method of expansion and the result of 

an expansion must not affect the 

statutory validity of the condominium 

regime or the validity of title to the 

units. 

(3) The declaration or equivalent 

document must contain a covenant that 

the condominium regime may not be 

amended or merged with a successor 

condominium regime without prior 

written approval of the Secretary. The 

declarant may have the proposed legal 

documentation to accomplish the 

merger reviewed prior to recordation. 

However, the Secretary’s final approval 

of the merger will not be granted until 

the successor condominium has been 

legally established and construction 

completed. The declarant may add 

phases to an expandable condominium 

regime without the prior approval of the 

Secretary if the phasing implements a 

previously approved general plan for 

the total development. A copy of the 

amendment to the declaration or other 

annexation document which adds each 

phase must be submitted to the 

Secretary in accordance with 

§ 36.4865(b)(6). 

(4) Liens arising in connection with 

the declarant’s ownership of, and 

construction of improvements upon, the 

property to be added must not adversely 

affect the rights of existing unit owners, 

or the priority of first mortgages on units 

in the existing condominium property. 

All taxes, assessments, mechanic’s liens, 

and other charges affecting such 

property, covering any period prior to 

the addition of the property, must be 

paid or otherwise satisfactorily provided 

for by the declarant. 

(5) The declarant must purchase (at 

declarant’s own expense) a general 

liability insurance policy in an amount 

not less than $1 million for each 

occurrence, to cover any liability which 

owners of previously sold units are 

exposed to as a result of further 

condominium project development. 

(6) Each expandable project shall have 

a specified maximum number of units 

which will give each unit owner a 

minimum percentage of interest in the 

common elements. Each project shall 

also have a specified minimum number 

of units which will give each unit owner 

a maximum percentage of interest in the 

common elements. The minimum 

number of units to be built should be 

that which would be adequate to 

reasonably support the common 

elements. The maximum number of 

units to be built should be that which 

would not overload the capacity of the 

common facilities. The maximum 

possible percentage(s) and the minimum 

possible percentage(s) of undivided 

interest in the common elements for 

each type of unit must be stated in the 

declaration or equivalent document. 

(7) The declaration or equivalent 

document shall set forth clearly the 

basis for reallocation of unit owner’s 

ownership interests, common expense 

liabilities and voting rights in the event 

the number of units in the 

condominium is increased. Such 

reallocation shall be according to the 

applicable criteria set forth in 

§§ 36.4861(b) and 36.4862(c)(1) and (2). 

(8) The declarant’s right to expand the 

condominium must be for a reasonable 

period of time with a specific ending 

date. The maximum acceptable period 

will usually be from 5 to 7 years after 

the date of recording the declaration. On 

a case basic, longer periods of expansion 

rights will be acceptable, particularly in 

circumstances involving sizable 

condominium developments. 

(b) Series projects. (1) Each phase in 

the series approach is to be considered 

as a separate project. A separate set of 

legal documents must be filed for each 

phase or project that relates to the 

condominium within its own boundary. 

The declaration for each phase must 

describe the particular project as a part 

of the whole development area, but 

subject only the one phase to the 

condominium regime. A separate unit 

ratio must be established that would 

relate each unit to all units of the 

particular condominium for purposes of 

ownership in the common areas, voting 

rights and assessment liability. A 

separate association may be created to 

govern the affairs of each condominium. 

Each phase is subject to a separate 

presale requirement. 

(2) In the case of proposed projects, or 

projects under construction, the 

declaration should state the number of 

total units that the developer intends to 

build on other sections of the 

development area. 

(c) Other flexible condominiums. 

Condominiums containing 

withdrawable real estate (contractable 

condominiums) and condominiums 

containing convertible real estate 

(portions of the condominium within 

which additional units or limited 

common elements, or both, may be 

created) will be considered acceptable 

provided the flexible condominium 

complies with the § 36.4800 series. 

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) 

(The Office of Management and Budget has 

approved the information collection 

requirements of this section under control 

number 2900–0448.) 

§ 36.4865 Appraisal requirements. 

(a) Existing resale condominiums. 

Upon acceptance by the local office of 

the organizational documents, the 

project and unit(s) proposed as security 

for guaranteed financing shall be 

appraised to ensure that they meet 

MPRs (Minimum Property 

Requirements) and are safe, sanitary, 

and structurally sound. The Department 

of Veterans Affairs MPRs for existing 

construction apply to all existing resale 

condominiums including conversions, 

except that water, heating, ventilating, 

air conditioning and sewer service may 

be supplied from a central source. 

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6), 

(b)(5)) 

(b) Proposed condominiums or 

existing condominiums with declarant 

in control or marketing units—(1) Low 

rise and high rise condominiums. Low 

rise and high rise condominiums shall 

comply with local building codes. Only 

the alterations, improvements, or repairs 

to low rise and high rise buildings 


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proposed to be converted to the 

condominium form of ownership must 

comply with current local building 

codes, unless local authorities require 

total code compliance on the entire 

structure when a building is being 

converted to the condominium form of 

ownership. In those areas where local 

standards are nonexistent, inferior to, or 

in conflict with Department of Veterans 

Affairs objectives, a certification will be 

required from a registered professional 

architect and/or registered engineer 

certifying that the plans and 

specifications conform to one of the 

national building codes which is typical 

of similar construction methods and 

standards for condominiums used in the 

area. Those portions of the 

condominium conversion which are not 

being altered, improved or repaired 

must be appraised in accordance with 

paragraph (a) of this section. 

(2) Horizontal condominiums. 

Department of Veterans Affairs policies 

and procedures applicable to singlefamily residential construction shall 

also apply to horizontal condominiums. 

Proposed or existing (declarant in 

control or marketing units) horizontal 

condominium conversions shall comply 

with current local building codes for 

alterations and improvements or repairs 

made to convert the building to the 

condominium form of ownership unless 

local authorities require total code 

compliance on the entire structure when 

a building is being converted to the 

condominium form of ownership. In 

those areas where local standards are 

nonexistent, inferior to, or in conflict 

with Department of Veterans Affairs 

objectives, a certification will be 

required from a professional architect 

and/or registered engineer certifying 

that the plans and specifications 

conform to one of the national building 

codes which is typical of similar 

construction methods and standards for 

condominiums used in the area. Those 

portions of the condominium 

conversion which are not being altered, 

improved or repaired must be appraised 

in accordance with paragraph (a) of this 

section. 

(Authority: 38 U.S.C. 3703(c)(1)) 

(3) Unit completion. All units in the 

individual project or phase must be 

substantially completed except for 

customer preference items, such as 

interior finishes, appliances or 

equipment. 

(4) Common element completion. All 

amenities of the condominium (to 

include offsite community facilities), 

that are to be considered in the unit 

value, must be bound legally to the 

condominium regime. All such 

amenities as well as the common 

elements of the project, must be 

substantially completed and available 

for use by the unit owners. In large 

multi-phase projects, the declarant 

should construct common elements in a 

manner consistent with the addition of 

units to support the entire development. 

The Secretary, in appropriate cases, may 

approve the placement of adequate 

funds by the declarant in an escrow or 

otherwise earmarked account or accept 

a letter of credit or surety bond to assure 

completion of amenities and allow 

closing of VA-guaranteed (or insured) 

loans. Such funds must be adequate to 

assure completion of the amenities free 

and clear of all liens. 

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) 

(5) Information brochure/public 

offering statement. When units are being 

sold by the declarant (not applicable to 

resales), an information brochure/public 

offering statement must be given to 

veteran buyers prior to the time a down 

payment is received and an agreement 

is signed, unless State law authorized 

receipt of the down payment and 

delivery of the information brochure 

followed by a period in which 

purchasers may cancel the purchase 

agreement without penalty for a 

specified number of days. Information 

brochures must be written in simple 

terms to inform buyers that the 

association does not provide owner’s 

contents and personal liability policies 

which are the owner’s responsibility. In 

the event the development is 

expandable, series, etc., there must be 

full disclosure of the impact of the total 

development plan. In expandable, series 

or other projects with more than one 

phase, the information brochure must 

disclose fully later development rights, 

and the general plans of the declarant 

for additional phases. If the declarant 

makes no assurance concerning phases 

which are not required to be built, the 

declarant should state that no 

assurances are given concerning 

construction, unit sizes, building types, 

architectural styles, etc. In 

condominium conversions, the 

information brochure must list the 

major structural and mechanical 

components and the estimated 

remaining useful life of the components. 

A brief explanation must be furnished 

in the brochure explaining that certain 

major structural or mechanical 

components may require replacement 

within a specified time period. If the 

declarant has elected to place funds into 

a condominium reserve fund for 

replacement of a major component 

under the provisions of § 36.4865(b)(7), 

the amount of the contribution into the 

reserve fund must be specified in the 

information brochure. 

(6) Evidence of proper phasing. In an 

expandable or flexible condominium, 

evidence of the addition of each phase 

in accordance with a previously 

approved general plan of development 

must be submitted to the Secretary prior 

to the guaranty of the first loan in the 

added area. 

(7) Additional condominium 

conversion requirements. (i) The 

declarant of any condominium project 

must furnish structural and mechanical 

common element component statements 

on the present condition of all 

accessible structural and mechanical 

components material to the use and 

enjoyment of the condominium. These 

statements must be completed by a 

registered professional engineer and/or 

architect prior to the guaranty of the 

first unit loan in the project. Each 

statement must also give an estimate of 

the expected useful life of the roof, 

elevators, heating and cooling, 

plumbing and electrical systems 

assuming normal maintenance. A 

minimum of 10 years estimated 

remaining useful life is required on all 

structural and mechanical components. 

In the alternative, the declarant may 

contribute an amount of funds to the 

condominium reserve fund equal to a 

minimum of 1⁄10 (one-tenth) of the 

estimated costs of replacement of a 

major structural or mechanical 

component (as determined by an 

independent registered professional 

architect or engineer) for each year of 

estimated remaining useful life less than 

10 years, e.g. 7 years remaining useful 

life equals a 3⁄10 required declarant 

contribution to the reserve fund of the 

component’s estimated replacement 

cost. The noted statements and 

remaining useful life requirement are 

not applicable to existing resale 

conversion projects when the declarant 

is no longer marketing units and/or in 

control of the association. Expandable 

or series condominium conversions 

require engineering and architectural 

statements on each stage or phase. 

(ii) In declarant controlled projects, a 

statement(s) by the local authority(ies) 

of the adequacy of offsite utilities 

servicing the site (e.g., sanitary or water) 

is required. If a local authority(ies) 

declines to issue such a statement(s), a 

statement(s) may be obtained from a 

registered professional engineer. If local 

authority(ies) declines to issue such a 

statement(s), a statement(s) may be 

obtained from a registered professional 

engineer. 

(c) Presale requirements: 

(1) Proposed construction or existing 

declarant in control. Bona fide 


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agreements of sale must have been 

executed by purchasers other than the 

declarant (who are obligated 

contractually to complete the purchase) 

of 70 percent of the total number of 

units in the project. Lenders shall certify 

as to satisfaction of the presale 

requirement prior to VA guaranty of the 

first unit loan. When a declarant can 

demonstrate that a lower percentage 

would be justified, the Secretary, on an 

individual case basis, may approve a 

presale requirement of less than 70 

percent. Reduction of the 70 percent 

presale requirement will be considered 

when: 

(i) Strong initial sales demonstrate a 

ready market, or 

(ii) The declarant will provide cash 

assets or acceptable bonds for payment 

of full common area assessments to the 

owners’ association until such 

assessments are assumed by unit 

purchasers, or 

(iii) Subsequent phases of an overall 

development are being undertaken in a 

proven market area, or 

(iv) Previous experience in similar 

projects in the same market area 

indicates strong market acceptance, or 

(v) The development is in a market 

area that has repeatedly indicated 

acceptance of such projects. 

(2) Multiphase—proposed or existing 

declarant in control. The requirements 

of paragraph (c)(1) of this section shall 

apply to each individual phase of a 

multiphase development, taking into 

consideration that each individual 

phase must be capable of self-support in 

the event that the developer does not 

complete all planned phases. 

(d) Warranty. Except in condominium 

conversion projects, each CRV 

(Certificate of Reasonable Value) issued 

by the Secretary relating to a proposed 

or existing not previously occupied 

dwelling unit in a condominium project 

shall be subject to the express condition 

that the builder, seller, or the real party 

in interest in the transaction shall 

deliver to the veteran purchasing the 

dwelling unit with the aid of a 

guaranteed or insured loan a warranty 

against defects for the unit and common 

elements. The unit shall be warranted 

for 1 year from the date of settlement or 

the date of occupancy (whichever first 

occurs). The common elements shall be 

warranted for 2 years from the date each 

of the common elements is completed 

and available for use by the unit owners, 

or 2 years from the date the first unit is 

conveyed to a unit owner other than the 

declarant, whichever is later, in the 

particular phase of the condominium 

containing the common element. For 

these purposes, defects shall be those 

items reasonably requiring the repair, 

renovation, restoration, or replacement 

of any of the components constituting 

the unit or common elements. Items of 

maintenance relating to the unit or 

common elements are not covered by 

the warranty. No certificate of guaranty 

or insurance credit shall be issued 

unless a copy of such warranty, duly 

receipted by the purchaser, is submitted 

with the loan papers. 

(e) Ownership and operation of offsite 

facilities—(1) Title requirements. 

Evidence must be presented that the 

offsite facility owned by an owners’

association with mandatory 

membership by condominium unit 

owners or condominium unit owners’

associations has been completed and 

conveyed free of encumbrances by the 

declarant for the benefit of the unit 

owners with title insured by an owner’s 

title policy or other acceptable title 

evidence. Offsite facilities conveyed to a 

nonprofit corporation are the preferred 

method of offsite facilities ownership; 

however, the Secretary will consider 

other forms of ownership on an 

individual case basis. 

(2) Mandatory membership. The 

declaration of the condominium (each 

condominium in a series development) 

and the legal documentation of the 

corporation or association which owns 

the offsite facility must provide the 

following: 

(i) The owner of a condominium unit 

is automatically a member of the offsite 

facility corporation or association and 

that upon the sale of the unit, 

membership is transferred automatically 

to the new owner/purchaser. It is also 

acceptable if each condominium 

owners’ association (in lieu of each 

individual unit owner) is automatically 

a member of the offsite facility 

corporation or association coupled with 

use rights for each of the unit owners or 

residents. If membership in an offsite 

owners’ association is voluntary, no 

credit in the CRV valuation may be 

given for such offsite amenities. 

(ii) Each member of the offsite facility 

corporation or association must be 

entitled to a representative vote at 

meetings of the offsite facility 

corporation or association. If the 

individual condominium owners’

association is a member of the offsite 

facility corporation or association, each 

condominium owners’ association must 

be entitled to a representative vote at 

meetings of the offsite facility 

corporation or association. 

(iii) Each member must agree by 

acceptance of the unit deed to pay a 

share of the expenses of the offsite 

facility corporation or association as 

assessed by the corporation or 

association for upkeep, insurance, 

reserve fund for replacements, 

maintenance and operation of the offsite 

facility. The share of said expenses shall 

be determined equitably. Failure to pay 

such assessment must result in a lien 

against the individual unit in the same 

manner as unpaid assessments by the 

association of owners of the 

condominium. If each condominium 

owners’ association is a member of the 

offsite facility in lieu of individual unit 

owners, failure of the condominium 

owners’ association to pay its equitable 

assessment to the offsite facility must 

result in an enforceable lien. 

(3) Declarant payment of offsite 

facility in a series project. Until the 

declarant has completed all of the 

intended condominium phases in a total 

condominium development or 

established each condominium regime 

by filing a separate declaration in a 

series development, the balance of the 

total sum of the expenses of the offsite 

facility not covered by the assessment 

against the unit owners should be 

assessed against and be payable by the 

declarant commencing on the first day 

of the first month after the first unit is 

conveyed to a homeowner in the first 

phase. If this balance is not paid, it must 

become a lien against those parcels of 

land in the development area which are 

owned by the declarant. The collection 

of such debt and enforcement of such 

lien may be by foreclosure or such other 

remedies afforded the corporation or 

association under local law. 

(f) Professional management. Many 

condominiums are small enough and 

their common areas so minimal that 

professional management is not 

necessary. VA does not have a 

requirement for professional 

management of condominiums. The 

powers given to the owners’ association 

by the declaration and bylaws are 

fundamentally for ‘‘use control’’ and 

maintenance of the undivided interest 

all of the owners have in the common 

areas. These powers normally include 

management which may, if desired, be 

delegated to a professional manager. 

However, if the board of directors wants 

professional management, the 

management agreement must be 

terminable for cause upon 30 days’

notice, and run for a reasonable period 

of from 1 to 3 years and be renewable 

for consent of the association and the 

management. (Management contracts 

negotiated by the declarant should not 

exceed 2 years.) 

(g) Commercial areas. With respect to 

existing and proposed condominiums, 

commercial areas within condominium 

developments are acceptable, but such 

interests will be considered in value. 


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(Authority: 38 U.S.C. 3703(c)(2), 3710(a)(6)) 

(The Office of Management and Budget has 

approved the information collection 

requirements in this section under control 

number 2900–0448.) 

§ 36.4867 Requirement of construction 

warranty. 

Each certificate of reasonable value 

issued by the Secretary relating to a 

proposed or newly constructed dwelling 

unit, except those covering one-family 

residential units in condominium 

housing developments or projects 

within the purview of §§ 36.4860 

through 36.4865, shall be subject to the 

express condition that the builder, 

seller, or the real party in interest in the 

transaction shall deliver to the veteran 

constructing or purchasing such 

dwelling with the aid of a guaranteed or 

insured loan a warranty, in the form 

prescribed by the Secretary, that the 

property has been completed in 

substantial conformity with the plans 

and specifications upon which the 

Secretary based the valuation of the 

property, including any modifications 

thereof, or changes or variations therein, 

approved in writing by the Secretary, 

and no certificate of guaranty or 

insurance credit shall be issued unless 

a copy of such warranty duly receipted 

by the purchaser is submitted with the 

loan papers. 

(Authority: 38 U.S.C. 3703(c)(1), 3705) 

§ 36.4868 Nondiscrimination and equal 

opportunity in housing certification 

requirements. 

(a) Any request for a master certificate 

of reasonable value on proposed or 

existing construction, and any request 

for appraisal of individual existing 

housing not previously occupied, which 

is received on or after November 21, 

1962, will not be assigned for appraisal 

prior to receipt of a certification from 

the builder, sponsor or other seller, in 

the form prescribed by the Secretary, 

that neither it nor anyone authorized to 

act for it will decline to sell any 

property included in such request to a 

prospective purchaser because of his or 

her race, color, religion, sex or national 

origin. 

(b) On requests for appraisal of 

individual proposed construction 

received on or after November 21, 1962, 

the prescribed nondiscrimination 

certification will be required if the 

builder is to sell the veteran the lot on 

which the dwelling is to be constructed, 

but will not be required if: 

(1) The veteran owns the lot; or 

(2) The lot is being acquired by the 

veteran from a seller other than the 

builder and there is no identity of 

interest between the builder and the 

seller of the lot. 

(c) Each builder, sponsor or other 

seller requesting approval of site and 

subdivision planning shall be required 

to furnish a certification, in the form 

prescribed by the Secretary, that neither 

it nor anyone authorized to act for it 

will decline to sell any property 

included in such request to a 

prospective purchaser because of his or 

her race, color, religion, sex or national 

origin. Site and subdivision analysis 

will not be commenced by the 

Department of Veterans Affairs prior to 

receipt of such certification. 

(d) No commitment shall be issued 

and no loan shall be guaranteed or 

insured under 38 U.S.C. chapter 37 

unless the veteran certifies, in such form 

as the Secretary shall prescribe, that 

(1) Neither he/she, nor anyone 

authorized to act for him/her, will 

refuse to sell or rent, after the making of 

a bona fide offer, or refuse to negotiate 

for the sale or rental of, or otherwise 

make unavailable or deny the dwelling 

or property covered by this loan to any 

person because of race, color, religion, 

sex, or national origin; 

(2) He/she recognizes that any 

restrictive covenant on the property 

relating to race, color, religion, sex or 

national origin is illegal and void and 

any such covenant is specifically 

disclaimed; and 

(3) He/she understands that civil 

action for preventive relief may be 

brought by the Attorney General of the 

United States in any appropriate U.S. 

District Court against any person 

responsible for a violation of the 

applicable law. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4869 Correction of structural defects. 

(a) The purpose of this section is to 

specify the types of assistance that the 

Secretary may render pursuant to 38 

U.S.C. 3727 to an eligible borrower who 

has been unable to secure satisfactory 

correction of structural defects in a 

dwelling encumbered by a mortgage 

securing a guaranteed, insured or direct 

loan, and the terms and conditions 

under which such assistance will be 

rendered. 

(b) A written application for 

assistance in the correction of structural 

defects shall be filed by a borrower 

under a guaranteed, insured or direct 

loan with the Director of the Department 

of Veterans Affairs office having loan 

jurisdiction over the area in which the 

dwelling is located. The application 

must be filed not later than 4 years after 

the date on which the first direct, 

guaranteed or insured mortgage loan on 

the dwelling was made, guaranteed or 

insured by the Secretary. A borrower 

under a direct, guaranteed or insured 

mortgage loan on the same dwelling 

which was made, guaranteed or insured 

subsequent to the first such loan shall 

be entitled to file an application if it is 

filed not later than 4 years after the date 

on which such first loan was made, 

guaranteed or insured by the Secretary. 

(c) An applicant for assistance under 

this section must establish that: 

(1) The applicant is the owner of a 

one- to four-family dwelling which was 

inspected during construction by the 

Department of Veterans Affairs or the 

Federal Housing Administration. 

(2) The applicant is an original 

veteran-borrower on an outstanding 

guaranteed, insured or direct loan 

secured by a mortgage on such dwelling 

which was made, guaranteed or insured 

on or after May 8, 1968. The Secretary 

may, however, recognize an applicant 

who is not the original veteran-borrower 

but who contracted to assume such 

borrower’s personal obligation 

thereunder, if the Secretary determines 

that such recognition would be in the 

best interests of the Government in the 

particular case. 

(3) There exists in such dwelling a 

structural defect, not the result of fire, 

earthquake, flood, windstorm, or waste, 

which seriously affects the livability of 

the dwelling. 

(4) The applicant has made reasonable 

efforts to obtain correction of such 

structural defect by the builder, seller, 

or other person or firm responsible for 

the construction of the dwelling. 

(d) In those instances in which the 

Secretary determines that assistance 

under this section is appropriate and 

necessary the Secretary may take any of 

the following actions: 

(1) Pay such amount as is reasonably 

necessary to correct the defect, or 

(2) Pay the claim of the borrower for 

reimbursement of the borrower’s 

expenses for correcting or obtaining 

correction of the defect, or 

(3) Acquire title to the property upon 

terms acceptable to the borrower and 

the holder of the guaranteed or insured 

loan. 

(e) To the extent of any expenditure 

made by the Secretary pursuant to 

paragraph (d) of this section the 

Secretary shall be subrogated to any 

legal rights the borrower or applicant 

described in paragraph (c)(2) of this 

section may have against the builder, 

seller, or other persons arising out of the 

structural defect or defects. 

(f) The borrower shall not be entitled, 

as a matter of right, to receive the 

assistance in the correction of structural 

defects provided in this section. Any 

determination made by the Secretary in 


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connection with a borrower’s 

application for assistance shall be final 

and conclusive and shall not be subject 

to judicial or other review. Authority to 

act for the Secretary under this section 

is delegated to the Under Secretary for 

Benefits. 

(g) For the purpose of this section, the 

term ‘‘structural defects seriously 

affecting livability’’ shall in no event be 

deemed to include—

(1) Defects of any nature in a dwelling 

in respect to which the applicant for 

assistance under this section was the 

builder or general contractor, or 

(2) Structural features, improvements, 

amenities, or equipment which were not 

taken into account in the Secretary’s 

determination of reasonable value. 

(Authority: 38 U.S.C. 3703(c)(1), 3727) 

§ 36.4870 Advertising and solicitation 

requirements. 

Any advertisement or solicitation in 

any form (e.g., written, electronic, oral) 

from a private lender concerning 

housing loans to be guaranteed or 

insured by the Secretary: 

(a) Must not include information 

falsely stating or implying that it was 

issued by or at the direction of VA or 

any other department or agency of the 

United States, and 

(b) Must not include information 

falsely stating or implying that the 

lender has an exclusive right to make 

loans guaranteed or insured by VA. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4875 Insured loan and insurance 

account. 

(a) Loans otherwise eligible may be 

insured when purchased by a lender 

eligible under 38 U.S.C. 3703(a) if the 

purchaser (lender) submits with the 

loan report evidence of an agreement, 

general or special, made prior to the 

closing of the loan, to purchase such 

loan subject to its being insured. 

(b) A current account shall be 

maintained in the name of each insured 

lender or purchaser. The account shall 

be credited with the appropriate 

amounts available for the payment of 

losses on insured loans made or 

purchased. The account shall be debited 

with appropriate amounts on account of 

transfers, purchases under § 36.4820, or 

payment of losses. The Secretary may 

on 6 months’ notice close any lender’s 

insurance account. Such account after 

expiration of the 6-month period shall 

be available only as to loans embraced 

therein. 

(c) Amounts received or recovered by 

the Secretary or the holder with respect 

to a loan after payment of an insured 

claim thereon will not restore any 

amount to the holder’s insurance 

account. 

(Authority: 38 U.S.C. 3703(a)(2)) 

§ 36.4877 Transfer of insured loans. 

(a) In cases involving the transfer from 

one insured financial institution to 

another insured institution of loans 

which are transferred without recourse, 

guaranty, or repurchase agreement, if no 

payment on any loan included in the 

transfer is past due more than one 

calendar month at the time of transfer 

there shall be transferred from the 

insurance account of the transferor to 

the insurance account of the transferee 

an amount equal to the original 

percentage credited to the insurance 

account in respect to each loan being 

transferred applied to the unpaid 

balance of such loans, or to the purchase 

price, whichever is the lesser. 

(b) Transfers between insurance 

accounts in a manner or under 

conditions not provided in paragraph (a) 

of this section must have the prior 

approval of the Secretary. 

(c) Where loans are transferred with 

recourse or under a guaranty or 

repurchase agreement no insurance 

credit will be transferred or insurance 

account affected and no reports will be 

required. 

(d) In all cases of transfer of loans 

from one insured financial institution to 

another insured institution, except as 

provided in paragraph (c) of this 

section, a report on a prescribed form 

executed by the parties and showing 

their agreement with regard to the 

transfer of insurance credits shall be 

made to the Secretary. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4878 Debits and credits to insurance 

account under § 36.4820. 

In the event that an insured loan is 

transferred under the provisions of 

§ 36.4820, there shall be charged to the 

insurance account of the transferor a 

sum equal to the amount paid transferor 

on account of the indebtedness less the 

current market value of the property 

transferred as security therefor as 

determined by an appraiser designated 

by the Secretary, or the amount 

chargeable to such insurance account in 

the event of a transfer under § 36.4877, 

whichever sum is the greater. The credit 

to the insurance account of the 

transferee will be computed in 

accordance with § 36.4877(a). 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4879 Payment of insurance. 

(a) Upon the continuance of a default 

for a period of three months, the holder 

may proceed to establish the net loss, 

after giving the notices prescribed in 

§§ 36.4817 and 36.4850 if security is 

available. The net loss shall be reported 

to the Secretary with proper claim, 

whereupon the holder shall be entitled 

to payment of the claim within the 

amount then available for such payment 

under the payee’s related insurance 

account. Subject to the provisions of the 

paragraph (b) of this section and to 

§ 36.4875(b) a supplemental claim for 

any balance of an insurance loss may be 

filed at any time within 5 years after the 

date of the original claim. 

(b) The basis of the claim for an 

insured loss shall consist in the 

unrealized principal or the amount paid 

for the obligation, if less, plus 

unrealized interest to the date of claim 

or the date of sale whichever is earlier, 

and those expenses, if any, allowable 

under § 36.4814, but subject to proper 

credits because of payments, set-off, 

proceeds of security or otherwise, 

provided that if there is no liquidation 

of security the claim shall not include 

an accrual of interest for a period in 

excess of 6 months from the date of the 

first uncured default. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4880 Reports of insured institutions. 

An insured financial institution shall 

make such reports respecting its 

insurance accounts as the Secretary may 

from time to time require, not more 

frequently than semiannually. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4890 Purpose. 

Sections 36.4890 through 36.4893 are 

promulgated to achieve the aims of the 

applicable provisions of Executive 

Orders 11246 and 11375 and the 

regulations of the Secretary of Labor 

with respect to federally assisted 

construction contracts. 

§ 36.4891 Applicability. 

(a) For the purposes of the home loan 

guaranty and insurance and direct loan 

programs of the Department of Veterans 

Affairs, the term ‘‘applicant for Federal 

assistance’’ or ‘‘applicant’’ in Part III of 

Executive Order 11246, shall mean the 

builder, sponsor or developer of land to 

be improved by such builder, sponsor or 

developer for the purpose of 

constructing housing thereon for sale to 

eligible veterans with financing which 

is to be guaranteed or insured or made 

under the provisions of 38 U.S.C. 

chapter 37, or the builder, sponsor or 

developer of housing to be constructed 

for sale to eligible veterans with 

financing which is to be guaranteed or 

insured or made under the provisions of 

38 U.S.C. chapter 37. 


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(b) The provisions of Executive 

Orders 11246 and 11375 and the rules 

and regulations of the Secretary of Labor 

are applicable to: 

(1) Each Master Certificate of 

Reasonable Value or extension or 

modification thereof relating to 

proposed construction issued on or after 

July 22, 1963; 

(2) Each individual Certificate of 

Reasonable Value or extension or 

modification thereof relating to 

proposed construction issued on or after 

July 22, 1963, except as provided in 

paragraph (c)(2) of this section; 

(3) Each Special Conditions Letter or 

modification thereof issued on or after 

July 22, 1963, in respect to site approval 

of land to be improved by a builder, 

sponsor or developer for the 

construction of housing thereon; and 

(4) Each direct loan fund reservation 

commitment or extension thereof issued 

to builders on or after July 22, 1963. 

(c) The provisions of Executive Orders 

11246 and 11375 and the rules and 

regulations of the Secretary of Labor are 

not applicable to: 

(1) Grants under chapter 21, title 38, 

U.S.C.; 

(2) Individual Certificates of 

Reasonable Value issued on or after July 

22, 1963, if: 

(i) The certificate relates to existing 

properties, either previously occupied 

or unoccupied; or 

(ii) The certificate relates to proposed 

construction and—

(A) A veteran was named in the 

request for appraisal, or 

(B) A veteran contracted for the 

construction or purchase of the home 

prior to issuance of the certificate, or 

(C) The property was listed in the 

Schedule of Reasonable Values on an 

outstanding Master Certificate of 

Reasonable Value issued prior to July 

22, 1963; 

(3) Any contract or subcontract for 

construction work not exceeding 

$10,000; and 

(4) Any other contract or subcontract 

which is exempted or excepted by the 

regulations of the Secretary of Labor. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4892 Certification requirements. 

In any case in which §§ 36.4890 

through 36.4893 are applicable, as set 

forth in § 36.4891, no action will be 

taken by the Department of Veterans 

Affairs on any request for appraisal 

relating to proposed construction, site 

approval of land to be improved by a 

builder, sponsor or developer for the 

construction of housing thereon, or for 

a direct loan fund reservation 

commitment unless the builder, sponsor 

or developer has furnished the 

Department of Veterans Affairs a signed 

certification in form as follows: 

To induce the Department of Veterans 

Affairs to act on any request submitted by or 

on behalf of the undersigned for site approval 

of land to be improved for the construction 

of housing thereon to be financed with loans 

guaranteed, insured or made by the 

Department of Veterans Affairs, or for 

establishment by the Department of Veterans 

Affairs of reasonable value relating to 

proposed construction or for direct loan fund 

reservation commitments, the undersigned 

hereby agrees that it will incorporate or cause 

to be incorporated into any contract for 

construction work or modification thereof, as 

defined in the rules and regulations of the 

Secretary of Labor relating to the land or 

housing included in its request to the 

Department of Veterans Affairs the following 

equal opportunity clause: 

During the performance of this contract the 

contractor agrees as follows: 

(1) The contractor will not discriminate 

against any employee or applicant for 

employment because of race, color, religion, 

sex or national origin. The contractor will 

take affirmative action to ensure that 

applicants are employed, and that employees 

are treated during employment without 

regard to their race, color, religion, sex or 

national origin. Such action shall include, 

but not be limited to the following: 

Employment, upgrading, demotion or 

transfer; recruitment or recruitment 

advertising; layoff or termination; rates of pay 

or other forms of compensation; and 

selection for training, including 

apprenticeship. The contractor agrees to post 

in conspicuous places, available to 

employees and applicants for employment, 

notices to be provided setting forth the 

provisions of this nondiscrimination clause. 

(2) The contractor will, in all solicitations 

or advertisements for employees placed by or 

on behalf of the contractor, state that all 

qualified applicants will receive 

consideration for employment without regard 

to race, color, religion, sex or national origin. 

(3) The contractor will send to each labor 

union or representative of workers with 

which he has a collective bargaining 

agreement or other contract or 

understanding, a notice to be provided 

advising the said labor union or workers’

representative of the contractor’s 

commitments under section 202 of Executive 

Order 11246 of September 24, 1965, and shall 

post copies of the notice in conspicuous 

places available to employees and applicants 

for employment. 

(4) The contractor will comply with all 

provisions of Executive Order 11246 of 

September 24, 1965, and of the rules, 

regulations and relevant orders of the 

Secretary of Labor. 

(5) The contractor will furnish all 

information and reports required by 

Executive Order 11246 of September 24, 

1965, and by the rules, regulations and orders 

of the Secretary of Labor, or pursuant thereto, 

and will permit access to his books, records 

and accounts by the administering agency 

and the Secretary of Labor for purposes of 

investigation to ascertain compliance with 

such rules, regulations and orders. 

(6) In the event of the contractor’s 

noncompliance with the nondiscrimination 

clauses of this contract or with any of the 

said rules, regulations or orders, this contract 

may be canceled, terminated or suspended in 

whole or in part and the contractor may be 

declared ineligible for further Government 

contracts or federally assisted construction 

contracts in accordance with procedures 

authorized in Executive Order 11246 of 

September 24, 1965, and such other 

sanctions may be imposed and remedies 

invoked as provided in Executive Order 

11246 of September 24, 1965, or by rule, 

regulation or order of the Secretary of Labor, 

or as otherwise provided by law. 

(7) The contractor will include the 

provisions of paragraphs (1) through (7) in 

every subcontract or purchase order unless 

exempted by rules, regulations or orders of 

the Secretary of Labor issued pursuant to 

section 204 of Executive Order 11246 of 

September 24, 1965, so that such provisions 

will be binding upon each subcontractor or 

vendor. The contractor will take such action 

with respect to any subcontract or purchase 

order as the administering agency may direct 

as a means of enforcing such provisions, 

including sanctions for noncompliance: 

Provided, however, That in the event a 

contractor becomes involved in, or is 

threatened with, litigation with a 

subcontractor or vendor as a result of such 

direction by the agency, the contractor may 

request the United States to enter into such 

litigation to protect the interests of the 

United States. 

Except in special cases and in subcontracts 

for the performance of construction work at 

the site of construction, the clause is not 

required to be inserted in subcontracts below 

the second tier. Subcontracts may 

incorporate by reference the equal 

opportunity clause. 

The undersigned further agrees that it will 

be bound by the above equal opportunity 

clause in any federally assisted construction 

work which it performs itself other than 

through the permanent work force directly 

employed by an agency of Government. 

The undersigned agrees that it will 

cooperate actively with the administering 

agency and the Secretary of Labor in 

obtaining the compliance of contractors and 

subcontractors with the equal opportunity 

clause and the rules, regulations and relevant 

orders of the Secretary of Labor, that it will 

furnish the administering agency and the 

Secretary of Labor such information as they 

may require for the supervision of such 

compliance, and that it will otherwise assist 

the administering agency in the discharge of 

the agency’s primary responsibility for 

securing compliance. The undersigned 

further agrees that it will refrain from 

entering into any contract or contract 

modification subject to Executive Order 

11246 with a contractor debarred from, or 

who has not demonstrated eligibility for, 

Government contracts and federally assisted 

construction contracts pursuant to Part II, 

Subpart D of Executive Order 11246 and will 

carry out such sanctions and penalties for 

violation of the equal opportunity clause as 

may be imposed upon the contractors and 

subcontractors by the administering agency 


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or the Secretary of Labor pursuant to Part II, 

Subpart D of Executive Order 11246. 

In addition, the undersigned agrees that if 

it fails or refuses to comply with these 

undertakings such failure or refusal shall be 

a proper basis for cancellation by the 

Department of Veterans Affairs of any 

outstanding master certificates of reasonable 

value or individual certificates of reasonable 

value relating to proposed construction, 

except in respect to cases in which an 

eligible veteran has contracted to purchase a 

property included on such certificates, and 

for the rejection of future requests submitted 

by the undersigned or on his or her behalf 

for site approval, appraisal services, and 

direct loan fund reservation commitments 

until satisfactory assurance of future 

compliance has been received from the 

undersigned, and for referral of the case to 

the Department of Justice for appropriate 

legal proceedings. 

(Authority: 38 U.S.C. 3703(c)(1)) 

§ 36.4893 Complaint and hearing 

procedure. 

(a) Upon receipt of a written 

complaint signed by the complainant to 

the effect that any person, firm or entity 

has violated the undertakings referred to 

in § 36.4892, such person, firm or other 

entity shall be invited to discuss the 

matter in an informal hearing with the 

Director of the Department of Veterans 

Affairs regional office or center. 

(b) If the existence of a violation is 

denied by the person, firm or other 

entity against which a complaint has 

been made, the Director or designee 

shall conduct such inquiries and 

hearings as may be deemed appropriate 

for the purpose of ascertaining the facts. 

(c) If it is found that the person, firm 

or other entity against which a 

complaint has been made has not 

violated the undertakings referred to in 

§ 36.4892, the parties shall be so 

notified. 

(d) If it is found that there has been 

a violation of the undertakings referred 

to in § 36.4892, the person, firm or other 

entity in violation shall be requested to 

attend a conference for the purpose of 

discussing the matter. Failure or refusal 

to attend such a conference shall be 

proper basis for the application of 

sanctions. 

(e) The conference arranged for 

discussing a violation shall be 

conducted in an informal manner and 

shall have as its primary objective the 

elimination of the violation. If the 

violation is eliminated and satisfactory 

assurances are received that the person, 

firm or other entity in violation will 

comply with the undertakings pursuant 

to § 36.4892 in the future, the parties 

concerned shall be so notified. 

(f) Failure or refusal to comply and 

give satisfactory assurances of future 

compliance with the equal employment 

opportunity requirements shall be 

proper basis for applying sanctions. The 

sanctions shall be applied in accordance 

with the provisions of Executive Order 

11246 as amended and the regulations 

of the Secretary of Labor. 

(g) Upon written application, a 

complainant or a person, firm or other 

entity against which a complaint has 

been filed may apply to the Under 

Secretary for Benefits for a review of the 

action taken by a Director. Upon 

receiving such application, the Under 

Secretary for Benefits may designate a 

representative or representatives to 

conduct an informal hearing and to 

make a report of findings. The Under 

Secretary for Benefits may, after a 

review of such report, modify or reverse 

an action taken by a Director. 

(h) Reinstatement of restricted 

persons, firms or other entities shall be 

within the discretion of the Under 

Secretary for Benefits and under such 

terms as the Under Secretary for 

Benefits may prescribe. 

(Authority 38 U.S.C. 3703(c)(1)) 

[FR Doc. 08–337 Filed 1–25–08; 8:45 am] 

BILLING CODE 8320–01–P 


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