Proposed Rule2022-23387
Loan Guaranty: Revisions to VA-Guaranteed or Insured Interest Rate Reduction Refinancing Loans
Primary source
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Published
November 1, 2022
Issuing agencies
Veterans Affairs Department
Abstract
The Department of Veterans Affairs (VA) proposes to amend its rules on VA-backed interest rate reduction refinancing loans (IRRRLs). The Economic Growth, Regulatory Relief, and Consumer Protection Act and the Protecting Affordable Mortgages for Veterans Act of 2019 outlined the circumstances in which VA may guarantee or insure refinance loans, by setting forth net tangible benefit, recoupment, and seasoning standards. The proposed rule would update VA's existing IRRRL regulation to current statutory requirements.
Full Text
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<title>Federal Register, Volume 87 Issue 210 (Tuesday, November 1, 2022)</title>
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[Federal Register Volume 87, Number 210 (Tuesday, November 1, 2022)]
[Proposed Rules]
[Pages 65700-65714]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-23387]
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DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
[2900-AR58]
Loan Guaranty: Revisions to VA-Guaranteed or Insured Interest
Rate Reduction Refinancing Loans
AGENCY: Department of Veterans Affairs.
ACTION: Proposed rule.
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SUMMARY: The Department of Veterans Affairs (VA) proposes to amend its
rules on VA-backed interest rate reduction refinancing loans (IRRRLs).
The Economic Growth, Regulatory Relief, and Consumer Protection Act and
the Protecting Affordable Mortgages for Veterans Act of 2019 outlined
the circumstances in which VA may guarantee or insure refinance loans,
by setting forth net tangible benefit, recoupment, and seasoning
standards. The proposed rule would update VA's existing IRRRL
regulation to current statutory requirements.
DATES: Comments must be received on or before January 3, 2023.
ADDRESSES: Comments must be submitted through <a href="http://www.regulations.gov">www.regulations.gov</a>.
Except as provided below, comments received before the close of the
comment period will be available at <a href="http://www.regulations.gov">www.regulations.gov</a> for public
viewing, inspection, or copying, including any personally identifiable
or confidential business information that is included in a comment. We
post the comments received before the close of the comment period on
the following website as soon as possible after they have been
received: <a href="http://www.regulations.gov">http://www.regulations.gov</a>. VA will not post on
<a href="http://Regulations.gov">Regulations.gov</a> public comments that make threats to individuals or
institutions or suggest that the commenter will take actions to harm
the individual. VA encourages individuals not to submit duplicative
comments. We will post acceptable comments from multiple unique
commenters even if the content is identical or nearly identical to
other comments. Any public comment received after the comment period's
closing date is considered late and will not be considered in the final
rulemaking.
FOR FURTHER INFORMATION CONTACT: Terry Rouch, Assistant Director, Loan
Policy and Valuation, and Stephanie Li, Chief, Regulations, Loan
Guaranty Service (26), Veterans Benefits Administration, Department of
Veterans Affairs, 810 Vermont Avenue NW, Washington, DC 20420, (202)
632-8862 (This is not a toll-free telephone number.)
SUPPLEMENTARY INFORMATION: The proposed rulemaking described by this
notice would update VA's existing IRRRL regulation at 38 CFR 36.4307 to
reflect current statutory requirements set forth by section 309 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act, Public
Law 115-174, 132 Stat. 1296, and section 2 of the Protecting Affordable
Mortgages for Veterans Act of 2019, Public Law 116-33, 133 Stat. 1038
(collectively, the ``Acts''). The subject provisions of the Acts are
codified at 38 U.S.C. 3709. Section 3709 sets forth statutory criteria
for determining whether VA can guarantee or insure a refinance loan.
Additional statutory authorities underpinning VA's proposed rulemaking
include 38 U.S.C. 3710, 3703, and 501. IRRRLs are specifically
authorized under subsections (a)(8), (a)(11), and (e) of 38 U.S.C.
3710.
I. Background
(Note: VA does not use the term IRRRL in the proposed rule text.
For ease of reading, however, this preamble substitutes the term
``IRRRL'' for the proposed rule text's ``refinancing loan''. The terms
are interchangeable in this context.)
A. Section 3709 Background Discussion
1. IRRRLs Described
The purpose of an IRRRL is to improve a veteran's financial
position by reducing the interest rate on the veteran's existing VA-
backed loan. An IRRRL typically results in a reduction in the dollar
amount the veteran owes toward monthly housing loan payments. See 38
CFR 36.4307(a)(3). An IRRRL may be used alternatively to reduce the
veteran's required number of monthly loan payments, to convert an
adjustable-rate mortgage (ARM) to a loan with a fixed interest rate, or
to make energy efficient improvements to the home. Id. A veteran cannot
use an IRRRL to obtain cash for the equity the veteran may have in the
property securing the loan, because that would be a cash-out refinance.
See 38 CFR 36.4306.
2. Section 3709's Effect on IRRRLs
VA-backed refinancing loans were historically divided into two
categories. See Revisions to VA-Guaranteed or Insured Cash-Out Home
Refinance Loans, 83 FR 64459 (Dec. 17, 2018). The two categories were
cash-outs offered under 38 U.S.C. 3710(a)(5) or 3710(a)(9) and IRRRLs.
Id.
As VA noted in its cash-out refinance interim final rule (IFR)
notice, Congress structured 38 U.S.C. 3709 such that VA-backed
refinance loans have since been effectively grouped into three
categories: (i) IRRRLs, (ii) cash-outs in which the amount of the
principal for the refinancing loan is equal to or less than the payoff
amount on the loan being refinanced (Type I Cash-Outs), and (iii) cash-
outs in which the amount of the principal for the refinancing loan is
larger than the payoff amount of the loan being refinanced (Type II
Cash-Outs). 83 FR at 64459. Subsections (a) through (c) of section 3709
apply to IRRRLs. Id. at 64460. Each of these three subsections creates
a pass/fail standard applicable to IRRRLs. If one or more of the
requirements is not met, VA cannot guarantee the IRRRL. See id. at
64462.
[[Page 65701]]
B. Rulemaking Purpose
VA is proposing to revise 38 CFR 36.4307 to reflect current
statutory requirements, including net tangible benefit, recoupment, and
seasoning standards, consistent with 38 U.S.C. 3709. Also, because
section 3709 has caused confusion among program participants, VA is
proposing clarifications to diminish the risk of lender noncompliance.
In helping lenders understand compliance expectations, VA's regulation
would safeguard veterans, ease lender concerns, reduce potential
instability in the secondary loan market, and insulate taxpayers from
unnecessary financial risk. Ultimately, VA's regulation would help
ensure that IRRRLs continue to be used for their intended purpose, that
is, improving veterans' financial positions.
Additionally, VA proposes certain technical changes (described
below) for ease of reading and proposes using a redesigned VA Form 26-
8923, IRRRL Worksheet, which is the worksheet that lenders complete
when making IRRRLs, to collect certain lender certifications. The
proposed redesigned IRRRL Worksheet is described in more detail later
in this notice.
C. Qualified Mortgage Standards and the Proposed Rule
On May 9, 2014, VA published an IFR notice to describe which VA-
guaranteed loans were to be considered as ``qualified mortgages'' (QM),
thereby subject to either safe harbor protection or the presumption
that the veteran is able to repay a loan, in accordance with the
Ability to Repay provisions that existed at the time. See Loan
Guaranty: Ability-to-Repay Standards and Qualified Mortgage Definition
Under the Truth-in-Lending Act, 79 FR 26620 (May 9, 2014). The QM IFR
did not change VA's regulations or policies with respect to how lenders
are to originate mortgages, except to the extent lenders seek to make
qualified mortgages. Id. at 26625. On October 9, 2018, VA published an
agency determination regarding the status of the QM IFR, explaining
that, due to enactment of section 309 of the Economic Growth,
Regulatory Relief, and Consumer Protection Act (Pub. L. 115-174), VA
would need to revise its QM criteria in a future rulemaking, wherein VA
would take into account the spirit of the comments submitted in
response to the QM IFR. See Loan Guaranty: Ability-to-Repay Standards
and Qualified Mortgage Definition Under the Truth-in-Lending Act, 83 FR
50506 (Oct. 9, 2018). The agency determination also stated that until
VA conducted a new rulemaking relating to QMs and IRRRLs, the QM IFR
would remain in effect, except for any provision of the IFR that
conflicted with or was superseded by Public Law 115-174. Id. As with
the agency's previous determination, VA is not proposing in this notice
to make express changes to the QM standards. Accordingly, all
provisions of the QM IFR that do not conflict with or have not been
superseded by later-in-time provisions of law continue to remain in
effect.
II. Analysis of the Proposed Rule
A. Recoupment (38 CFR 36.4307(a)(8))
In 38 U.S.C. 3709(a), Congress set forth a maximum recoupment
period of 36 months for certain charges associated with an IRRRL. VA
proposes to add a new paragraph (a)(8) in Sec. 36.4307 which would
clarify the statutory recoupment standard. Consistent with section
3709(a), proposed paragraph (a)(8)(i) would state that the lender of
the IRRRL must provide the Secretary with a certification that all
fees, closing costs, and expenses (other than taxes, amounts held in
escrow, and fees paid under 38 U.S.C. chapter 37) that would be
incurred by the veteran as a result of the refinance are scheduled to
be recouped on or before the date that is 36 months after the note date
of the IRRRL. VA proposes to collect lenders' certifications via the
redesigned VA Form 26-8923, IRRRL Worksheet, discussed in more detail
below.
To help veterans and lenders understand how the recoupment period
is calculated, VA proposes to describe a formula in proposed paragraph
(a)(8)(ii). The formula would require lenders first to total the dollar
amounts of all fees, closing costs, and expenses, whether included in
the loan or paid at or outside of closing. The lender would then
subtract from that total the dollar amounts of lender credits, if any.
The resulting figure would be used as the formula's numerator (the
numerator). The denominator of the formula would be the dollar amount
by which the veteran's monthly payment for principal and interest would
be reduced as a result of the IRRRL (the denominator). In a final
calculation, lenders would divide the numerator by the denominator to
determine the number of months it would take for the veteran to recoup
the subject IRRRL costs:
[GRAPHIC] [TIFF OMITTED] TP01NO22.050
1. Recoupment Numerator
VA proposes to clarify in paragraph (a)(8)(iii) that the numerator
to be used in the formula described above is the dollar amount equating
to the sum of all fees, closing costs, and expenses that would be
incurred by the veteran as a result of the refinance. VA also proposes
that, except as provided in paragraph (a)(8)(iii), such sum includes
any charge that is incurred by the veteran as a result of the
refinance, including taxes that are not described in paragraph
(a)(8)(iii)(C). VA proposes to specify in paragraph (a)(8)(iii) that
lender credits may be subtracted from other amounts in the numerator.
Proposed paragraph (a)(8)(iii) would also contain a list of items
that are excluded from the numerator: (A) the loan fee as prescribed by
38 U.S.C. 3729; (B) prepaid interest and amounts held in escrow (for
example, amounts for hazard insurance); and (C) taxes and assessments
on the property, even when paid outside of their normal schedule, that
are not incurred solely due to the refinance transaction (for example,
property taxes and special assessments).
a. Understanding the ``Fees, Closing Costs, and Expenses'' To Be
Recouped Within 36 Months
There has been confusion among stakeholders as to the fees, closing
costs, and expenses that must be recouped under section 3709(a).
Subsection (a) establishes a standard but uses unclear terms and
phrasing across its three paragraphs. The lack of clarity has led to
uncertainty and various interpretations among program participants. To
dispel the confusion, VA proposes regulatory clarification.
[[Page 65702]]
VA interprets subsections (a)(1) and (a)(2) to refer to the same
group of charges. Specifically, subsection (a)(1)'s phrase, ``fees,
closing costs, and any expenses (other than taxes, amounts held in
escrow, and fees paid under this chapter) that would be incurred by the
borrower in the refinancing of the loan'' is the antecedent to
subsection (a)(2)'s phrase, ``all of the fees and incurred costs'' in
38 U.S.C. 3709(a)(2). This means that the fees, closing costs, and any
expenses (except those expressly excluded) in paragraph (a)(1) comprise
all charges--not a select collection of charges--resulting from the
IRRRL and must, under paragraph (2), ``be recouped on or before the
date that is 36 months after'' the IRRRL is made. 38 U.S.C. 3709(a).
VA bases this interpretation on rules of grammar and usage that
suggest Congress's use of the definite article ``the'' in subsection
(a)(2)'s clause, ``all of the fees'', establishes a grammatical
connection to, and dependence on, subsection (a)(1)'s reference to
``fees''. The connection and dependence are furthered by subsection
(a)(2)'s reference to ``incurred costs'', which operates as a truncated
reference back to subsection (a)(1)'s list of charges ``incurred by the
borrower.'' In short, subsection (a)(2) should not be taken on its own.
It is part of a whole and should be read in that context.
An alternative reading of section 3709(a)(1) and (a)(2) would be
that these clauses should be interpreted differently because Congress
phrased the clauses differently. Under such a reading, lenders would
certify to VA as to one set of fees, closing costs, and expenses as
described in subsection (a)(1). The only charges to be included in the
recoupment period of 36 months, however, would be subsection (a)(2)'s
``all of the fees and incurred costs'', where ``incurred costs'' is a
distinctly new and undefined term. In other words, the different
phrasing in subsection (a)(2) would create a second and distinct
recoupment standard alongside the one prescribed in subsection (a)(1).
VA believes that requiring two separate recoupment standards as
outcomes of a single statutory sentence would inject unnecessary
complexity into the statutory scheme. It is VA's position that the text
of section 3709(a)'s anti-predatory lending scheme instead creates a
harmonious, albeit not always textually clear, recoupment standard for
stakeholders. See Public Law 115-174 Sec. 309, ``Protecting Veterans
from Predatory Lending'' (May 24, 2018); Gustafson v. Alloyd Co., 513
U.S. 561, 569 (1995) (holding that courts must interpret statutes ``as
a symmetrical and coherent regulatory scheme''); FTC v. Mandel
Brothers, Inc., 359 U.S. 385, 389 (1959) (directing courts to ``fit, if
possible, all parts [of a statute] into an harmonious whole'').
In viewing ``incurred costs'' as a reference to a previously used
term rather than the introduction of a new one, VA's interpretation
would eliminate the need for program participants to go beyond the
statutory language and hypothesize and debate Congress's intent. At the
same time, VA's rationale for interpreting the text would align with
and further the Congressional aim of enacting section 3709 and the
IRRRL benefit. For example, it would save veterans and lenders from
bearing the burden of deciphering separate recoupment outcomes, one for
certifying to VA under paragraph (1) and another for determining under
paragraph (2) whether the loan could be guaranteed. Additionally, VA's
approach would result in a more transparent and easier-to-administer
oversight requirement. It would also reduce the risk of errors and
loopholes to which an alternate reading is more vulnerable. Finally, it
would avoid unnecessary complexity, reducing the likelihood of veterans
suffering confusing and convoluted outcomes. Each of these factors
would help prevent predatory lending and ensure that a veteran has the
opportunity to understand whether an IRRRL is in the veteran's
financial interest.
For similar reasons, VA interprets subsection (a) to refer to
charges the veteran actually paid and that were incurred as a result of
the refinance transaction. The veteran could pay such charges before
closing, at closing, or by including such charges in the loan amount.
b. Charges Not Included in the Recoupment Numerator
Generally, no charge can be made against, or paid by, a veteran
unless compliant with 38 CFR 36.4313. To assist lenders in
understanding what types of borrower-incurred charges would be added in
the recoupment numerator, VA proposes in section 36.4307(a)(8)(iii) to
expressly list those amounts that are not to be included. In other
words, any charge not enumerated in VA's proposed list would need to be
included in the numerator.
The first charge VA proposes to exclude is the loan fee (more
commonly referred to as the ``funding fee'') paid pursuant to 38 U.S.C.
3729. This exclusion is explicitly required under section 3709(a)(1).
See 38 U.S.C. 3709(a)(1) parenthetical's exclusion of ``taxes, amounts
held in escrow, and fees paid under [38 U.S.C. chapter 37]''. Section
3709(a)(1) also provides that ``amounts held in escrow'' are to be
excluded from the recoupment calculation, which is why VA proposes to
exclude them from the recoupment numerator. Id.
Although section 3709(a)(1) does not expressly exclude prepaid
interest, VA is proposing to exclude it from the recoupment
calculation. VA believes this exclusion is necessary because the per
diem interest, which is often referred to as ``prepaid interest'', is
not a fee, closing cost, or expense incurred in the refinance
transaction. Rather, prepaid interest is incurred outside the refinance
transaction, as the same per diem interest would accrue on the loan
being refinanced regardless of the refinance. Put another way, a
veteran's prepayment of interest at the time of loan closing is a
matter of scheduling, not a new charge incurred in the refinancing. To
view it otherwise would unduly restrict veterans from taking advantage
of their home loan benefits, as lenders would refuse to accept a novel
treatment of prepaid interest that requires lenders to absorb the
costs. VA notes, too, that VA's proposal would ensure that a veteran
who closes the IRRRL earlier in a month (and therefore must prepay more
in interest) is not put at a disadvantage when compared to a veteran
who closes toward the end of a month. Therefore, VA proposes to exclude
prepaid interest from the numerator.
Finally, the above-referenced parenthetical in section 3709(a)(1)
states that ``taxes'' are to be excluded from calculation of items to
be recouped. VA interprets the term ``taxes'' to be limited to ad
valorem property taxes and analogous assessments. VA bases this
understanding on the real estate finance industry's common usage of the
term ``taxes''; for instance, when calculating PITI (Principal,
Interest, Taxes, and Insurance). This understanding is also consistent
with Congress's instruction that the amounts to be recouped are those
``incurred by the borrower in the refinancing.'' 38 U.S.C. 3709(a)(1).
Much like prepaid interest, certain taxes and assessments might
normally be paid by the veteran on a schedule (for example, monthly
payments to an escrow account), but because of the refinance
transaction, must be paid by the veteran ahead of their normal
schedule. Payment of these amounts is a matter of timing, not a new
charge attributable to the refinancing transaction itself. Conversely,
other items charged during a refinance that may be referred to as
``taxes'', such as
[[Page 65703]]
intangible taxes, tax stamps, and recording taxes, are transaction
costs incurred as a result of the refinance. Such charges are not
normally mentioned in the industry as ``taxes'' like those described by
PITI but are instead viewed as closing costs or expenses incurred
solely due to the refinance transaction. This is why VA is not
proposing to exclude these types of charges from the recoupment
calculation. Thus, the result would be that only those taxes that are
charged because of the refinance should be included in the recoupment
numerator. This furthers the goal that the recoupment standard will
generally demonstrate whether the true cost of the refinance can be
recouped within the prescribed 36-month period.
In sum, by listing the charges to be excluded from the recoupment
numerator, VA is not proposing to provide an exhaustive list of all
charges that must be recouped within the prescribed period, but instead
proposes exclusions that are consistent with section 3709(a). Where
appropriate, VA has provided examples to promote a better understanding
of such charges. To the extent the scope of these exclusions may
require additional clarity, VA invites comments for consideration.
c. Lender Credits
For purposes of the recoupment numerator, VA proposes that lender
credits may be subtracted from other amounts in the numerator. Lenders
offer lender credits for several reasons, most commonly to provide the
veteran with the option to reduce up-front costs in exchange for paying
a higher interest rate on the loan. But section 3709 is silent on how
to treat lender credits in relation to the recoupment standard.
Allowing lenders to subtract the amount of such credits from the
recoupment numerator is consistent with VA's position that the
numerator should measure the transaction costs incurred as a result of
the refinance transaction. Prohibiting lender credits as offsets would
not only skew the true transaction costs incurred by the veteran but
also run counter to the industry norm. See, for example, 12 CFR
1026.38(h)(3), which recognizes lender credits as a type of offset to
closing costs. It would also put veterans at a disadvantage when
compared to other borrowers and would, in VA's view, unfairly decrease
veterans' opportunities to refinance.
While lender credits usually coincide with the veteran paying a
higher interest rate, Congress provided in subsection (a) two
safeguards against lenders using their credits to circumvent the
recoupment standard. First, Congress established the safeguard that the
recoupment must be ``calculated through lower regular monthly payments
(other than taxes, amounts held in escrow, and fees paid under this
chapter) as a result of the refinanced loan.'' 38 U.S.C. 3709(a)(3).
This means that, even though the lender credit would be subtracted
under VA's proposed rule from the numerator's charges, the recoupment
formula's denominator (described in more detail below) would look to
the regular monthly payments to account for the potential loss of
savings attributable to the slightly increased interest rate.
Second, Congress has established separate interest rate limitations
that prevent predatory interest rate increases. For instance, 38 U.S.C.
3709(b) sets parameters around interest rates, values, and discount
points. As mentioned above, VA proposes regulations to implement this
statutory interest rate safeguard for IRRRLs, as explained later in
this notice. Another interest rate limitation on IRRRLs is provided in
38 U.S.C. 3710(e)(1)(A). Permitting lender credits to be included in
the recoupment calculation would not override such requirements. VA
notes, too, that lender credits would not affect the loan seasoning
provisions outlined in section 3709(c). In sum, VA's proposal to
account for lender credits in the recoupment calculation would reflect
the fees, closing costs, and expenses a veteran would incur as a result
of the refinance--both at the time of refinance and over the repayment
term--while preserving for the veteran the option to lower their up-
front closing costs via lender credits.
2. Recoupment Denominator
With respect to the denominator of the recoupment calculation
formula, VA proposes to state in paragraph (a)(8)(iv) that the
denominator is the dollar amount by which the veteran's monthly payment
for principal and interest is reduced as a result of the refinance. The
proposed paragraph would prescribe that the reduction is calculated by
subtracting the veteran's monthly payment for principal and interest
under the IRRRL from the veteran's monthly payment for principal and
interest under the loan being refinanced. VA would also clarify that
when calculating monthly payments for principal and interest, the
lender must use the full payment, without omitting any amounts to be
repaid monthly by the veteran and attributable to, for example,
financed fees, financed funding fees prescribed by 38 U.S.C. 3729,
financed closing costs, and financed expenses.
In proposing this standard, VA is clarifying that the phrase
``lower regular monthly payments (other than taxes, amounts held in
escrow, and fees paid under this chapter)'' in 38 U.S.C. 3709(a)(3)
means the difference between the veteran's monthly payment for
principal and interest under the IRRRL and the veteran's monthly
payment for principal and interest under the loan being refinanced.
This clarification focusing on principal and interest would produce a
direct comparison of what the veteran is truly required to pay as
between the two loans, regardless of externalities that may vary case-
to-case, making the cost of the refinancing transaction more
transparent to veterans. Therefore, VA interprets section 3709(a)(3) as
requiring a comparison between that which the veteran pays for
principal and interest under the loan being refinanced and that which
the veteran would pay for principal and interest under the IRRRL.
By limiting the recoupment denominator to comparisons of the
veteran's monthly payments for principal and interest, the proposal
would satisfy section 3709's requirement to exclude taxes, amounts held
in escrow, and fees paid under chapter 37. 38 U.S.C. 3709(a)(3). VA
would clarify, however, that due to industry confusion regarding fees
paid under chapter 37, the chapter 37 fees to be excluded from
calculation under subsection (a)(3) are limited to fees that are
charged monthly.
VA appreciates there could be other interpretations. For example,
VA sees some merit in the suggestion that subsection (a)'s
parentheticals are categorical exclusions, excluding VA's funding fee
from every aspect of the recoupment calculation. The rationale would be
that the parentheticals in both paragraphs (1) and (3) of section
3709(a) are phrased identically and provide that ``fees paid under
[chapter 37]'' should not be included in the recoupment. The funding
fee is required under 38 U.S.C. 3729, which makes it a fee paid under
chapter 37 and therefore, necessarily excluded. Additionally, that
interpretation would, in one way, seem consistent with VA's approach to
providing a harmonious, singular recoupment standard. Since VA is
proposing to interpret paragraph (1) to exclude wholly the funding fee,
VA could also propose to interpret paragraph (3) the same way.
VA agrees to some extent but disagrees with the outcome. Although
VA would agree that VA must exclude from both the numerator and the
[[Page 65704]]
denominator fees paid under chapter 37, VA does not believe the
exclusion of fees paid under chapter 37 extends to every attenuated
impact. If VA were to apply section 3709 in this manner, VA would have
to exclude from the calculation any increase to the principal and
interest of a monthly payment if such an increase was related in some
way to a fee paid under chapter 37. To do so could pose a significant
concern for veterans and would not be the most logical interpretation
of the text.
In cases where veterans finance the funding fee by including it in
one or both subject loans, veterans could not, as the statute could be
read to require, simply rely on the difference between their pre-IRRRL
monthly payments and IRRRL monthly payments to know whether the IRRRL
would be in their financial interest. Instead, they would have to rely
on the lender to correctly calculate an artificial month-to-month
payment for both the loan being refinanced and the IRRRL to determine
whether there are any savings. The denominator would be artificial
because both payments--the payment used for principal and interest
under the loan being refinanced and such payment used for the IRRRL--
would not correspond to a real payment. Instead, lenders would need to
reverse-engineer a monthly payment for each loan by subtracting out the
funding fee and re-amortizing the artificial principal balance, to
contrive a non-existent payment solely for the purposes of recoupment.
Such artificiality is unnecessary under the text of the statute. VA
does not believe that subsection (a)(3) requires lenders to construct
non-existent payments, especially as measurements of the veteran's
month-to-month savings as part of an anti-predatory scheme. Moreover,
VA does not believe that the text requires veterans to rely on
artificial payment amounts, rather than the actual amount the veteran
will need to pay each month for principal and interest, to determine
how the IRRRL affects the veteran from a financial perspective.
VA instead interprets the text of each parenthetical--both
subsection (a)(1) and (a)(3)--as explained above, on its face and as
elements of a harmonious whole, one that treats subsections (a)(1) and
(a)(3) consistently but addresses different elements. Both paragraphs
(1) and (3) exclude fees paid under chapter 37. But paragraph (3)
further delimits its application, making it applicable to ``regular
monthly payments'', meaning any fees paid under chapter 37 monthly.
When a veteran closes a refinance transaction and pays a funding
fee under section 3729, the charge is made at the closing table as a
one-time collection. Either the veteran pays the fee in cash and the
lender remits it to the Secretary, or the lender advances the fee on
behalf of the veteran, remits the fee to the Secretary, and adds the
advance to the principal loan amount. Regardless of the choice, the fee
is collected and remitted to the Secretary, not to the lender.
Otherwise, there could not be a guaranteed loan. See 38 U.S.C. 3729
(``No such loan may be guaranteed, insured, made, or assumed until the
fee payable under this section has been remitted to the Secretary.'').
But the funding fee required under section 3729 is not a fee on top
of a regular monthly payment. VA's funding fee is not like private
mortgage insurance, for instance, which in other programs is a separate
and distinct charge that must be added to the monthly payment of
principal and interest and paid monthly over the course of the loan
repayment period. If Congress or VA were to introduce such a monthly
fee under chapter 37, one that a veteran and lender would need to add
to the veteran's regular monthly payments, VA would be required to
exclude it from the recoupment calculation. Indeed, VA is proposing
that such fees paid under chapter 37 must be excluded from the
recoupment numerator and denominator.
Nevertheless, to say that subsection (a)(3)'s parenthetical
exclusion would apply to every attenuated impact arising from fees paid
under chapter 37 would go too far. When taken to its logical end, it
could, in addition to necessitating the reverse engineering of
artificial payments described above, largely undermine the recoupment
standard. For instance, VA has in 38 CFR 36.4307 and 36.4313 outlined
charges that may be made against and paid by a veteran in conjunction
with an IRRRL. If a veteran were to finance all the veteran's closing
costs of an IRRRL, VA would include those costs in the recoupment
calculation. If, however, VA were to interpret subsection (a)(3)'s
parenthetical exclusion to apply to every attenuated impact arising
from charges paid under chapter 37, all VA-approved charges could be
construed as having been ``paid under'' chapter 37 for the purposes of
section 3709(a)(3) because chapter 37 is the primary source of
statutory authority for the VA-guaranteed loan program. In other words,
if the fee is paid under the express or tacit authority of the organic,
enabling legislation, such fee would be paid under the auspices of
chapter 37 and could fit within a narrow construction of subsection
(a)(3). Any fee, closing cost, or expense that was financed would have
to be backed out of the monthly payment and excluded from the
recoupment calculation. This would require an artificial payment even
further from the reality of the veteran's experience; and because all
charges would be excluded, would undermine the purpose of section
3709(a).
VA's focus on the ``calculation'' of ``lower regular monthly
payments . . . as a result of the refinanced loan'', shows a natural
progression in the context of subsection (a) as a whole, consistent
with VA's proposed recoupment formula. First, subsection (a)(1),
requires a complete tallying of transaction costs for a tailored anti-
predatory scheme. Second, subsection (a)(2) establishes the target for
the recoupment period (36 months). Third, subsection (a)(3) establishes
that the critical link between the two is the easiest, most
straightforward way one might be able to compare the veteran's before-
and-after financial situation, that is, the actual difference between
the veteran's ``regular monthly payments . . . as a result of the
refinanced loan''. See 38 U.S.C. 3709(a)(3). In sum, VA's proposed
interpretation is to exclude the items named by the parenthetical, that
is, ``taxes, amounts held in escrow, and fees paid under this
chapter'', provided the veteran is making payments for such items that
are separate and apart from the veteran's payments toward principal and
interest. Id.
VA also notes that an interpretation requiring veterans, lenders,
servicers, and other stakeholders to understand and execute an
artificial month-to-month savings would make it more difficult for VA
to administer a compliance program. VA believes, based on its oversight
expertise, that the straightforward and transparent recoupment standard
outlined in this proposed rule notice would further VA's ability to
protect veterans from predatory lending practices. Using the actual and
true monthly principal and interest amounts for the denominator would
be less confusing for veterans, lenders, and consumer advocates. The
ability for stakeholders to rely on the monthly principal and interest
amounts that are shown on standard loan documents would enable all
parties, especially veterans, to understand the costs and calculate the
recoupment period of the refinancing loan. Similarly, it is important
for lenders to have confidence in their ability to calculate recoupment
correctly, because passing recoupment is a prerequisite of VA's
guaranty. See 38 U.S.C. 3709(a)
[[Page 65705]]
(refinance loan ``may not be guaranteed'' unless recoupment standard is
met). In VA's experience, the more difficult it is to understand how to
ensure a good outcome, the more likely it is that lenders would be
prone to shy away from the loan product. Ultimately, such a confusing
paradigm would produce negative results for veterans, despite Congress
having provided statutory language that could avoid such results. VA
therefore proposes a recoupment standard that avoids contrived and
artificial calculations and provides for a simple and direct comparison
of the veteran's actual payments for principal and interest.
3. Additional Recoupment Matters
In proposed paragraph (a)(8)(v), VA would clarify that if the
dollar amount of the veteran's monthly payment for principal and
interest under the IRRRL is equal to or greater than the dollar amount
of the veteran's monthly payment for principal and interest under the
loan being refinanced, meaning there is no reduction in the monthly
payment for principal and interest as a result of the IRRRL, the lender
must not charge any fees, closing costs, or expenses, except for those
enumerated by paragraphs (a)(8)(iii)(A), (a)(8)(iii)(B), and
(a)(8)(iii)(C). Proposed paragraph (a)(8)(v) addresses those instances
where the veteran chooses to realize the savings of an IRRRL by
shortening the repayment term (for example, the veteran moves from 30-
year repayment term to 15-year repayment term), which may cause an
increase in the monthly principal and interest payment. For such
IRRRLs, veterans can realize significant savings by reducing the amount
of interest paid and the number of months during which veterans must
make loan payments, even though there is an increase or perhaps no
change in the dollar amount of the monthly principal and interest
payment as between the two subject loans.
Lenders offer such ``zero-cost'' refinance loans for several
reasons. For example, lenders might offer such loans in recognition of
a veteran's loyalty to the lender or to attract veterans as new
customers. VA has not made a practice of prohibiting ``zero-cost''
IRRRLs because, as discussed above, veterans can often realize
significant savings in such transactions. Given the prospect of
significant savings for veterans, VA proposes to continue allowing the
practice of ``zero-cost'' IRRRLs under this rulemaking.
While veterans can realize significant savings under ``zero-cost''
IRRRLs, in the context of fee recoupment under 38 U.S.C. 3709(a), the
plain text states that ``all of the fees and incurred costs'' must be
recouped ``through lower regular monthly payments.'' In other words,
the plain text commands that without a reduction in the dollar amount
owed for monthly payments, that is, a recoupment denominator greater
than zero, the recoupment standard cannot be met unless the recoupment
numerator is zero.
An alternative, albeit untenable, reading of subsection (a)(3)
could be that ``lower regular monthly payments'' might refer to the
fact that, in repayment term reduction scenarios discussed above,
veterans would have a smaller, that is, ``lower,'' number of monthly
payments to make as a result of the refinancing loan (for example, from
300 payments to 180 payments). VA believes such an interpretation is
not feasible because it does not fit within the mathematical recoupment
formula set forth by subsection (a). Without computing a fraction under
the statutory scheme, VA would be unable to determine whether ``all of
the fees and incurred costs'' would be recouped within ``36 months'',
even in cases where the refinance loan reduced the number of monthly
payments. 38 U.S.C. 3709(a). Additionally, such an interpretation would
render subsection (a)(3)'s parenthetical, which excludes certain taxes,
escrows, and fees from the recoupment denominator, superfluous and
incompatible with the remaining statutory text because such exclusions
are irrelevant to whether there has been a reduction in the number of
monthly payments. See Republic of Sudan v. Harrison, 139 S. Ct. 1048,
1058 (2019) (holding that courts must be hesitant to adopt statutory
interpretations that render ``superfluous another portion of that same
law'' (internal quotations omitted)). In other words, if paragraph
(a)(3)'s element of the recoupment formula could be satisfied by virtue
of a reduced number of monthly payments, it is unclear why the
parenthetical would be necessary to establish that the number of
required payments for taxes, escrows, and fees should be ignored or
excluded. It is universally understood that property taxes continue
even after a housing loan is satisfied. Additionally, loan servicers
would not maintain escrow accounts after the loan is satisfied. VA's
proposed interpretation ascribes meaning to the entire statutory
provision and fits with VA's mathematical approach to the recoupment
fraction, as described in this notice.
B. Loan Seasoning (38 CFR 36.4307(a)(9))
VA proposes to add a new paragraph (a)(9) to clarify loan seasoning
standards for IRRRLs. Loan seasoning refers to the age of the loan
being refinanced. If the loan being refinanced is not properly seasoned
on or before the note date of the refinancing loan, VA cannot guarantee
the loan. See 38 U.S.C. 3709(c).
In proposed paragraph (a)(9)(i), VA would clarify that the
refinancing loan must meet two primary statutory seasoning elements, as
described below.
1. Seasoning Element One: Six Consecutive Monthly Payments
In proposed paragraph (a)(9)(i)(A), VA would describe the first
statutory seasoning element that must be met, that is, that on or
before the note date of the refinancing loan, the veteran must have
made at least six consecutive monthly payments on the loan being
refinanced. VA also proposes to clarify in this paragraph that a
``monthly payment'' for IRRRL seasoning purposes is the full monthly
dollar amount owed under the note plus any additional monthly amounts
agreed to between the veteran and the holder of the loan being
refinanced, such as payments for taxes, hazard insurance, fees and
charges related to late payments, and amounts owed as part of a
repayment plan. Additionally, VA proposes to clarify that a ``monthly
payment'' will count toward the requisite six consecutive monthly
payments only if made in or before the same calendar month for which it
is due. VA also proposes that a prepaid monthly payment will count
toward the requisite six consecutive monthly payments, provided that
the holder of the loan being refinanced applies such payment as
satisfying the veteran's obligation of payment for a specific month,
advances the due date of the veteran's next monthly payment, and does
not apply the payment solely toward principal. VA would also explain
that when multiple partial payments sum to the amount owed for one
monthly payment, they will count as a single monthly payment toward the
requisite six consecutive monthly payments, but only if all partial
payments are made in or before the same calendar month for which full
payment is due.
VA notes that 38 U.S.C. 3709(c) does not expressly state the
requisite six consecutive monthly payments must immediately precede the
refinancing loan. A missed payment after reaching the six-payment-
threshold does not start a new seasoning period. To illustrate: a
[[Page 65706]]
veteran makes six consecutive monthly payments and meets the seasoning
requirement. The veteran is later hospitalized and misses payments
eight and nine. The veteran applies for an IRRRL, which would allow the
veteran to catch up on payments, and the savings provided by a lower
payment would help the veteran better afford other credit obligations,
including those from the hospitalization. VA would view this veteran's
loan as having met the seasoning period. To view it otherwise would
prevent the use of an IRRRL as a de facto home retention option.
IRRRLs provide many veterans a viable path to home retention when
faced with financial difficulties. This was especially evident during
the early stages of the COVID-19 pandemic, where many veterans took
advantage of historically low interest rates and obtained IRRRLs to
reduce their monthly housing loan payments. Many such veterans had
never missed a payment before the pandemic. VA believes that a
requirement that the six consecutive monthly payments must immediately
precede the making of an IRRRL would not prevent predatory loan
practices but would create unnecessary barriers to home retention.
VA believes that, rather than barring such veterans from receiving
an IRRRL, the text of section 3709(c) allows for the requisite six
consecutive monthly payments to be made at any point during the
repayment term of the loan being refinanced. Regardless of whether a
loan is in default, if the loan was seasoned before the default, the
loan can satisfy the first element of the seasoning standard. If there
is a break in monthly payments before six consecutive payments are
made, the count would reset to zero. Additionally, if a veteran
continues to make monthly payments during a forbearance, such payments
would count toward the requisite six consecutive monthly payments.
However, if a veteran did not make a payment during the forbearance,
the count would reset to zero.
Regarding what constitutes a ``monthly payment'', VA believes the
proposed definition would account for the various ways in which a
veteran may remit a monthly loan payment, while making it clear that a
mere partial payment, alone, cannot count toward the requisite six
consecutive monthly payments. Thus, VA's proposed definition would
allow for cases where, for example, a veteran remits a partial payment
to a lender (perhaps inadvertently) and then remits any outstanding
amounts in or before the same calendar month for which the full payment
is due. In the case of prepayment of certain amounts (for example,
where a veteran arranges with the holder to make payments biweekly or
on a quarterly or semi-annual basis), VA proposes such payments will
count toward the requisite six consecutive monthly payments, provided
that the payments actually correspond to and satisfy specific and
particular monthly obligations, as described above.
Finally, considering the effects of the COVID-19 pandemic on
veterans' ability to meet housing loan payments, VA seeks public
feedback on the impact of VA's proposal to require that amounts owed as
part of a repayment plan be included in the ``monthly payment''
definition for loan seasoning purposes. VA is interested in comments
that could lead to alternative approaches.
2. Seasoning Element Two: 210 Days After the First Payment Due Date
In proposed paragraph (a)(9)(i)(B) VA would describe the second
statutory seasoning element that must be met, which is that the note
date of the IRRRL must be a date that is not less than 210 days after
the first payment due date of the loan being refinanced, regardless of
whether the loan being refinanced became delinquent. VA would also
state that the first payment due date of the loan being refinanced is
not included in the 210-day count. Additionally, the note date of the
IRRRL would be included in the 210-day count. For example, if the first
payment due date of the loan being refinanced is June 1, 2020, day 1
would be June 2, 2020, and day 210 would be December 28, 2020. The
IRRRL note could be dated on or after December 28.
VA also proposes to include language in paragraph (a)(9)(i)(B) to
clarify that the 210-day period includes days when the veteran's loan
is delinquent. Where the consecutive payment requirement hinges on
dates payments are made, the 210-day requirement hinges on the date the
first payment is due. Therefore, any period in which the veteran is not
making payments on the loan (a situation that could affect the
consecutive monthly payment count) would not affect the 210-day count.
In other words, VA would require lenders to calculate the 210-day
period based upon the first payment due date of the loan being
refinanced, regardless of delinquency, except in cases of loan
modifications and assumptions as described below. This is because VA
interprets the first element of the seasoning requirement to be
specific to timeliness of payments and the 210-day requirement to be
specific to the overall time that must elapse.
3. Seasoning Elements 1 and 2: Loan Modifications and Assumptions
Section 3709(b) does not mention loan modifications or loan
assumptions in the context of loan seasoning. There is no explicit
direction on how to determine whether the borrower has paid six
consecutive monthly payments or satisfied the 210-day requirement.
To provide clarity, VA is proposing in paragraph (a)(9)(ii) that if
the loan being refinanced has been modified, any payment made before
the modification date does not count toward the requisite six
consecutive monthly payments under paragraph (a)(9)(i)(A).
Additionally, the note date of the IRRRL must be a date that is not
less than 210 days after the first payment due date of the modified
loan. In other words, when the IRRRL is preceded by a loan
modification, a process that generally results in an adjustment of the
monthly payment and a re-pooling of the loan on the secondary market,
the veteran must make six consecutive monthly payments under the loan
modification. Additionally, the 210-day count would reset upon the date
of loan modification. The first payment due date of the modified loan
would not be included in the 210-day count. The note date of the
refinancing loan would be included in the 210-day count.
Similarly, VA proposes to clarify in paragraph (a)(9)(iii) that if
the loan being refinanced was assumed pursuant to 38 U.S.C. 3714, any
payment made before the assumption date would not count toward the
requisite six consecutive monthly payments under paragraph
(a)(9)(i)(A). VA would also state that the note date of the IRRRL must
be a date that is not less than 210 days after the first payment due
date of the assumed loan. VA would clarify that the first payment due
date of the assumed loan is not included in the 210-day count. The note
date of the IRRRL would be included in the 210-day count.
In proposing this clarification for loan modifications and
assumptions, VA interprets 38 U.S.C. 3709(c) as resetting the loan
seasoning count following a fundamental change in the contractual terms
of the loan. In other words, if the loan was modified or assumed, the
borrower would need to make six consecutive monthly payments after the
loan modification or assumption to meet loan seasoning. Additionally,
the note date of the IRRRL would need to be not less than 210 days
after the first payment due date of the modified or assumed loan.
VA believes both proposed clarifications are grounded in the
[[Page 65707]]
statutory text of section 3709(c), even if the statute does not mention
them explicitly. In the case of a loan modification, a veteran and loan
holder agree to a fundamental contractual alteration of the loan, where
the dollar amount owed for monthly payments and the number of monthly
payments necessary to satisfy the loan change, effectively resetting
the expectations among veteran, lender, and secondary markets (such as
markets for Government National Mortgage Association pools). Through
these fundamental alterations, the veteran is required to initiate
repayment on a new ``first payment due date'' of the modified loan. 38
U.S.C. 3709(c)(2). In the case of an assumption, a new borrower is
agreeing to be bound by the terms of an existing housing loan contract.
Under the plain text of the statute, ``the borrower'' of the loan being
refinanced must make ``at least six consecutive monthly payments on the
loan being refinanced.'' 38 U.S.C. 3709(c)(1). (emphasis added). The
previous borrower's payment history is not the new borrower's and,
therefore, is not attributable to the new borrower. This means that the
loan would not be properly seasoned until the subject borrower, that
is, the new borrower under the assumption, has made the requisite six
consecutive monthly payments.
C. Net Tangible Benefit (38 CFR 36.4307(a)(10) and (11))
VA proposes to add new paragraphs (a)(10) and (11) to clarify
statutory net tangible benefit (NTB) requirements under 38 U.S.C.
3709(b). In the home loan financing industry, NTB generally refers to
the advantage a borrower gains by refinancing. Congress specified in
section 3709(b)(1) that, as a prerequisite of VA's guaranty, lenders
must provide a veteran with an NTB test. 38 U.S.C. 3709(b)(1). Congress
required the test but did not define its parameters. Thus, VA is
proposing to provide the parameters, as described later in this notice.
Also, Congress provided more specific NTB criteria requiring
minimum interest rate reductions for certain types of IRRRLs. As noted
in VA's cash-out IFR notice, VA considered whether the NTB test
described in subsection (b)(1) was introductory to the criteria set
forth in subsections (b)(2) through (b)(4). See Revisions to VA-
Guaranteed or Insured Cash-Out Home Refinance Loans, 83 FR 64459, 64460
(Dec. 17, 2018). VA concluded, however, that paragraphs (2) through (4)
did not, in fact, comprise the totality of the NTB test, but instead
imposed separate requirements in addition to the paragraph (1)
requirement. Id. As discussed in the IFR notice, Congress, in setting
these additional thresholds, addressed the risky aspects of moving from
one type of interest rate to another and imposed differing parameters
depending on the veteran's interest rate decision (that is, a fixed-
rate or an adjustable rate). Id. at 64461.
1. Interest Rate Requirements
VA proposes to restate the specific interest rate requirements
described in sections 3709(b)(2) through 3709(b)(4) in new paragraph
(a)(10) of Sec. 36.4307. VA also proposes to interpret section
3709(b)(2) through 3709(b)(4) according to the same rationale that VA
described for cash-out refinances, that is, paragraph (4) discount
point requirements apply only in the cases where paragraph (3) applies.
See id. at 64460-64462 (explaining that subsection (b)'s structure,
sequence, and coherent scheme supports such an interpretation).
In proposed paragraph (a)(10)(i), VA would state that for cases in
which the loan being refinanced has a fixed interest rate and the IRRRL
will also have a fixed interest rate, the interest rate on the IRRRL
must not be less than 50 basis points less than the loan being
refinanced. See 38 U.S.C. 3709(b)(2). In proposed paragraph
(a)(10)(ii), VA would state that, in a case in which the loan being
refinanced has a fixed interest rate and the IRRRL will have an
adjustable rate (ARM), the interest rate on the IRRRL must not be less
than 200 basis points less than the interest rate on the loan being
refinanced. In addition, for fixed-to-ARM IRRRLs, discount points may
be included in the IRRRL amount only if: (A) the lower interest rate is
not produced solely from discount points; (B) the lower interest rate
is produced solely from discount points, discount points equal to or
less than one discount point are added to the loan amount, and the
resulting loan balance (inclusive of all fees, closing costs, and
expenses that have been financed) maintains a loan to value (LTV) ratio
of 100 percent or less; or (C) the lower interest rate is produced
solely from discount points, more than one discount point is added to
the loan amount, and the resulting loan balance (inclusive of all fees,
closing costs, and expenses that have been financed) maintains a loan
to value ratio of 90 percent or less. VA also proposes to add a new
paragraph (a)(10)(iii) to remind lenders that, under existing paragraph
(a)(4)(i), no more than two discount points may be added to the loan
amount.
In determining whether a loan must comply with one of the LTV
ratios in proposed paragraph (a)(10)(ii), a lender must determine
whether the lower interest of the IRRRL is produced solely from
discount points. See 38 U.S.C. 3709(b)(4). The interest rate offered to
a veteran is specific to each case and is based on several factors,
including the type of loan and the overall mortgage market (for
example, the interest rate environment). See What are (discount) points
and lender credits and how do they work?, Consumer Financial Protection
Bureau (Sept. 4, 2020), <a href="https://www.consumerfinance.gov/ask-cfpb/what-are-discount-points-and-lender-credits-and-how-do-they-work-en-136">https://www.consumerfinance.gov/ask-cfpb/what-are-discount-points-and-lender-credits-and-how-do-they-work-en-136</a>.
Veterans can ``buy down'' the interest rate on a particular loan by
purchasing discount points, which are expressed as a percentage of the
loan amount (that is, one discount point equals one percent of the loan
amount). Id. See also 38 U.S.C. 3703(c). In the context of sections
3709(b)(3) and 3709(b)(4), this would mean that the lender must
determine whether the requisite 200 basis point (two percent) interest
rate reduction was met solely by virtue of the veteran's purchase of
discount points. If the lender concludes that the veteran would not be
offered the requisite interest rate reduction absent the veteran's
purchase of discount points, then certain additional requirements would
apply under proposed paragraphs (a)(10)(ii)(B) and (a)(10)(ii)(C).
VA observes that information to support whether a lower interest
rate is produced solely from discount points is not widely available.
While one discount point typically lowers the rate by 25 basis points,
lenders have their own pricing structure (often referred to as lender
pricing or rate sheets). The rate a lender might offer without discount
points is generally not publicly accessible, and the rate can change
due to factors such as daily market conditions, borrower risk factors,
and corporate strategy. If VA does not have access to, for example, the
lender's rate sheet, it can be difficult for VA to determine whether a
lender has complied with certain discount point requirements. To avoid
this issue, VA proposes a new paragraph (a)(10)(iv) requiring, in cases
where the lender determines that the lower interest rate is not
produced solely from discount points, that lenders provide VA with
evidence to support such determination. VA believes that this approach
will help shield veterans from predatory lending practices, while
saving lenders from the burden of providing evidence in cases
[[Page 65708]]
where the requisite interest rate reduction is produced solely from
discount points.
The text of section 3709(b) implies some degree of risk of
predatory lending inherent to veterans refinancing from a fixed
interest rate to an adjustable interest rate, specifically when
veterans finance the interest rate buy down by including discount
points in the IRRRL. VA notes that Sec. 36.4307(a)(4)(i) currently
prohibits veterans from financing more than two discount points,
meaning that veterans would still likely need to pay cash for some
amount of discount points in the event of a 200-basis point reduction
where the interest rate is achieved solely through discount points.
Regardless, since appraisals of the home are not generally required for
IRRRLs, veterans who refinance from a fixed rate to an adjustable rate,
obtain a 200-basis point reduction solely through the purchase of
discount points, and finance up to two discount points through the loan
could be at risk of extending their liability beyond the value of their
home.
VA's proposal to require lenders to provide evidence that the
subject lower interest rates are not produced solely from discount
points will help shed light on whether there is a true NTB to the
veteran over the life of IRRRL. In cases where a veteran finances
discount points on a fixed-to-ARM IRRRL, the lender would be required
to show either that some portion of the veteran's lower interest rate
was due, for example, to the lender's pricing structure (meaning
discount points were not solely responsible for the lower rate) or that
the financing of discount points would not exceed section 3709's cap on
LTV ratios (90 or 100 percent, depending on the number of discount
points financed).
Under this proposed regulatory standard, VA notes that lenders
would only be required to provide VA with evidence that the subject
interest rate reduction was not solely due to discount points in cases
where the veteran finances discount points. Section 3709(b) does not
impose an inquiry into whether the reduced interest rate is solely due
to such points when a veteran pays for all discount points using cash
(likely at closing). Therefore, VA would not require evidence from the
lender in such cases. In proposed paragraph (a)(10)(iv), VA would state
that, in cases where the lower interest rate is not produced solely
from discount points, as described by paragraph (a)(10)(ii)(A), lenders
must provide to the Secretary evidence that the lower interest rate is
not produced solely from discount points.
VA notes that section 3709(b) does not specify how lenders are to
determine the requisite LTV ratios for NTB purposes. In 2019, VA
clarified that a new appraisal would be necessary to determine such LTV
ratios, but that the appraisals need not be ordered through VA's
appraisal request system and need not be performed by a VA fee panel
appraiser. See VA Circular 26-19-22, Clarification and Updates to
Policy Guidance for VA Interest Rate Reduction Refinance Loans (IRRRLs)
(Aug. 8, 2019), <a href="https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_19_22.pdf">https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_19_22.pdf</a>; see also VA Circular 26-19-22, Change 1,
Clarification and Updates to Policy Guidance for VA Interest Rate
Reduction Refinance Loans (IRRRLs) (July 24, 2020), <a href="https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_19_22_Change1.pdf">https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_19_22_Change1.pdf</a>.
VA also stated that lenders may only charge veterans a reasonable and
customary amount for the appraisal. Id. Finally, VA listed acceptable
types of appraisal reports to determine property value for purposes of
calculating the LTV ratio, providing lenders with flexibility to use
less expensive valuation methods than those used to determine the
reasonable value of a property. Id.
In this notice, VA proposes a new paragraph (a)(10)(v) to require
lenders to use a property valuation from an appraisal report, completed
no earlier than 180 days before the note date, as the dollar amount for
the value in the loan to value ratio described by paragraph
(a)(10)(ii). VA would also require that the appraisal report must be
completed by a licensed appraiser and the appraiser's license must be
active at the time the appraisal report is completed. VA would also
state that a veteran may only be charged for one such appraisal report
and that a veteran may only be charged for such appraisal report as
part of the flat charge not exceeding 1 percent of the amount of the
loan, as described by Sec. 36.4313(d)(2). Under this proposed
standard, VA would continue to accept appraisal reports in the formats
listed by VA Circular 26-19-22 and would provide notice to lenders of
any updates to the list.
While VA proposes to require lenders to use a property valuation
from an appraisal report as the dollar amount for the value in the LTV
ratio, as mentioned above, lenders would not be required to use VA's
appraisal request system to obtain the appraisal. Rather, VA proposes
that lenders use their own appraisal management and assignment process
to fulfill this requirement, unless directed by VA.
VA believes it would not be an effective use of government
resources to require a VA fee panel appraisal in these LTV ratio
determinations. VA fee panel appraisals are used to determine the
reasonable value of a property, which helps protect VA from undue risk
under the guaranty. Such appraisals also contribute toward determining
VA's maximum guaranty amounts and can help VA understand whether
certain minimum property and construction requirements are satisfied.
See 38 U.S.C. 3710 and 3731; see also 38 CFR 36.4339 and 36.4351. Under
38 U.S.C. 3710(b)(8), an IRRRL's total loan amount is not subject to a
maximum limit based upon the reasonable value of the property. See also
38 CFR 36.4339(a)(2). In other words, IRRRLs are not subject to the
general requirement for VA-guaranteed loans that the loan not exceed
100 percent of the reasonable value of the property. Additionally,
since IRRRLs can only refinance existing VA-guaranteed loans, VA
presumes, absent evidence to the contrary, that the subject property
still meets minimum property and construction requirements because such
requirements applied at the time the loan being refinanced was closed.
Without the need to evaluate the property for these specific concerns,
VA believes it would not be prudent to apply a requirement of a VA fee
panel appraiser in the NTB context, due to potential elevated costs and
burdens.
While VA believes this proposed approach for determining valuation
for this select set of fixed-to-ARM IRRRL scenarios is the most
reasonable and appropriate method, VA is interested in feedback
regarding the advantages, if any, of using an alternative appraisal
method.
2. Net Tangible Benefit Test
In VA's cash-out refinance IFR, VA explained that section 3709(b)'s
NTB test is a test that must be passed. See Revisions to VA-Guaranteed
or Insured Cash-Out Home Refinance Loans, 83 FR 64459, 64462 (Dec. 17,
2018). VA further elaborated that Congress, through section 3709(b),
``imposed a requirement to establish the fitness of the loan, as
opposed to a requirement only to disclose the characteristics of the
loan for the veteran's understanding.'' Id. Under the same rationale,
VA proposes to define the parameters of the NTB test for IRRRLs, which
like the NTB test for cash-outs, would include requirements as to the
loan's fitness and disclosure
[[Page 65709]]
requirements to help veterans understand the financial implications of
the refinance transaction. VA proposes to set forth the NTB test
requirements in a new paragraph (a)(11) of Sec. 36.4307. More
specifically, VA proposes to clarify in introductory text in paragraph
(a)(11) that the refinancing loan must provide an NTB to the veteran.
VA would also state that, for purposes of Sec. 36.4307, NTB means that
the refinancing loan is in the financial interest of the veteran, that
the lender of the refinancing loan must provide the veteran with an NTB
test, and that the NTB test must be satisfied.
In proposed paragraph (a)(11)(i), VA proposes to state that the
IRRRL must meet the requirements prescribed by paragraphs (a)(8),
(a)(9), and (a)(10). As described in this notice, such paragraphs set
forth requirements for fee recoupment, loan seasoning, and interest
rates, respectively. VA believes that an IRRRL that meets such
requirements, given the safeguards imposed, will improve the veteran's
financial position, meaning the loan will be in the veteran's financial
interest.
In paragraph (a)(11)(ii), VA proposes to require lenders to provide
veterans with an initial loan comparison disclosure and a final loan
comparison disclosure of the following: the loan payoff amount of the
IRRRL, with a comparison to the loan payoff amount of the loan being
refinanced; the type of interest rate, whether a fixed-rate,
traditional adjustable-rate, or hybrid adjustable-rate, with a
comparison to the type of the loan being refinanced; the interest rate
of the IRRRL, with a comparison to the current interest rate of the
loan being refinanced; the term of the IRRRL, with a comparison to the
term remaining on the loan being refinanced; and the dollar amount of
the veteran's monthly payment for principal and interest under the
IRRRL, with a comparison to the current dollar amount of the veteran's
monthly payment for principal and interest under the loan being
refinanced. Consistent with feedback received on VA's cash-out
refinance IFR notice, VA proposes to require that lenders provide the
subject information in a format prescribed by the Secretary, that is,
via a new proposed form, Interest Rate Reduction Refinancing Loan
Comparison Disclosure. More information about this form is provided in
the Paperwork Reduction Act section below.
Under new paragraph (a)(11)(iii), VA proposes to require that
lenders provide the veteran with the IRRRL disclosures on at least two
separate occasions. First, VA proposes to require that the lender
provide the veteran with an initial loan comparison disclosure on the
date the lender provides the Loan Estimate, required under 12 CFR
1026.19(e), to the veteran. Paragraph (a)(11)(iii) would also state
that if the lender is required to provide to the veteran a revised Loan
Estimate under 12 CFR 1026.19(e) that includes any of the revisions
described by proposed paragraph (a)(11)(iv), the lender must provide to
the veteran, on the same date the revised Loan Estimate must be
provided, an updated loan comparison disclosure. Under proposed
paragraph (a)(11)(iv), the enumerated revisions would be: a revision to
any loan attribute that must be compared under proposed paragraph
(a)(11)(ii); a revision that affects the recoupment under paragraph
(a)(8); and any other revision that is a numeric, non-clerical change.
VA also proposes a new paragraph (a)(11)(v), which would require
the lender to provide the veteran with a final loan comparison
disclosure (in a format specified by the Secretary) on the date the
lender provides to the veteran the Closing Disclosure required under 12
CFR 1026.19(f). Additionally, the veteran would need to certify,
following receipt of the final loan comparison disclosure, that the
veteran received the initial and final loan comparison disclosures
required by proposed paragraph (a).
Finally, VA proposes to clarify in paragraph (a)(11)(vi), that
regardless of whether the lender must provide the veteran with a Loan
Estimate under 12 CFR 1026.19(e) or a Closing Disclosure under 12 CFR
1026.19(f), the lender must provide the veteran with the initial and
final loan comparison disclosures. Proposed paragraph (a)(11)(vi) would
also state that where the lender is not required to provide the veteran
with a Loan Estimate or a Closing Disclosure because the IRRRL is an
exempt transaction under 12 CFR 1026.3, the lender must provide the
veteran with the initial and final comparison disclosures on the dates
the lender would have been required to provide the veteran with the
Loan Estimate under 12 CFR 1026.19(e) and the Closing Disclosure under
12 CFR 1026.19(f), respectively, as if the IRRRL was not an exempt
transaction.
Requiring lenders to provide veterans with a comparison of the
fundamental loan details described above, on two separate occasions,
would help enable such veterans to better understand the IRRRL
transaction and, consequently, make a sound financial decision.
Further, providing the disclosures on the same dates that lenders, in
most cases, would need to provide Loan Estimates and Closing
Disclosures under Consumer Financial Protection Bureau (CFPB) rules,
would reduce the likelihood of lender confusion regarding disclosure
dates and save lenders from having to meet deadlines that are out of
sync with such CFPB rules. As VA described in the cash-out IFR, these
disclosures would help veterans ``avoid costly mistakes that may strip
their home equity or make it difficult to sell or refinance their home
in the future.'' See 83 FR at 64463.
D. Conforming Amendments, Revisions for Consistency and Clarity, and
Technical Corrections
1. Fees Associated With IRRRL Appraisals
As mentioned above, VA proposes appraisal provisions in furtherance
of the LTV ratio determinations required by 38 U.S.C. 3709. VA believes
it is necessary to clarify in this rulemaking how lenders can account
for the costs of such IRRRL appraisal fees. Current VA policy states
that lenders can include the cost of such appraisals as part of the
flat charge authorized for VA-guaranteed loans. See 38 CFR
36.4313(d)(2) (``lender may charge . . . a flat charge not exceeding 1
percent of the amount of the loan . . . in lieu of all other charges
relating to costs of origination not expressly specified''). Through
this rulemaking, VA proposes to add a provision to 38 CFR
36.4313(d)(1)(i), and make necessary associated formatting revisions,
to specify that any appraisal fee for a purpose specified in Sec.
36.4307(a)(10) is not to be considered a fee that may be separately
charged, but rather, should the lender choose to charge the fee to the
veteran, is to be included in the one percent flat charge. For VA audit
purposes, VA would expect that any appraisal report and invoice be
included in the lender's loan file.
2. Other Revisions
VA proposes the following non-substantive changes to Sec. 36.4307.
First, VA proposes to correct a reference error in paragraph
(a)(4)(ii). Current paragraph (a)(4)(ii) incorrectly references Sec.
36.4339(a)(4) as the source relating to financed energy efficient
improvements. The correct reference is Sec. 36.4339(b). Additionally,
for ease of reading, VA proposes to insert paragraph headings in
current
[[Page 65710]]
Sec. 36.4307(a)(4), (a)(5), (a)(6) and (a)(7); the headings being:
``Maximum Amount of Refinancing Loan.'', ``Cases of Delinquency.'',
``Guaranty Amount.'', and ``Loan Term.'', respectively.
Lastly, VA proposes a technical correction to Sec.
36.4313(e)(1)(i) to clarify that the 0.50 percent funding fee applies
to all IRRRLs. Specifically, VA proposes to replace the ``and'' in
paragraph (e)(1)(i) with an ``or''.
Executive Orders 12866 and 13563
Executive Orders 12866 and 13563 direct agencies to assess the
costs and benefits of available regulatory alternatives and, when
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, and other advantages; distributive impacts;
and equity). Executive Order 13563 (Improving Regulation and Regulatory
Review) emphasizes the importance of quantifying both costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
The Office of Information and Regulatory Affairs has determined that
this rule is a significant regulatory action under Executive Order
12866. The Regulatory Impact Analysis associated with this rulemaking
can be found as a supporting document at <a href="http://www.regulations.gov">www.regulations.gov</a>.
Regulatory Flexibility Act
The Secretary hereby certifies that this proposed 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. 601-612). To assess whether the proposed rule could be expected
to have a ``significant economic impact'' on small entities, VA
considers the annual costs and transfer payments of the rule for and
from small entities compared to their annual revenue. As described in
the impact analysis, this proposed rule and Public Law 115-174 (the
2018 Act) would affect lenders participating in VA's home loan program.
VA was able to estimate the size of 1,073 of 1,202 active lenders
that originated IRRRLs within the past three fiscal years using a
combination of sources. VA relied on the size standards from the Small
Business Administration (SBA) \1\ and used data from Data Axle and
Factiva (two business data providers) along with data from the Federal
Deposit Insurance Corporation (FDIC) and the National Credit Union
Administration (NCUA).\2\ Of the 1,073 lenders with sufficient data for
VA to estimate their size, 598 (55.73%) are considered small. The
average annual revenue of these 598 small lenders is estimated at
$23.65 million.\3\
VA compares this average annual revenue of the small lenders to the
average annual costs that fall on the small lenders, as well as the
annual transfer payments from small lenders to determine the economic
significance of the 2018 Act and the proposed rule described by this
notice on small entities. The costs of the proposed rule that fall on
all lenders, including small lenders, would come from rule
familiarization and those accounted for through PRA analysis (that is,
information technology system alignment). The transfer payments of the
2018 Act from lenders, including small, would come from the reduction
in annual payments from the interest rate reduction requirements and
the reduction in refinance fees from the recoupment requirement. These
reductions would represent transfer payments from lenders to veterans.
VA divides the one-time cost of rule familiarization and system
alignments evenly across the 1,202 lenders. The costs of the one-time
rule familiarization and system alignments in the first year of the
rule are estimated at $1,235 for each lender, including the small
lenders. The reduction in annual payments and the reduction in closing
costs range from $78,463 to $94,868 per small lender, depending on the
year in the analysis period.\4\ As shown in Table 1, adding these
impacts results in the average estimated burden from $79,678 to $94,868
per small lender in the first and final years of the analysis period,
respectively.
Table 1--Average Burden on Small Lenders by Provision
[2020 dollars]
----------------------------------------------------------------------------------------------------------------
2032 (final year
Provision 2023 (first year) of analysis
period)
----------------------------------------------------------------------------------------------------------------
2018 Act................................... Reduction in Annual Payments. $29,314 $35,443
Reduction in Refinance Fees.. 49,149 59,425
Proposed Rule.............................. Rule Familiarization......... 101.66 0
PRA System Alignment......... 1,133.06 0
----------------------------------------------------------------------------------------------------------------
The estimated burden of the 2018 Act and rule as a proportion of
small lender revenue ranges from 0.337 percent to 0.401 percent, as
displayed in Table 2. The burden on small lenders stemming from the
2018 Act would be significantly greater than the burden associated with
the rule.
---------------------------------------------------------------------------
\1\ U.S. Small Business Administration. (2019). SBA Table of
Size Standards. <a href="https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf">https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf</a>.
\2\ VA uses data from Data Axle and Factiva to determine the
industry (as identified by the primary NAICS code) for the active VA
home loan lenders. For industries where size standards are
determined by annual revenue, VA compares the revenue of each lender
in these industries as reported in Data Axle and Factiva to the SBA
annual revenue threshold for small businesses. For industries where
size standards are determined by assets, VA compares the relevant
SBA threshold for small businesses to asset data from the FDIC for
lenders with primary NAICS codes 522110 (Commercial Banking) and
522120 (Savings Institutions), and asset data from the NCUA for
lenders with a primary NAICS code of 522130 (Credit Unions).
\3\ VA averages the sales volumes from Data Axle and Factiva for
all lenders considered small, including those primarily considered
commercial banks, savings institutions, and credit unions.
\4\ VA scales the costs/transfers by first dividing the total
average annual volume of IRRRLs guaranteed by small lenders in the
past three full fiscal years (64,758) by the total average annual
IRRRLs guaranteed in the same period by all lenders with enough
information to classify their size (306,671). Multiplying that ratio
(0.211) by the total costs and transfers that vary depending on
lender size gives VA the total costs and transfers that fall on
small lenders. Dividing the total costs and transfers that fall on
small lenders by the total estimated number of small lenders (670,
which is the percent of small lenders from the classified population
(55.73%) multiplied by all IRRRL lenders (1,202)) provides the
average annual cost and transfers for and from each small lender.
[[Page 65711]]
Table 2--Annual Costs/Transfers and Revenue per Affected Small Entity
[000s of 2020 dollars]
------------------------------------------------------------------------
2032 (final year
Year 2023 (first year) of analysis
period)
------------------------------------------------------------------------
Annual Burden of 2018 Act--A...... $79 $95
Annual Burden of the Proposed $1 $0
Rule--B..........................
Total Annual Burden--c = a + b.... $80 $95
Average Annual Revenue for Small $23,647 $23,647
Entities--D......................
Burden of the 2018 Act as a 0.337 0.401
Percentage of Annual Revenue--e =
a/d..............................
Burden of the Proposed Rule as a 0.005 0
Percentage of Annual Revenue--f =
b/d..............................
Total Burden as a Percentage of 0.342 0.401
Annual Revenue--g = c/d..........
------------------------------------------------------------------------
VA considers a rule to have a ``significant economic impact'' when
the impact associated with the rule for a small entity equals or
exceeds 1 percent of annual revenue. Thus, while the rule is expected
to affect a substantial number of small entities (55.73 percent of
active small IRRRL lenders), the burden would not be economically
significant. On this basis, the Secretary certifies that the adoption
of this proposed rule will not have a significant economic impact on a
substantial number of small entities as defined in the Regulatory
Flexibility Act.
Unfunded Mandates
The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C.
1532, that agencies prepare an assessment of anticipated costs and
benefits before issuing any rule that may result in the expenditure by
State, local, and tribal governments, in the aggregate, or by the
private sector, of $100 million or more (adjusted annually for
inflation) in any one year. This proposed rule would have no such
effect on State, local, and tribal governments, or on the private
sector.
Paperwork Reduction Act
This proposed rule includes provisions constituting a revised
collection of information under the Paperwork Reduction Act of 1995 (44
U.S.C. 3501-3521) that require approval by the Office of Management and
Budget (OMB). Accordingly, under 44 U.S.C. 3507(d), VA has submitted a
copy of this rulemaking action to OMB for review and approval.
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. If OMB does not approve the
collection of information as requested, VA will immediately remove the
provisions containing that collection of information or take such other
action as is directed by OMB.
Comments on the revised collection of information contained in this
rulemaking should be submitted through <a href="http://www.regulations.gov">www.regulations.gov</a>. Comments
should indicate that they are submitted in response to ``RIN 2900-AR58;
Loan Guaranty: Revisions to VA-Guaranteed or Insured Interest Rate
Reduction Refinancing Loans'' and should be sent within 60 days of
publication of this rulemaking. The collections of information
associated with this rulemaking can be viewed at: <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>.
OMB is required to make a decision concerning the collection of
information contained in this rulemaking between 30 and 60 days after
publication of this rulemaking in the Federal Register (FR). Therefore,
a comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication. This does not affect the
deadline for the public to comment on the provisions of this
rulemaking.
The Department considers comments by the public on a new collection
of information in--
<bullet> Evaluating whether the new collections of information are
necessary for the proper performance of the functions of the
Department, including whether the information will have practical
utility;
<bullet> Evaluating the accuracy of the Department's estimate of
the burden of the new collection of information, including the validity
of the methodology and assumptions used;
<bullet> Enhancing the quality, usefulness, and clarity of the
information to be collected; and
<bullet> Minimizing the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, for example,
permitting electronic submission of responses.
The collection of information associated with this rulemaking
contained in 38 CFR 36.4307 is described immediately following this
paragraph, under its respective title.
Title: Interest Rate Reduction Refinancing Loans.
OMB Control No: 2900-0386.
CFR Provision: 38 CFR 36.4307.
<bullet> Summary of collection of information: This information
collection currently includes VA Form 26-8923, IRRRL Worksheet,
certification by lenders regarding recoupment, net tangible benefit,
and loan seasoning, and a disclosure from lenders to veterans outlining
recoupment and net tangible benefit. Through this proposed rulemaking,
at proposed 38 CFR 36.4307(a)(11), VA would standardize the disclosure
provided by lenders to veterans. Specifically, as proposed, lenders
would be required to utilize a new standardized form, Interest Rate
Reduction Refinancing Loan Comparison Disclosure (hereinafter,
Comparison Disclosure), to notify veterans of certain loan information,
including the total closing costs and recoupment period, at various
stages during the loan process (initial, revised (as applicable), and
final). As part of the proposed process, veterans would need to sign
the final disclosure. Regarding the IRRRL Worksheet, VA is revising
this form consistent with provisions of proposed 38 CFR 36.4307(a)(8)-
(11) to collect information and certifications in one place. Generally,
as explained below, VA already collects the subject information as part
of the normal course of business. The proposed method of such
collection should not increase stakeholders' burden for providing the
information.
<bullet> Description of need for information and proposed use of
information: VA would use the information on the Comparison Disclosure
to ensure lender compliance with the comparison disclosure
requirements, which would ensure that veterans can be fully apprised of
the financial impact the
[[Page 65712]]
refinancing transaction has on their loan terms, as part of meeting the
NTB test. The Comparison Disclosure would standardize the information
veterans are receiving and would make it easier for veterans to compare
lenders' fees and charges. The standardized disclosure would also
assist stakeholders in understanding whether the lender disclosed
information for each requisite item. The information associated with
the IRRRL Worksheet would be used by VA to ensure that the IRRRL is
made in the veteran's financial interest. The worksheet would provide
evidence that the lender complied with recoupment, loan seasoning, and
net tangible benefit requirements. The certification would further
diminish the likelihood that veterans are subject to predatory loans.
<bullet> Description of likely respondents: The Comparison
Disclosure and IRRRL Worksheet must be completed for each VA-guaranteed
IRRRL. For each loan, lenders and veterans would review and complete
the Comparison Disclosure. Lenders would complete the IRRRL Worksheet.
<bullet> Estimated number of respondents: VA anticipates the
estimated number of annual respondents to be 173,193. This number
reflects a three-year average of VA's projected volume of IRRRLs for
fiscal years 2023 through 2025.
<bullet> Estimated frequency of responses: For the Comparison
Disclosure, four times per loan for generating and disclosing the
information to the veteran; one time per loan for the final disclosure
signing by the veteran; and one time for the information technology
system alignment. For the IRRRL Worksheet, typically a one-time
collection per loan.
<bullet> Estimated average burden per response: For the Comparison
Disclosure, 10 minutes for loan officers (total for average of four
instances of generation and disclosure); 5 minutes for the veteran per
loan for the final disclosure. For the IRRRL Worksheet, 15 minutes for
loan officers. While VA proposes to update the disclosure for an IRRRL
into the standardized Comparison Disclosure and revise the IRRRL
Worksheet, VA has assessed no incremental burden associated with this
rulemaking because: (A) standardization of the disclosures would make
it easier for lenders to comply with overall procedures that predate
this proposed rule, and (B) lenders can do so through technological
means.
<bullet> Estimated total annual reporting and recordkeeping burden:
VA anticipates no change in the total annual reporting and
recordkeeping burden regarding this collection, which is currently
estimated to be no burden hours. In that regard, VA's proposed
revisions to this existing information collection, including
standardization of the comparison disclosures, would merely standardize
and adjust the documentation/information that lenders must provide to
the veteran, the cost of which falls within customary and usual
business practices.
<bullet> Estimated cost to respondents per year: VA estimates the
annual cost to respondents to be $3,060,038.\5\ While VA notes that
this represents a decrease from previous estimates, this is based on
the revised volume estimates not associated with the rulemaking and not
a change in the burden to respondents to comply with this information
collection. Therefore, VA estimates no incremental annual burden cost
to respondents as a result of this proposed rulemaking.
---------------------------------------------------------------------------
\5\ To estimate the total information collection burden cost, VA
uses the 2020 Bureau of Labor Statistics (BLS) mean hourly wage of
$27.07 for ``All Occupations'' (veterans) and $36.99 for ``Loan
Officers''. This information is available at <a href="https://www.bls.gov/oes/2020/may/oes_nat.htm">https://www.bls.gov/oes/2020/may/oes_nat.htm</a>. VA is using 2020 BLS mean hourly wages for
consistency with the regulatory impact analysis, which uses 2020
dollars for the base year estimate.
---------------------------------------------------------------------------
<bullet> VA also estimates a one-time system alignment cost
associated with this information collection of $1,361,943. To derive
this estimate, VA generated a high/low estimate of the one-time
technology costs associated with this information collection. The low
estimate assumes that 80 percent of affected lending entities (that is,
962 of the 1,202 active VA lenders that make IRRRLs) would not be
required to complete any technology alignments as the software
companies who supply their loan origination software (LOS) systems
would update their products in time to enable these lenders to comply
with the regulatory requirements. The costs therefore represent the
costs to the remaining 20 percent of lenders (that is, 240 lenders)
that would need to complete a technology alignment to enable them to
generate the comparison disclosure in their LOS consistent with this
information collection's standardized form. The high estimate assumes
that no LOS company product updates would be in place on time and all
1,202 lenders would be required to assume the costs of completing a
technology alignment to enable generating their disclosures.
VA calculated the one-time technology costs utilizing the amount of
time estimated to develop a custom comparison disclosure form (either
through existing LOS software or via a third-party contract). VA
assumed 40 hours of planning, development, testing, and deployment to
add the standardized disclosure to a lender's existing LOS. The wage
burden was calculated as a composite wage, with weighting based on
information provided by various industry professionals. Mean hourly
wages from the 2020 BLS Occupational Employment and Wages data were
used to estimate a composite wage as 5% Compliance Officer (occupation
code 13-1041) at $36.35/hour, 5% Lawyer (occupation code 23-1011) at
$71.59/hour, and 90% Computer Occupations (occupation code 15-1200) at
$46.46/hour, for a composite wage of $47.21.\6\
---------------------------------------------------------------------------
\6\ The 2020 Bureau of Labor Statistics (BLS) mean hourly wages
are available at <a href="https://www.bls.gov/oes/2020/may/oes_nat.htm">https://www.bls.gov/oes/2020/may/oes_nat.htm</a>.
---------------------------------------------------------------------------
Assistance Listing
The Assistance Listing number and title for the program affected by
this document is 64.114, Veterans Housing--Guaranteed and Insured
Loans.
List of Subjects in 38 CFR Part 36
Condominiums, Housing, Individuals with disabilities, Loan
programs--housing and community development, Loan programs--veterans,
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements, Veterans.
Signing Authority
Denis McDonough, Secretary of Veterans Affairs, approved this
document on September 14, 2022, and authorized the undersigned to sign
and submit the document to the Office of the Federal Register for
publication electronically as an official document of the Department of
Veterans Affairs.
Luvenia Potts,
Regulation Development Coordinator, Office of Regulation Policy &
Management, Office of General Counsel, Department of Veterans Affairs.
For the reasons stated in the preamble, the Department of Veterans
Affairs proposes to amend 38 CFR part 36 as set forth below:
PART 36--LOAN GUARANTY
Subpart B-- Guaranty or Insurance of Loans to Veterans With
Electronic Reporting
0
1. The authority citation for part 36 continues to read as follows:
Authority: 38 U.S.C. 501 and 3720.
0
2. Amend Sec. 36.4307 by:
0
a. In paragraph (a)(4)(ii), removing the cross-reference to ``Sec.
36.4339(a)(4)'' and adding, in its place, the cross-reference ``Sec.
36.4339(b)'';
[[Page 65713]]
0
b. In paragraphs (a)(4), (5), (6), and (7), adding paragraph headings;
0
c. Adding new paragraphs (a)(8), (9), (10), and (11); and
0
d. Revising the authority citation at the end of the section.
The revisions and additions read as follows:
Sec. 36.4307 Interest rate reduction refinancing loan.
(a) * * *
* * * * *
(4) Maximum amount of refinancing loan. * * *
(5) Cases of delinquency. * * *
(6) Guaranty amount. * * *
(7) Loan term. * * *
(8) Recoupment. (i) The lender of the refinancing loan must provide
the Secretary with a certification that all fees, closing costs, and
expenses (other than taxes, amounts held in escrow, and fees paid under
38 U.S.C. chapter 37) that would be incurred by the veteran as a result
of the refinance are scheduled to be recouped on or before the date
that is 36 months after the note date of the refinancing loan.
(ii) The recoupment period is calculated by dividing the dollar
amount equating to the sum of all fees, closing costs, and expenses,
whether included in the loan or paid at or outside of closing, minus
lender credits (the numerator), by the dollar amount by which the
veteran's monthly payment for principal and interest is reduced as a
result of the refinance (the denominator).
(iii) Numerator. The numerator described by paragraph (a)(8)(ii) of
this section is the dollar amount equating to the sum of all fees,
closing costs, and expenses that would be incurred by the veteran as a
result of the refinance. Except as provided in this paragraph
(a)(8)(iii), such sum includes any charge that is incurred by the
veteran as a result of the refinance, including taxes that are not
described in paragraph (a)(8)(iii)(C) of this section. Lender credits
may be subtracted from other amounts in the numerator. The following
items do not constitute fees, closing costs, or expenses for the
purposes of this paragraph (a)(8)(iii) and are excluded from the
numerator:
(A) The loan fee as prescribed by 38 U.S.C. 3729;
(B) Prepaid interest and amounts held in escrow (for example,
amounts for hazard insurance); and
(C) Taxes and assessments on the property, even when paid outside
of their normal schedule, that are not incurred solely due to the
refinance transaction (for example, property taxes and special
assessments).
(iv) Denominator. The denominator described by paragraph (a)(8)(ii)
of this section is the dollar amount by which the veteran's monthly
payment for principal and interest is reduced as a result of the
refinance. The reduction is calculated by subtracting the veteran's
monthly payment for principal and interest under the refinancing loan
from the veteran's monthly payment for principal and interest under the
loan being refinanced. When calculating monthly payments for principal
and interest, the lender must use the full payment, without omitting
any amounts to be repaid monthly by the veteran and attributable to,
for example, financed fees, financed loan fees prescribed by 38 U.S.C.
3729, financed closing costs, and financed expenses.
(v) If the dollar amount of the veteran's monthly payment for
principal and interest under the refinancing loan is equal to or
greater than the dollar amount of the veteran's monthly payment for
principal and interest under the loan being refinanced, meaning there
is no reduction in the monthly payment for principal and interest as a
result of the refinancing loan, the lender must not charge any fees,
closing costs, or expenses, except for those enumerated by paragraphs
(a)(8)(iii)(A), (B), and (C) of this section.
(9) Loan seasoning. (i) The refinancing loan must meet both of the
following requirements:
(A) On or before the note date of the refinancing loan, the veteran
must have made at least six consecutive monthly payments on the loan
being refinanced. For the purposes of this paragraph (a)(9), ``monthly
payment'' means the full monthly dollar amount owed under the note plus
any additional monthly amounts agreed to between the veteran and the
holder of the loan being refinanced, such as payments for taxes, hazard
insurance, fees and charges related to late payments, and amounts owed
as part of a repayment plan. A monthly payment will count toward the
requisite six consecutive monthly payments only if made in or before
the same calendar month for which it is due. A prepaid monthly payment
will count toward the requisite six consecutive monthly payments,
provided that the holder of the loan being refinanced applies such
payment as satisfying the veteran's obligation of payment for a
specific month, advances the due date of the veteran's next monthly
payment, and does not apply the payment solely toward principal. When
multiple partial payments sum to the amount owed for one monthly
payment, they will count as a single monthly payment toward the
requisite six consecutive monthly payments, but only if all partial
payments are made in or before the same calendar month for which full
payment is due.
(B) The note date of the refinancing loan must be a date that is
not less than 210 days after the first payment due date of the loan
being refinanced, regardless of whether the loan being refinanced
became delinquent. The first payment due date of the loan being
refinanced is not included in the 210-day count. The note date of the
refinancing loan is included in the 210-day count.
(ii) Loan modifications. If the loan being refinanced has been
modified, any payment made before the modification date does not count
toward the requisite six consecutive monthly payments under paragraph
(a)(9)(i)(A) of this section. The note date of the refinancing loan
must be a date that is not less than 210 days after the first payment
due date of the modified loan. The first payment due date of the
modified loan is not included in the 210-day count. The note date of
the refinancing loan is included in the 210-day count.
(iii) Assumptions. If the loan being refinanced was assumed
pursuant to 38 U.S.C. 3714, any payment made before the assumption date
does not count toward the requisite six consecutive monthly payments
under paragraph (a)(9)(i)(A) of this section. The note date of the
refinancing loan must be a date that is not less than 210 days after
the first payment due date of the assumed loan. The first payment due
date of the assumed loan is not included in the 210-day count. The note
date of the refinancing loan is included in the 210-day count.
(10) Interest rate. (i) In a case in which the loan being
refinanced has a fixed interest rate and the refinancing loan will also
have a fixed interest rate, the interest rate on the refinancing loan
must not be less than 50 basis points less than the interest rate on
the loan being refinanced.
(ii) In a case in which the loan being refinanced has a fixed
interest rate and the refinancing loan will have an adjustable rate,
the interest rate on the refinancing loan must not be less than 200
basis points less than the interest rate on the loan being refinanced.
In addition, discount points may be included in the loan amount only
if--
(A) The lower interest rate is not produced solely from discount
points;
(B) The lower interest rate is produced solely from discount
points, discount points equal to or less than one discount point are
added to the loan amount, and the resulting loan balance (inclusive of
all fees, closing costs, and
[[Page 65714]]
expenses that have been financed) maintains a loan to value ratio of
100 percent or less; or
(C) The lower interest rate is produced solely from discount
points, more than one discount point is added to the loan amount, and
the resulting loan balance (inclusive of all fees, closing costs, and
expenses that have been financed) maintains a loan to value ratio of 90
percent or less.
(iii) Pursuant to paragraph (a)(4)(i) of this section, no more than
two discount points may be added to the loan amount.
(iv) In cases where the lower interest rate is not produced solely
from discount points, as described by paragraph (a)(10)(ii)(A) of this
section, lenders must provide to the Secretary evidence that the lower
interest rate is not produced solely from discount points.
(v) Lenders must use a property valuation from an appraisal report,
completed no earlier than 180 days before the note date, as the dollar
amount for the value in the loan to value ratio described by paragraph
(a)(10)(ii) of this section. The appraisal report must be completed by
a licensed appraiser and the appraiser's license must be active at the
time the appraisal report is completed. A veteran may only be charged
for one such appraisal report. A veteran may only be charged for such
appraisal report as part of the flat charge not exceeding 1 percent of
the amount of the loan, as described by Sec. 36.4313(d)(2). While a
lender may use a VA-designated fee appraiser to complete the appraisal
report, lenders should not request an appraisal through VA systems
unless directed by the Secretary.
(11) Net tangible benefit. The refinancing loan must provide a net
tangible benefit to the veteran. For the purposes of this section, net
tangible benefit means that the refinancing loan is in the financial
interest of the veteran. The lender of the refinancing loan must
provide the veteran with a net tangible benefit test. The net tangible
benefit test must be satisfied. The net tangible benefit test is
defined as follows:
(i) The refinancing loan must meet the requirements prescribed by
paragraphs (a)(8), (9), and (10) of this section.
(ii) The lender must provide the veteran with an initial loan
comparison disclosure and a final loan comparison disclosure of the
following:
(A) The loan payoff amount of the refinancing loan, with a
comparison to the loan payoff amount of the loan being refinanced;
(B) The type of the refinancing loan, whether a fixed-rate loan,
traditional adjustable-rate loan, or hybrid adjustable-rate loan, with
a comparison to the type of the loan being refinanced;
(C) The interest rate of the refinancing loan, with a comparison to
the current interest rate of the loan being refinanced;
(D) The term of the refinancing loan, with a comparison to the term
remaining on the loan being refinanced; and
(E) The dollar amount of the veteran's monthly payment for
principal and interest under the refinancing loan, with a comparison to
the current dollar amount of the veteran's monthly payment for
principal and interest under the loan being refinanced.
(iii) The lender must provide the veteran with an initial loan
comparison disclosure (in a format specified by the Secretary) on the
date the lender provides the Loan Estimate, required under 12 CFR
1026.19(e), to the veteran. If the lender is required to provide to the
veteran a revised Loan Estimate under 12 CFR 1026.19(e) that includes
any of the revisions described by paragraph (a)(11)(iv) of this
section, the lender must provide to the veteran, on the same date the
revised Loan Estimate must be provided, an updated loan comparison
disclosure.
(iv) The revisions described by this paragraph (a)(11)(iv) are:
(A) A revision to any loan attribute that must be compared pursuant
to paragraph (a)(11)(ii) of this section;
(B) A revision that affects the recoupment under paragraph (a)(8)
of this section; and
(C) Any other revision that is a numeric, non-clerical change.
(v) The lender must provide the veteran with a final loan
comparison disclosure (in a format specified by the Secretary) on the
date the lender provides to the veteran the Closing Disclosure required
under 12 CFR 1026.19(f). The veteran must certify, following receipt of
the final loan comparison disclosure, that the veteran received the
initial and final loan comparison disclosures required by this
paragraph.
(vi) Regardless of whether the lender must provide the veteran with
a Loan Estimate under 12 CFR 1026.19(e) or a Closing Disclosure under
12 CFR 1026.19(f), the lender must provide the veteran with the initial
and final loan comparison disclosures. Where the lender is not required
to provide the veteran with a Loan Estimate or a Closing Disclosure
because the refinancing loan is an exempt transaction under 12 CFR
1026.3, the lender must provide the veteran with the initial and final
loan comparison disclosures on the dates the lender would have been
required to provide the veteran with the Loan Estimate under 12 CFR
1026.19(e) and the Closing Disclosure under 12 CFR 1026.19(f),
respectively, as if the refinancing loan was not an exempt transaction.
* * * * *
(The Office of Management and Budget has approved the information
collection requirements in this section under control number 2900-0601)
(Authority: 38 U.S.C. 3703, 3709, and 3710)
0
3. Amend Sec. 36.4313 by:
0
a. Revising paragraph (d)(1)(i); and
0
b. In paragraph (e)(1)(i), removing the word ``and'' and adding, in its
place, the word ``or''.
The revisions read as follows:
Sec. 36.4313 Charges and fees.
* * * * *
(d) * * *
(1) * * *
(i) Fees of Department of Veterans Affairs appraiser and of
compliance inspectors designated by the Department of Veterans Affairs
except the following: (A) Appraisal fees incurred for the
predetermination of reasonable value requested by others than veteran
or lender; and
(B) Appraisal fees incurred for the purpose specified by Sec.
36.4307(a)(10)(v) of this subpart.
* * * * *
[FR Doc. 2022-23387 Filed 10-31-22; 8:45 am]
BILLING CODE 8320-01-P
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</html>Indexed from Federal Register on November 1, 2022.
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