Proposed Rule2024-26776
Loan Guaranty: Loan Reporting and Partial or Total Loss of Guaranty or Insurance
Primary source
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Published
November 20, 2024
Issuing agencies
Veterans Affairs Department
Abstract
The Department of Veterans Affairs (VA) proposes to amend its regulations governing loan reporting requirements for lenders that participate in the VA-guaranteed home loan program and circumstances when VA would assert a defense for partial or total loss of guaranty or insurance for lenders and holders. These proposed amendments would support VA's ongoing efforts to modernize and transform technology and processes within the guaranteed home loan program, capitalizing on industry standard datasets. In addition, the proposed regulatory changes would update and enhance the loan guaranty reporting requirements for lenders, providing veterans stronger protections against noncompliant loans through improved transparency and oversight of the program.
Full Text
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<title>Federal Register, Volume 89 Issue 224 (Wednesday, November 20, 2024)</title>
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[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Proposed Rules]
[Pages 91624-91635]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-26776]
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DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
RIN 2900-AS16
Loan Guaranty: Loan Reporting and Partial or Total Loss of
Guaranty or Insurance
AGENCY: Department of Veterans Affairs.
ACTION: Proposed rule.
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SUMMARY: The Department of Veterans Affairs (VA) proposes to amend its
regulations governing loan reporting requirements for lenders that
participate in the VA-guaranteed home loan program and circumstances
when VA would assert a defense for partial or total loss of guaranty or
insurance for lenders and holders. These proposed amendments would
support VA's ongoing efforts to modernize and transform technology and
processes within the guaranteed home loan program, capitalizing on
industry standard datasets. In addition, the proposed regulatory
changes would update and enhance the loan guaranty reporting
requirements for lenders, providing veterans stronger protections
against noncompliant loans through improved transparency and oversight
of the program.
DATES: Comments must be received on or before January 21, 2025.
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
<a href="http://www.regulations.gov">www.regulations.gov</a> as soon as possible after they have been received.
VA will not post on <a href="http://www.regulations.gov">www.regulations.gov</a> public comments that make
threats to individuals or institutions or suggest that the commenter
will take actions to harm an individual. VA encourages individuals not
to submit duplicative comments; however, we will post 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. In accordance with the Providing
Accountability Through Transparency Act of 2023, a 100 word Plain-
Language Summary of this proposed rule is available at <a href="http://Regulations.gov">Regulations.gov</a>,
under RIN 2900-AS16(P).
FOR FURTHER INFORMATION CONTACT: Stephanie Li, Assistant Director for
Regulations, Legislation, Engagement, and Training; Terry Rouch,
Assistant Director for Loan Policy and Valuation; and Colin Deaso,
Assistant Director for Data and Technology Solutions, Loan Guaranty
(26), Veterans Benefits Administration, Department of Veterans Affairs,
1800 G Street NW, Washington DC 20006, (202) 632-8862. (This is not a
toll-free telephone number.)
SUPPLEMENTARY INFORMATION:
I. Purpose of This Rulemaking
VA proposes to amend its reporting regulation at 38 CFR 36.4303 and
its partial or total loss of guaranty or insurance regulation at 38 CFR
36.4328 to support its ongoing efforts to modernize and transform
technology and processes within its VA-guaranteed home loan program and
to make the regulations more reader-friendly. VA is accomplishing the
technological transformation by updating reporting requirements and
connecting with lenders and holders through application programming
interfaces (APIs). Utilizing APIs will more efficiently and effectively
support veterans, lenders, servicers, and other stakeholders who
participate in the VA-guaranteed home loan program. Specifically, VA
would launch an API ecosystem in which VA and veterans would, through
increased VA oversight capabilities, have stronger protections against
noncompliant lenders and holders. Additionally, lenders and holders
would have more assurance and confidence in using their authority to
close VA-guaranteed loans on an automatic basis and in carrying out
lending and servicing functions in VA's home loan program.
To help ensure success, updates to 38 CFR 36.4303 and 36.4328 are
necessary. Amendments to Sec. 36.4303 would expand loan reporting
requirements by allowing VA, lenders, and holders to take advantage of
technological improvements that APIs provide, resulting in more
efficient and more effective program administration. Section 36.4328
amendments would clarify provisions addressing partial or total loss of
the guaranty or insurance when VA identifies fraud, material
misrepresentations, or other noncompliance with VA requirements.
II. Section-by-Section Analysis of the Proposed Regulatory Amendments
A. 38 CFR 36.4303--Reporting Requirements
1. Reporting Loans Closed on an Automatic Basis
VA proposes to revise Sec. 36.4303(a) to add the heading,
``Automatically guaranteed loans'', and provide that, for loans
automatically guaranteed under 38 U.S.C. 3703(a)(1), a lender of a
class described under 38 U.S.C. 3702(d), would be required to report
the loan, after loan closing, in an electronic
[[Page 91625]]
format using an API, as designated by the Secretary. The proposed rule
would further require that such a lender must, not later than 15 days
after the loan closing date, use the designated API to report a loan to
VA. When reporting the loan, the lender must also use the designated
API to submit the appropriate funding fee as prescribed by 38 U.S.C.
3729 and required information regarding the loan, including the loan
application (e.g., the Uniform Loan Application Dataset--ULAD), closing
disclosures (e.g., the Uniform Closing Dataset--UCD), and any other
information required by the Secretary.
VA further proposes to explain that VA would announce in the
Federal Register any designation of a new API at least 60 days before a
lender would be required to use the API for reporting the loan and
submitting the funding fee and loan information. The notice would
provide the name of the newly designated API(s) and a link to VA's
website where VA would maintain and update technical details about the
operative API(s). At the expiration of the notice period, using the
designated API(s) when reporting the loan, including submission of the
funding fee and loan information to VA, would be a pre-condition to VA
issuing a loan guaranty certificate (LGC).
The proposed amendments would be more consistent with standard
industry practice for electronic reporting. Additionally, they would
allow for more efficient loan oversight. For example, currently, if a
funding fee is required, the lender collects the fee at closing and
electronically remits the funds to VA within 15 days of closing via
VA's electronic Funding Fee Payment System (FFPS). The lender also
reports the loan using WebLGY, a different system. Thus, lenders have
to submit documents and remittances to two VA systems, using manual
processes. Due to the manual processes and separate systems necessary,
VA currently allows the lender 60 days within which to submit the loan
information. See 38 CFR 36.4313(e)(3) and (4). But under the new
electronic reporting system, VA would retire FFPS and combine reporting
the loan and remittance of the VA funding fee into one automated
process. Furthermore, because of the simplification and automation, the
60-day submission process could be handled efficiently within 15 days.
VA is committed to a user-friendly API environment that improves
the overall experience with VA--not launching technological
improvements for their own sake. VA also understands that many lenders
have already been working with other API environments. Accordingly, VA
welcomes feedback, including technical, on how VA can maximize the
efficiencies that come through reporting loans using APIs and how VA's
proposed process might be further refined. To that end, VA has already
published on VA's website the specifications for five APIs that are in
various stages of development, including the API the Secretary plans to
designate as the first API for reporting guaranteed loans.
The designated API would allow lenders to report loan information
electronically utilizing their Loan Origination Software (LOS). This is
another advantage to the API ecosystem, because the LOS is already
widely accepted throughout the industry. Most lenders use the Mortgage
Industry Standards Maintenance Organization (MISMO's) standards in the
delivery of closing disclosure data to other federal, or federally
sponsored, housing agencies such as Fannie Mae, Freddie Mac, and the
Department of Housing and Urban Development (HUD). With VA's designated
API for reporting the loan, lenders would be able to electronically
report information in the UCD and ULAD via API directly from the
lenders' LOS in accordance with MISMO standards. In the end, the
designated API for loan reporting would allow for the full automation
of the funding fee payment, loan reporting, and issuance of the LGC via
lenders' LOS. Overall, based on industry data and widely held
principles, VA assesses that the standardization of data reporting
would lead to better accuracy, consistency, and clarity surrounding the
loans VA guarantees and would promote a more consistent approach
between VA and lenders.
Lenders would also make the required certifications related to the
loan, using the API, including, for example, that the loan conforms
with the applicable provisions of 38 U.S.C. chapter 37 and of the
regulations concerning guaranty or insurance of loans to veterans.
The lender certifications are consistent with current regulations
and approved information collections. See Office of Management and
Budget (OMB) Control Number 2900-0909. The primary difference under the
proposal is that the certifications would be submitted using the
designated API(s), again saving resources and time for lenders and VA.
VA would also continue to require that a veteran make certain
certifications at the time the loan is closed. Veterans would not
notice any change. The primary change for lenders would be that, as
with their own certifications, they would report a veteran's
certifications using the designated API(s). One veteran certification
would relate to past or present occupancy of the property. In the case
of a loan for the purchase or construction of a residential property,
or for a cash-out refinance, the veteran would be required to certify
that the veteran intends to occupy such property as the veteran's home.
See 38 U.S.C. 3704(c). In the case of a loan for the repair,
alteration, or improvement of residential property, the veteran would
be required to certify that the veteran occupies the property as the
veteran's home. An exception to this is if the home improvement or
refinancing loan is for extensive changes to the property that would
prevent the veteran from occupying the property while the work is being
completed. In such a case, the veteran would be required to certify
that the veteran intends to occupy or reoccupy the property as the
veteran's home upon completion of the substantial improvements or
repairs. Another exception would be for an interest rate reduction
refinance loan (commonly referred to as an IRRRL), where the veteran
would be required to certify that the veteran either occupies the
property as the veteran's home or had previously occupied it as the
veteran's home. The certifications are required by statute, as are the
differing occupancy requirements based on loan type. See 38 U.S.C.
3703(c), 3704(c), 3710(e).
In the event a veteran is in active-duty status as a member of the
Armed Forces and is unable to occupy the property because of such
status, VA would accept a certification from the spouse of the veteran
that the veteran's spouse occupies or intends to occupy the property as
his or her home or a certification from the veteran's attorney-in-fact
or from the legal guardian of a dependent child of the veteran that the
dependent child occupies or intends to occupy the property as the
dependent child's home. See 38 U.S.C. 3704(c)(2).
In the case of an interest rate reduction refinancing loan, the
veteran must certify as to meeting one of the occupancy requirements at
38 CFR 36.4307(a)(2). See U.S.C. 3710(e)(1)(F). The certifications
required are consistent with current statutory and regulatory
requirements. Id.
Lastly, VA would provide that upon VA's acceptance of the
information, VA would issue the LGC, subject to provisions of proposed
Sec. 36.4328.
2. Reporting Loans That Require VA's Prior Approval
VA proposes to remove current paragraphs (b), (c), and (d) of 38
CFR 36.4303 and add a new paragraph (b).
[[Page 91626]]
Proposed paragraph (b) would include the heading, ``Prior-approval
loans'', and provide that, in the case of any loan made by a lender
without the authority to close loans on an automatic basis or any loan
where the Secretary provides advance notice of the need for prior
approval, the lender would be required to report the loan to the
Secretary before the loan closing for the Secretary's review. Lenders
would be required to report the loan in an electronic format and using
an API, if an API is designated by the Secretary for this purpose.
While VA anticipates releasing an API for lenders to submit loans that
require prior approval by the Secretary, this API is not currently
ready. As such, the Secretary would direct lenders under the proposed
rule to continue using VA's current loan reporting system, WebLGY, to
submit certain pre-closing and underwriting loan information for the
Secretary's review. As with automatically guaranteed loans, VA would
propose to include language in paragraph (b) that would require VA to
announce in the Federal Register any designation of a new API at least
60 days before a lender would be required to use the API.
The loan information that must be submitted before loan closing
would include the loan application (that is, the Uniform Residential
Loan Application (URLA), credit reports obtained in connection with the
loan application, certain VA forms as required by the Secretary, the
occupancy certification as noted in proposed Sec. 36.4303(a)(2)(iv)
obtained at the time of loan application, and any other information the
Secretary determines necessary for a determination.
Upon VA's review and approval of the above information, VA would
issue a certificate of commitment, which would commit an LGC to the
holder of the loan upon the payment of the full proceeds of the loan
for the purposes described in the original report and provided the
requirements in proposed Sec. 36.4303(b)(4) are met. If VA does not
approve the loan, VA would notify the lender that the loan cannot be
closed as a VA-guaranteed loan; however, the lender may resubmit the
loan to VA for prior approval after the lender corrects any issues
identified by VA.
The lender would be required to report the loan to VA not later
than 15 days after the loan closing date using the same API as when
reporting loans closed on an automatic basis. The submission would also
include the following items: the appropriate funding fee as prescribed
by 38 U.S.C. 3729; the information prescribed in proposed Sec.
36.4303(a)(2)(ii); evidence that any conditions identified by the
Secretary in the certificate of commitment are satisfied in order for
the Secretary to issue an LGC; evidence showing the property securing
the loan is that for which the certificate of commitment was issued;
evidence that all property purchased or acquired with the proceeds of
the loan has been encumbered as required by VA; and lender and veteran
certifications prescribed in proposed Sec. 36.4303(a)(2)(iii) and
(iv), respectively.
Lastly, VA would provide that upon VA's acceptance of the
information, VA would issue the LGC, subject to provisions of proposed
Sec. 36.4328.
These reporting requirements for loans that require pre-approval
from VA are generally not new. The change would be the method of
transmission to VA, meaning that the lender would transmit the
information using the designated API. VA notes, too, that prior-
approval loans constitute less than one percent of VA's guaranty
portfolio.
3. Failure To Close Prior-Approval Loans and Late Reporting of Loans
VA proposes to redesignate current paragraphs (e) and (f) of 38 CFR
36.4303 as new paragraphs (b)(6) and (c), respectively. VA would also
revise newly redesignated paragraphs (b)(6) and (c).
Proposed paragraph (b)(6) would provide that if the lender does not
close the loan on which prior approval was obtained, the certificate of
commitment would have no further effect.
Proposed paragraph (c) would include a heading to be styled, ``Late
reporting of closed loans'', and would provide that, for loans not
reported in accordance with the timing requirements of this section,
evidence of guaranty would be issued only if the loan report is
accompanied by a statement from the lending institution that explains
why the loan was reported late and whether, since origination, the loan
was in default. VA would require the statement to identify the case or
cases in issue and to set forth the specific reason or reasons why the
loan was not submitted on time. Upon receipt of such a statement, VA
would issue evidence of guaranty. A pattern of late reporting and the
reasons therefore would be considered by VA in taking action under
Sec. Sec. 36.4336 and 36.4353. VA believes that this change, to
include referencing existing authority to take action under Sec.
36.4336, would serve as a deterrence for late reporting of loans to VA.
4. Evidence of Guaranty and Clarifying or Conforming Amendments
VA proposes to redesignate current paragraph (g) as new paragraph
(d). The heading would be styled, ``Form of guaranty evidence.''
Substantively, proposed paragraph (d) would provide that, for
guaranteed loans, evidence of a guaranty would be issued by the
Secretary as an LGC and that, for insured loans, notice of credit to an
insurance account would be given to the lender. This revision would be
to improve clarity and readability.
VA would remove current paragraphs (h) and (j) and redesignate
current paragraph (i) as new paragraph (e). VA would also revise new
paragraph (e) by adding the heading, ``Exclusions from the guaranty or
insurance amount'', and clarifying that the amounts referenced are
those disbursed by a lender.
Lastly, VA would redesignate current paragraphs (k) and (l) as new
paragraphs (f) and (g) and would revise new paragraphs (f) and (g) by
adding the headings, ``Veteran's right to exit purchase contract'' and
``Processing and reporting a loan assumption'', respectively. VA also
proposes to revise new paragraph (g) to conform any internal references
to this new paragraph and correct the references in new paragraph
(g)(1)(ii)(D), which currently references paragraphs (l)(1)(i),
(I)(1)(i)(B), and (l)(1)(i)(A), rather than (g)(1)(i), (g)(1)(i)(B),
and (g)(1)(i)(A), respectively.
5. Information Collections and Authority Citations
Section 36.4303 already contains collections of information under
the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3521) that are approved by the Office of Management and Budget (OMB).
The information collection associated with proposed Sec. 36.4303(g),
pertaining to assumptions, is currently approved under OMB control
number 2900-0516. The information collection associated with proposed
Sec. 36.4303(a)(2)(iv), pertaining to the veteran's occupancy
certification, is currently approved under OMB control number 2900-
0521. VA is not proposing any substantive revisions to these provisions
or the information collections but is proposing to add OMB control
number 2900-0521 to the list of approved information collections at the
end of the section.
Similarly, VA proposes to add OMB control number 2900-0909 to the
list of approved information collections at the end of Sec. 36.4303.
This approved information collection pertains to existing lender
reporting requirements
[[Page 91627]]
for both automatically guaranteed loans and prior-approval loans. This
includes information and certifications required under current Sec.
36.4303(a), (c), (d), and (f). With this proposed rule, VA is revising
the information required by a lender to include additional loan
origination information including but not limited to the loan
application (e.g., ULAD) and closing disclosures (e.g., UCD). VA also
proposes to amend the format (i.e., collection instrument) lenders will
use to submit this information to reflect the use of APIs. Accordingly,
VA has outlined these changes in the below Paperwork Reduction Act
section and any incremental burden costs or savings to the public.
VA notes that it currently has approval from OMB to collect loan
application information and closing disclosures under the information
collection associated with 38 CFR 36.4333. This rule, in part, pertains
to lenders' requirement to maintain loan origination records and VA's
authority to request an audit of such records as necessary for
oversight and program management. Under the current approved
information collection (OMB control number 2900-0515), VA requires
lenders to upload the ULAD and UCD for any loan selected for audit
(also known as Full File Loan Review). With this proposed rule, lenders
will have already submitted this information when they report the loan
to VA for an LGC. As such, separate from this rulemaking, VA intends to
revise the information collection at 38 CFR 36.4333 to remove the
duplicate information collection.
Finally, VA proposes to remove the paragraph-specific authority
citations and amend the authority citation at the end of Sec. 36.4303.
B. Partial or Total Loss of Guaranty or Insurance
VA proposes to rewrite Sec. 36.4328, which addresses how lender or
holder noncompliance with VA requirements can affect the guaranty and
VA's payment of the guaranty. The rule has not been updated for some
time, and VA believes modernizing the style would promote transparency,
help stakeholders better understand VA's longstanding policy, and
improve VA's oversight function. For example, VA would add headings at
the paragraph level, as headings throughout the section would help VA
employees and stakeholders better understand which provisions apply to
a given situation, such as material misrepresentations in origination
compared to servicing. The goal is to minimize legalese and arrange the
section under a more orderly framework. In addition, VA would codify a
requirement for indemnifying VA when a lender fails to comply with
certain requirements.
1. Forgeries and Falsifications of Documents
Paragraph (a) of Sec. 36.4328 would be revised under the heading
``No liability on the guaranty or insurance due to forgery or
falsification of documents.'' The revision would explain that VA would
have no liability on account of a guaranty or insurance of a loan, or
any certificate or other evidence thereof, if--a signature to the note,
the mortgage, or any other loan papers is a forgery; the application
for guaranty or insurance is a forgery; or the certificate of discharge
or the certificate of eligibility is counterfeited or falsified, or is
not issued by the Government.
The current rule's phrase, ``Subject to the incontestable
provisions,'' would be deleted. The deletion is because, for some
readers, the phrase can perhaps give the wrong impression that VA has
no enforcement authority over a guaranteed loan. It is VA's position
that the introductory clause was inserted originally to emphasize what
was, at the time, a newly enacted law providing more guaranty
stability. VA has not intended the phrase to imply that VA has no way
of addressing losses caused by forgeries, fraud, or material
misrepresentations, nor has VA applied it that way.
Another historical reference that is not necessary anymore is the
date, July 1, 1948. References in paragraph (a) to the date ``July 1,
1948'' would be deleted, because VA's guaranty portfolio no longer
includes any loans made that long ago. Any substantive difference that
may have applied at one point has been overtaken by time.
In short, the substance under which VA applies paragraph (a) today
would not change under the proposed rule's paragraph (a). The proposal
would instead eliminate outdated text for clearer intent.
2. Material Misrepresentation by a Lender
VA would replace current paragraph (b) of Sec. 36.4328 by
inserting the heading, ``Material misrepresentation by a lender'', and
specifying the actions VA may take after learning of a material
misrepresentation. Specifically, the rule would provide that if a
lender knew or should have known of a material misrepresentation at the
time of reporting the loan to VA under Sec. 36.4303, VA may adjust the
maximum guaranty amount on the LGC or demand indemnification from the
lender. Paragraph (b)(1) would apply to instances where a material
misrepresentation is identified before VA issues the LGC. Paragraph
(b)(2) would apply to instances where a material misrepresentation is
identified after VA issues the LGC. Paragraph (b)(3) would provide an
opportunity for the lender to take corrective action, when the
Secretary determines it appropriate, and either have the full guaranty
amount restored or cancel the indemnification, as applicable.
Under paragraph (b)(1) of Sec. 36.4328, which would include the
heading, ``Material misrepresentation is identified before VA issues
the loan guaranty certificate'', VA would notify the lender of VA's
findings that the lender made a material misrepresentation when
reporting the loan and would issue the loan guaranty certificate with a
maximum guaranty amount of one dollar. For example, in a situation
where a lender reported to VA a $400,000 loan but VA found an improper
charge of $100, VA would, under paragraph (b)(1), notify the lender
that the LGC is issued in the amount of $1 rather than the expected
$100,000.
Under paragraph (b)(2), which would address, as the heading would
indicate, instances where a ``Material misrepresentation is identified
after VA issues the loan guaranty certificate,'' VA would notify the
originating lender of VA's findings and that the maximum guaranty
amount on the loan has been reduced to $1, if the originating lender is
the current loan holder. Alternatively, if the originating lender is
not the current loan holder, VA would require the originating lender to
indemnify VA, as provided in paragraph (c).
Paragraph (b)(3) of Sec. 36.4328 would be introduced with the
heading, ``Corrective action by lender.'' Paragraph (b)(3)(i) would
explain that, when notifying the lender of VA's findings under
paragraph (b)(1) or (2), VA would also identify corrective action(s),
if any, VA determines necessary to remediate the effects of the
material misrepresentation. After VA receives evidence confirming the
effects of the material misrepresentation have been remediated, VA
would either restore the guaranty to the full amount or cancel the
indemnification, as applicable. Paragraph (b)(3)(ii) would state that,
if VA determines the effects of the material misrepresentation cannot
be remediated, VA would not offer the originating lender the
opportunity to take corrective action. VA would require the originating
lender to indemnify VA, as provided in paragraph (c).
[[Page 91628]]
The proposed revisions would improve the readability of the
regulation; not change the substantive way VA conducts oversight and
works with lenders and holders to help ensure a fair outcome for VA,
veterans, lenders, and holders. For example, consistent with current
policy, VA would not limit the application of the regulation to
commissions of fraud, as violations resulting from misrepresentations
that were made without malintent can be just as damaging to veterans
and the Government as an act of fraud. It is longstanding policy that,
when VA finds a veteran has been wrongly charged a fee, for example, VA
does not need a finding of fraud to instruct the lender to reimburse
the veteran for the improper charge. VA instructs the lender that the
charge must be reimbursed. VA notes, too, that the applicable statute
does not, in authorizing VA to assert defenses, mention intent. See 38
U.S.C. 3721.
Similarly, VA has for some time offered lenders the opportunity to
indemnify VA against any eventual loss when the lender violated one of
VA's regulations. Although VA has not codified the procedure explicitly
until now, the indemnification process has proven effective for all
stakeholders. The veteran continues to receive all the advantages that
accompany a VA-guaranteed loan. The holder continues to be able to rely
on the guaranty. The market continues to consider the VA guaranty a
premium certification. Importantly, too, VA continues to be able to
protect the taxpayer against losses VA would not have incurred had VA
known of a violation at the time of issuing the LGC, using a common
risk-shifting mechanism in the financial industry.
VA would delete the term ``willful'' from the current rule, but
again, VA does not expect that lenders or holders would notice a change
in VA's approach. As with the illustration regarding the improper $100
charge, VA already considers the improper charge a material
misrepresentation, even if just the lender's mistake. This is because
the lender is responsible for ensuring its own compliance with VA's
statutes and regulations. Yet, the lender submitted the loan for
guaranty, requesting a higher guaranty amount than VA would have
guaranteed had VA known of the improper charge. Plus, the veteran who
obtained the guaranteed loan has been wrongly required to pay $100, and
VA believes that, in such a circumstance, the veteran deserves to be
made whole by the lender. VA also already works with the lender to
ensure the veteran is reimbursed for the improper charge. Thus, the
proposed rule would more specifically outline current procedures than
the current rule does but would not change the expectations lenders and
holders have come to rely on.
VA understands the importance of being able to rely on VA's
guaranty, particularly given how critical it is to the secondary
investment market, which supplies to many in the lending industry the
liquidity necessary for making VA-guaranteed loans. VA believes the
additional clarity under the proposed rule would help further that
stability, rather than detract from it, as it would make clearer the
policies and procedures VA has employed for some time in addressing
noncompliance. Yet at the same time, the revision would serve as a
clear reminder to lenders that in originating loans or servicing loans
of veterans with VA-guaranteed loans, the lender must ensure the
representations they make to VA align with the facts as represented.
3. Indemnification by the Lender
VA would, under the heading ``Indemnification after VA issues the
loan guaranty certificate,'' replace paragraph (c) of Sec. 36.4328 to
codify the indemnification process applicable to a loan where fraud or
a material misrepresentation is identified after VA has issued the LGC.
One type of indemnification, applicable to noncompliance with
underwriting requirements in Sec. 36.4340, would have a 5-year term,
including any subsequent interest rate reduction refinancing loans,
under proposed paragraph (c)(1). The other type of indemnification
would apply to noncompliance for reasons other than underwriting
decisions under Sec. 36.4340. Under proposed paragraph (c)(2), the
duration of this latter type would last the life of the loan, including
any subsequent interest rate reduction refinancing loans.
Proposed paragraph (c)(1) of Sec. 36.4328 would include the
heading of, ``Violations of underwriting requirements'', and state
that, if VA determines the originating lender made a material
misrepresentation relating to the credit underwriting of a loan
pursuant to the provisions of Sec. 36.4340, the originating lender
must abstain from filing a guaranty or insurance claim in the event of
a loan default and must indemnify VA for any and all losses arising
from or related to a guaranty or insurance claim made on the loan
within five years of the date of the loan guaranty certificate,
including any subsequent interest rate reduction refinancing loans. A
few examples of material misrepresentations related to the provisions
of Sec. 36.4340 are failures to (i) verify assets, employment, and
credit reports (38 CFR 36.4340(j)); (ii) determine or accurately
determine the veteran's acceptable debt-to-income ratio (38 CFR
36.4340(c)); or (iii) ensure residual income guidelines were met (38
CFR 36.4340(e)).
The proposed five-year indemnification for underwriting
deficiencies would reflect VA's longstanding policy that underwriting
is critical to a lender's assessment of a veteran's ability to repay,
while also recognizing that as time passes any underwriting
deficiencies are less likely to be responsible for a loan default by
the veteran. VA believes that five years of stable payment history by
the veteran provides enough time to assure VA that any default
thereafter is likely due to factors unrelated to any underwriting
deficiencies at origination. VA also believes a shorter period does not
offer adequate protection against preventable defaults or deterrence
against lenders who might otherwise adopt a pattern of noncompliance as
a business model. A longer timeframe, however, may unduly damage
lenders' interests and affect lender participation in helping to
deliver the home loan benefit to veterans.
To further support VA's proposed five-year indemnification policy,
VA reviewed the performance of 157 indemnified loans with five-year
agreements signed on or after January 12, 2017. Historically, VA-
guaranteed loans have maintained some of the lowest foreclosure rates
in the industry, often below one percent. However, VA observed 12
foreclosures that occurred within the five-year indemnification period
as opposed to only two foreclosures outside of the five-year
indemnification period. Further, one-third of foreclosures occurring
during the indemnification period (four out of 12 foreclosures)
happened between years three and five. Based on this analysis, VA
proposes to continue its current policy of requiring a five-year
indemnification period for any underwriting deficiencies.
The proposed carryover to include interest rate reduction refinance
loans likewise reflects VA's longstanding policy. Interest rate
reduction refinance loans, unlike purchase loans and cash-out refinance
loans, are guaranteed using the veteran's same entitlement from the
loan being refinanced and do not require a new, full underwriting. See
38 U.S.C. 3710(e) and 38 CFR 36.4307. Because of this, the same risks
associated with noncompliance in the original underwriting violations
are associated with the interest rate reduction refinance loan. If VA
were not to apply the indemnification,
[[Page 91629]]
unscrupulous lenders could avoid accountability because of a loophole
(for example, through strategic noncompliance, then an interest rate
reduction refinance loan, along with another origination fee to the
lender, to thwart enforcement). Thus, VA believes it is necessary to
close the loophole by ensuring the indemnification continues to cover
interest rate reduction refinances, as well as the original loan,
during the five-year indemnification period.
VA also proposes that recovery under the indemnification would be
irrespective of whether the material misrepresentation in the loan
underwriting directly leads to a loan default. VA's current standard
practice for indemnification agreements is not based on VA having to
establish a causal connection between the violation and the default,
and VA believes establishing causation as a threshold would be
inconsistent with proper risk management practices. Additionally,
investigations necessary to establish the cause would be overly taxing
on VA's limited resources, especially when viewed in light of the fact
that, if VA had known of the underwriting violation, VA never would
have guaranteed the loan in the first place.
Under proposed paragraph (c)(2) of Sec. 36.4328, an originating
lender would be required to indemnify VA for a longer period for the
originating lender's fraud or for the originating lender's material
misrepresentation related to non-underwriting violations. Specifically,
paragraph (c)(2) would include the heading, ``Non-underwriting related
violations'', and would state that if VA determines the originating
lender committed fraud or made an uncorrectable material
misrepresentation relating to noncompliance with requirements other
than those prescribed in Sec. 36.4340, the originating lender must
abstain from filing a guaranty or insurance claim in the event of a
loan default and must indemnify VA for any and all losses arising from
or related to a guaranty or insurance claim, for the life of the loan,
including any subsequent interest rate reduction refinancing loans.
Regarding fraud, VA believes there should not be a scenario where a
lender can choose whether defrauding the Government is financially
worth the risk. VA does not tolerate fraud. Indemnification for the
life of the loan, as well as for any later interest rate reduction
refinance loans, would protect the veteran by ensuring that the veteran
receives all the loan servicing advantages that accompany a VA-
guaranteed loan and would protect the government against any losses.
Even if made without fraudulent intent, a material
misrepresentation that cannot be remediated or one that is not related
to underwriting noncompliance can leave violations unresolved over the
duration of the loan. The defects simply cannot be resolved.
Accordingly, VA believes it is appropriate, and consistent with sound
financial practice common among industry participants, to shift the
risk from the entity harmed by the material misrepresentation (in this
case, veterans, the integrity of VA's program, and taxpayers at-large)
back to the originating lender that knew or should have known of an
uncorrectable noncompliance. The indemnification would be irrespective
of whether material misrepresentation is causally connected to a
default and would apply to later interest rate reduction refinance
loans, for the reasons explained above.
In proposed paragraph (c)(3), under the heading ``Notice of
indemnification'', VA would specify that the Secretary would notify the
lender when VA determines that a loan is subject to indemnification.
Procedurally, a paper agreement would no longer be used when
completing an indemnification agreement. When VA discovers a fraud or
material misrepresentation, VA and the originating lender would
communicate via one or more of the designated APIs described under
proposed Sec. 36.4303. This would provide more efficiency, require
fewer resources, and align with industry expectations of using
technology to help ease administrative burden.
4. Guaranty Adjustments to Holders
VA proposes to add a new paragraph (d) to 38 CFR 36.4328, under the
heading, ``Guaranty adjustments to holder'', to reduce possible
confusion surrounding the current regulation's application to holders.
VA proposes paragraph (d)(1), with the heading, ``Fraud in obtaining
the guaranty or insurance'', to provide that VA would have no liability
on account of a guaranty or insurance, or any loan guaranty
certificate, with respect to a transaction in which VA determines the
holder or holder's agent participated in fraud in obtaining the
guaranty or insurance. In other words, the holder is not a holder in
due course if the holder colluded with the originating lender in
defrauding VA. So, the rule would mean that, even if a holder was not
the originating lender, if the holder was directly involved or
complicit in the fraud at origination, VA would not have liability on
the guaranty.
In proposed paragraph (d)(2), VA would state, under the heading
``Holder fraud in obtaining a claim payment on the guaranty or
insurance'', that VA would have no liability on a guaranty or insurance
claim if the holder commits fraud in obtaining a claim payment from VA
on the guaranty or insurance of a loan. As explained in the paragraphs
related to fraud by lenders, VA believes a holder that commits fraud
against the government forfeits the protections Congress wanted to
provide the secondary market under 38 U.S.C. 3721.
Paragraph (d)(3) would include the heading ``Material
misrepresentations related to the quantum or quality of title'', and
would state that VA may adjust the amount of the guaranty or insurance,
or any loan guaranty certificate, if VA determines the holder knew or
should have known, at the time the holder reports the loan for guaranty
claim, of a material misrepresentation as to the quantum or quality of,
or title to, the property securing the loan such that the property
would not have been acceptable to prudent lending institutions,
investors, informed buyers, title companies, and attorneys, generally,
in the community in which the property is situated. VA would not,
however, adjust the guaranty or insurance amount for title exceptions
enumerated as acceptable under Sec. 36.4354(b), unless otherwise
specified in subpart B.
The proposed phrasing is almost identical to the current rule. The
changes are intended as clarifications. For instance, VA would replace
``limitations'' under Sec. 36.4354(b) with ``title exceptions
enumerated as acceptable,'' to eliminate some of the current ambiguity
that may surround VA's intent. Similarly, VA would add the caveat
``unless otherwise specified'' in subpart B, to remind readers that the
rule is part of a coherent and consistent framework and cannot be taken
out of context. A good example of how this might apply can be found in
Sec. 36.4327, which addresses authorized and unauthorized releases of
security. If a holder allowed a new oil and gas lease--a type of title
exception that could generally be acceptable under Sec. 36.4354(b)--
but did so without following the steps prescribed in Sec. 36.4327 for
partial releases in interest, the unauthorized release could affect the
amount of guaranty payable on an eventual default. This is the way VA
applies the current rule, but VA believes the current rule's text may
not express it clearly enough. Thus, VA believes that, as a part of
this regulatory update, VA should specify the scope of the rule more
explicitly.
[[Page 91630]]
Paragraph (d)(4) would include the heading ``Noncompliance with
servicing requirements and material misrepresentation in reporting.''
Paragraph (d)(4)(i) would provide that VA may adjust amounts payable to
the holder if VA determines the holder failed to comply with the
statutory requirements under 38 U.S.C. chapter 37 or the implementing
regulations concerning guaranty or insurance of loans to veterans at 38
CFR part 36 or if VA determines the holder knew or should have known of
a material misrepresentation in reporting to the Secretary or in
submitting a claim to VA for payment of the guaranty or insurance.
Paragraph (d)(4)(ii) would specify that the burden of proof would be
upon the holder to establish that no increase of ultimate liability is
attributable to such failure or misrepresentation. Paragraph
(d)(4)(iii) would explain that the amount of increased liability of the
Secretary would be offset by deduction from the amount of the guaranty
or insurance otherwise payable, or if based upon loss related to
property that secured the guaranteed loan, would be offset by crediting
to the indebtedness the amount of the impairment as proceeds of the
sale of security in the final accounting to the Secretary. Paragraph
(d)(4)(iv) would provide that, to the extent the loss resultant from
the failure or misrepresentation prejudices the Secretary's right of
subrogation, acceptance by the holder of the guaranty or insurance
payment would subordinate the holder's right to those of the Secretary.
In revising the rule, VA would eliminate the list of potential
reasons for adjustment found in current paragraphs (b)(1) through (9).
Stakeholders should not misconstrue this change to mean that VA would
no longer consider the failures outlined in the current rule as reasons
to adjust the guaranty. Rather, VA simply believes that the new rewrite
would eliminate the need to enumerate them in the current way. For
instance, current paragraph (b)(1) of Sec. 36.4328 reminds that one of
the fundamental requirements for a VA-guaranteed loan is that it be
obtained and retained as a superior lien. See 38 CFR 36.4328(b)(1). See
also, for example, 38 U.S.C. 3703(d) and 38 CFR 36.4327. The proposed
rule would omit the specific enumeration of this as an example of a
failure that would result in an adjustment. But even so, VA would,
under the proposed rule, still adjust the guaranty for such a failure,
because proposed paragraph (d)(4)(i) would provide that VA may adjust
the amount of the guaranty or insurance, or any loan guaranty
certificate, if VA determines the holder failed to comply with the
statutory requirements under 38 U.S.C. chapter 37 or the implementing
regulations concerning guaranty or insurance of loans to veterans. VA
welcomes comment on whether stakeholders would prefer to retain a more
illustrative list as a way of providing stakeholders further
understanding. VA does not intend for an attempt at simplification of
the rule to result in holders being unsettled about the reliability of
the guaranty; nor does VA want veterans, consumer advocates, or those
concerned about the welfare of program solvency to be concerned about
the scope of the change.
5. Liability After Payment of Guaranty or Insurance, or VA Purchase
VA would redesignate current paragraph (c) of 38 CFR 36.4328 as new
paragraph (e). VA would revise new paragraph (e) to clarify the wording
for readability, but the proposed change is not substantive.
6. Additional Remedies
In Sec. 36.4328, VA would add a new paragraph (f), under the
heading, ``Additional remedies'', to ensure full transparency related
to VA's enforcement authorities. VA would provide that, any action VA
takes under this section may be taken in addition to other remedies
available to VA, such as debarment and suspension pursuant to 38 U.S.C.
3704 and 2 CFR parts 180 and 801 or loss of automatic processing
authority pursuant to 38 U.S.C. 3702, or other actions by the
Government under any other law including but not limited to title 18
U.S.C. and 31 U.S.C. 3732. Although the paragraph is not legally
necessary to preserve VA's rights of enforcement, VA believes an
intentional, explicit redundancy would be helpful in emphasizing the
point that this section does not constitute the full range of potential
action VA could or would take if VA discovered, for instance, a pattern
of intentional material misrepresentations, seemingly incorporated into
business practices after a monetary cost-benefit calculus.
Lastly, VA would revise the authority citation for Sec. 36.4328 to
note 38 U.S.C. 3703, 3704, 3710, 3720, 3721, and 3732.
Executive Orders 12866, 13563, and 14094
Executive Order 12866 (Regulatory Planning and Review) directs
agencies to assess the costs and benefits of available regulatory
alternatives and, when regulation is necessary, to select regulatory
approaches that maximize net benefits (including potential economic,
environmental, public health and safety effects, and other advantages;
distributive impacts; and equity). Executive Order 13563 (Improving
Regulation and Regulatory Review) emphasizes the importance of
quantifying both costs and benefits, reducing costs, harmonizing rules,
and promoting flexibility. Executive Order 14094 (Executive Order on
Modernizing Regulatory Review) supplements and reaffirms the
principles, structures, and definitions governing contemporary
regulatory review established in Executive Order 12866 of September 30,
1993 (Regulatory Planning and Review), and Executive Order 13563 of
January 18, 2011 (Improving Regulation and Regulatory Review). The
Office of Information and Regulatory Affairs has determined that this
proposed rulemaking is a significant regulatory action under Executive
Order 12866, as amended by Executive Order 14094. 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 a substantial number of
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, the estimated impacts of this
rulemaking on lenders include transfers from lenders to VA associated
with overcharge fees and guarantee claim amounts, the cost of rule
familiarization and system updates to lenders, and cost savings
associated with reduced burden associate with API utilization. A more
detailed discussion of these impacts can be found in the impact
analysis.
VA was able to estimate the size of 1,203 out of 1,450 active
lenders that originated VA loans 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
[[Page 91631]]
Federal Deposit Insurance Corporation (FDIC) and the National Credit
Union Administration (NCUA).\2\ Of the 1,203 lenders with sufficient
data for VA to estimate their size, 703 (58.4%) are considered small.
The average annual revenue of these 640 lenders is estimated at $25.51
million.\3\
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\1\ U.S. Small Business Administration, SBA Table of Size
Standards, Retrieved from: <a href="https://www.sba.gov/document/support-table-size-standards">https://www.sba.gov/document/support-table-size-standards</a>.
\2\ VA uses data from Data Axle and Factiva to determine the
industry (as identified by the primary North American Industry
Classification System [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
522180 (Savings Institutions and Other Depository Credit
Intermediation), 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.
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The costs of the one-time rule familiarization in the first year of
the rule (fiscal year [FY] 2025) are estimated at approximately $240
for each lender, including the small lenders. VA estimates that the net
cost savings to lenders from the reduction in reporting burdens and
system updates ranges from $1,066 (FY 2025) to $1,110 (FY 2034) per
small lender.\4\ The estimated transfer payment from lenders in the
form of overcharge fees and guarantee claim amounts ranges from $2,547
(FY 2025) to $9,373 (FY 2034) per small lender. Adding these impacts
results in the average estimated annual burden of [$2,547 + $240 -
$1,066 = ] $1,721 to [$9,373 -$1,110 = ] $8,263 per small lender from
the first and final years of the analysis period (FY 2025 and FY 2034),
respectively. VA considers a significant economic impact to equal or
exceed 3 percent of annual revenue. The burden of the rule as a
proportion of small lender revenue ranges from 0.007 percent to 0.032
percent for FY 2025 and FY 2034, respectively. On this basis, the
Secretary certifies that adopting 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. Therefore, under
5 U.S.C. 605(b), the initial and final regulatory flexibility analysis
requirements of 5 U.S.C. 603 and 604 do not apply.
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\4\ VA scales the costs/transfers by first dividing the total
average annual volume of loans guaranteed by small lenders in the
past three full fiscal years (319,924) by the total average annual
loans guaranteed in the same period by all lenders with enough
information to classify their size (1,004,465). Multiplying that
ratio (31.85) 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 (703),
which is the percent of small lenders from the classified population
(58.4%) multiplied by all VA lenders (1,450)) provides the average
annual cost and transfers for and from each small lender.
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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
As noted above, this proposed rule contains collections of
information under the provisions of the Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3521) that are currently approved by OMB but do not
require revision. These information collections have valid OMB control
numbers of 2900-0516 and 2900-0521. Additionally, 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
requires approval by OMB under existing OMB control number 2900-0909.
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 the 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 be sent within 60 days of publication of this rulemaking. The
collection 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. 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 revised
collection of information in--
<bullet> Evaluating whether the revised collection of information
is 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 revised 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, e.g., permitting
electronic submission of responses.
The revised collection of information associated with this
rulemaking contained in 38 CFR 36.4303 is described immediately
following this paragraph, under its respective title.
Title: Guaranteed or Insured Loan Reporting Requirements.
OMB Control No: 2900-0909.
CFR Provision: 38 CFR 36.4303.
<bullet> Summary of collection of information: The revised
collection of information would require all lenders that participate in
the VA-guaranteed home loan program to submit the reporting and
certification requirements as noted in proposed 38 CFR 36.4303 in an
electronic format using an API, as designated by the Secretary. While
VA currently requires lenders to report certain loan information and
certifications as part of the existing loan guaranty certificate and
reporting process, this proposed rule would require additional
information including the loan application (e.g., Uniform Loan
Application Dataset), closing disclosures (e.g., Uniform Closing
Dataset), and other information necessary for VA evaluation and
oversight purposes. Additionally, lenders would be required to submit
information using an API rather than the current system, WebLGY.
<bullet> Description of need for information and proposed use of
information: VA would use this information to ensure that veterans have
stronger protections
[[Page 91632]]
against lenders closing nonconforming loans through increased VA
oversight, as the Guaranty Remittance API would allow VA to review 100
percent of guaranteed loans for policy conformance with certain VA
statutory and regulatory requirements that VA only currently evaluates
on three percent of loans as part of its full file loan review and
audit processes. Specifically, VA would be able to evaluate loan
closing data on 100 percent of guaranteed loans for VA policy
conformance with certain statutory, regulatory, or other requirements.
As a result, VA would be able to cite defenses to paying the guaranty
based on fraud or material misrepresentation and establish partial
defenses to the amount payable on the guaranty or insurance. Lenders
and holders would have a clear understanding of how failure to comply
with VA's statutory and regulatory requirements affect the guaranty to
be paid by VA.
<bullet> Description of likely respondents: Lenders.
<bullet> Estimated number of respondents:
Loans reported and certified: 484,019 annually.
Loans requiring VA prior approval: 1,815 annually.
Loans requiring Late Reporting Statements: 24,201 annually.
<bullet> Estimated frequency of responses: One time per
transaction.
<bullet> Estimated average burden per response:
Loans reported and certified: 0.008 hours (about 30 seconds). This
proposed rulemaking would result in an estimated reduction of 0.15
average burden hour per response (about 9 minutes) for this information
collection.
Loans requiring VA prior approval: 0.008 hours (about 30 seconds).
This proposed rulemaking would result in an estimated reduction of 0.04
average burden hour per response (about 2 minutes and 30 seconds) for
this information collection.
Loans requiring Late Reporting Statements: 0.03 hours (about 2
minutes). VA does not estimate any incremental change to the average
burden hour per response for this information collection.
<bullet> Estimated total annual reporting and recordkeeping burden:
VA estimates a total annual reporting and recordkeeping burden of 4,612
hours for lenders. Using VA's revised estimate of total annual
responses (loans) of 484,019 (down from 843,150 loans) loan estimate,
this rulemaking would result in incremental annual burden hour savings
of 72,675 burden hours.
Loans reported for Guaranty (including prior approval): 3,886 hours
((484,019+1,815) x 0.008 hours).
<bullet> Estimated cost to respondents per year: VA estimates the
annual burden cost to lenders to be $187,339.\5\ Using VA's revised
estimate of total annual responses (loans) of 484,019, this rulemaking
would result in incremental annual burden cost savings of $2,836,172
for FY 2025 (average of high/low estimated net cost savings) and
incremental annual burden cost savings of $2,952,050 in the following
outyears.
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\5\ Bureau of Labor Statistics. (2024). May 2023-National
Occupational Employment and Wage Estimates. Retrieved from: <a href="https://www.bls.gov/oes/current/oes_nat.htm">https://www.bls.gov/oes/current/oes_nat.htm</a>; Occupation code 13-2072.
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<bullet> VA also estimates this proposed rulemaking results in a
one-time system alignment cost to lenders and LOS providers ranging
from $88,288 to $143,468. More details about this estimate can be found
in the impact analysis.
List of Subjects in 38 CFR Part 36
Condominiums, Housing, Individuals with disabilities, Loan
programs--housing and community development, Loan programs--Indians,
Loan programs--veterans, Manufactured homes, Mortgage insurance,
Veterans.
Signing Authority
Denis McDonough, Secretary of Veterans Affairs, approved and signed
this document on November 12, 2024, 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.
Jeffrey M. Martin,
Assistant Director, 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
0
1. The authority citation for part 36 continues to read as follows:
Authority: 38 U.S.C. 501 and 3720.
Subpart B--Guaranty or Insurance of Loans to Veterans with
Electronic Reporting
0
2. Revise and republish Sec. 36.4303 to read as follows:
Sec. 36.4303 Reporting requirements.
(a) Automatically guaranteed loans. (1) For loans automatically
guaranteed under 38 U.S.C. 3703(a)(1), a lender of a class described
under 38 U.S.C. 3702(d) shall report the loan in an electronic format
using an application programming interface, as designated by the
Secretary. VA will announce in the Federal Register any designation of
a new application programming interface at least 60 days before a
lender would be required to use the application programming interface
for reporting the loan. The lender must also submit the information
required under paragraph (a)(2) of this section using the application
programming interface designated by the Secretary.
(2) The lender must submit the following not later than 15 days
after the loan closing date:
(i) The appropriate funding fee as prescribed by 38 U.S.C. 3729;
(ii) Required information regarding the loan, including but not
limited to the loan application (e.g., Uniform Loan Application
Dataset), closing disclosures (e.g., Uniform Closing Dataset), and any
other information required by the Secretary as necessary to issue a
loan guaranty certificate;
(iii) Required lender certifications related to the loan; and
(iv) Certification of the veteran at the time the loan is closed as
to their occupancy of the property.
(A) In the case of a loan for the purchase or construction of a
residential property, the veteran shall certify that the veteran
intends to occupy such property as the veteran's home.
(B) In the case of a loan for the repair, alteration, or
improvement of residential property, the veteran shall certify that the
veteran presently occupies the property as the veteran's home. An
exception to this paragraph (a)(2)(iv)(B) is if the home improvement or
refinancing loan is for extensive changes to the property that will
prevent the veteran from occupying the property while the work is being
completed. In such a case, the veteran shall certify that the veteran
intends to occupy or reoccupy the property as the veteran's home upon
completion of the substantial improvements or repairs.
(C) In the event a veteran is in active-duty status as a member of
the Armed Forces and is unable to occupy the property because of such
status, VA will accept:
(1) A certification from the spouse of the veteran that the
veteran's spouse occupies or intends to occupy the property as their
home as required by paragraphs (a)(2)(iv)(A) and (B) of this section;
or
(2) A certification from the veteran's attorney-in-fact or from the
legal guardian of a dependent child of the veteran that the dependent
child
[[Page 91633]]
occupies or intends to occupy the property as the dependent child's
home as required by paragraphs (a)(2)(iv)(A) and (B) of this section.
(D) In the case of an interest rate reduction refinancing loan, the
veteran shall certify as to meeting one of the occupancy requirements
at Sec. 36.4307(a)(2).
(3) Upon acceptance of the information prescribed in paragraph
(a)(2) of this section, VA shall issue the loan guaranty certificate
subject to the provisions of Sec. 36.4328.
(b) Prior-approval loans. (1) In the case of a loan made by a
lender without the authority to close loans on an automatic basis or
any loan where the Secretary provides advance notice of the need for
prior approval, the lender must report the loan to the Secretary before
the loan closing for the Secretary's review. The lender must report the
loan in an electronic format and, if designated by the Secretary, using
an application programming interface. VA will announce in the Federal
Register any designation of a new application programming interface at
least 60 days before a lender would be required to use the application
interface for reporting the loan for review prior to the loan closing.
The lender must also submit the information required under paragraph
(b)(2) of this section.
(2) The lender must submit certain pre-closing and underwriting
loan documents, including but not limited to--
(i) The loan application (e.g., Uniform Residential Loan
Application);
(ii) Credit reports obtained in connection with the loan;
(iii) Certain VA forms as required by the Secretary;
(iv) The occupancy certification prescribed in paragraph (a)(2)(iv)
of this section obtained at the time of loan application; and
(v) Any other information requested by the Secretary.
(3) Upon review and approval of the of the information prescribed
by paragraph (b)(2) of this section, VA shall:
(i) Issue a certificate of commitment which shall commit a loan
guaranty certificate to the holder of the loan upon the payment of the
full proceeds of the loan for the purposes described in the original
report and provided the requirements in paragraph (b)(4) of this
section are met; or
(ii) Notify the lender that the loan cannot close as a VA-
guaranteed loan; however, the lender may resubmit the loan to VA for
prior approval after the lender corrects any issues identified by VA.
(4) The lender would be required to report the loan to VA not later
than 15 days after the loan closing date using the same application
programming interface (API) as when reporting loans closed on an
automatic basis. The lender must also submit the following, using the
designated API, not later than 15 days after the loan closing date:
(i) The appropriate funding fee as prescribed by 38 U.S.C. 3729;
(ii) The information prescribed in paragraph (a)(2)(ii) of this
section;
(iii) Evidence that any conditions identified by the Secretary in
the certificate of commitment are satisfied in order for the Secretary
to issue a loan guaranty certificate;
(iv) Evidence showing the property securing the loan is that for
which the certificate of commitment was issued;
(v) Evidence that all property purchased or acquired with the
proceeds of the loan has been encumbered as required by VA;
(vi) Required lender certifications for the loan; and
(vii) The occupancy certification prescribed in paragraph
(a)(2)(iv) of this section obtained at the time of loan closing.
(5) Upon acceptance of the information prescribed in paragraph
(b)(4) of this section, VA shall issue the loan guaranty certificate
subject to the provisions of Sec. 36.4328.
(6) If the lender does not close the loan for which VA prior
approval was obtained, the certificate of commitment shall have no
further effect.
(c) Late reporting of closed loans. For loans not reported within
the timing requirements of this section, evidence of guaranty will be
issued only if the loan report is accompanied by a statement from the
lending institution that explains why the loan was reported late and
whether, since origination, the loan was in default. The statement must
identify the case or cases in issue and set forth the specific reason
or reasons why the loan was not submitted on time. Upon receipt of such
a statement, evidence of guaranty will be issued. A pattern of late
reporting and the reasons therefore will be considered by VA in taking
action under Sec. Sec. 36.4336 and 36.4353.
(d) Form of guaranty evidence. Evidence of a guaranty shall be
issued by the Secretary as a loan guaranty certificate. For insured
loans, notice of credit to an insurance account will be given to the
lender.
(e) Exclusions from the guaranty or insurance amount. Any amounts
that are disbursed by a lender for an ineligible purpose shall be
excluded in computing the amount of guaranty or insurance credit.
(f) Veteran's right to exit purchase contract. No guaranty or
insurance commitment or evidence of guaranty or insurance will be
issuable in respect to any loan to finance a contract that:
(1) Is for the purchase, construction, repair, alteration, or
improvement of a dwelling or farm residence;
(2) Is dated on or after June 4, 1969;
(3) Provides for a purchase price or cost to the veteran in excess
of the reasonable value established by the Secretary; and
(4) Was signed by the veteran prior to the veteran's receipt of
notice of such reasonable value; unless such contract includes, or is
amended to include, a provision that reads substantially as follows:
Figure 1 to Paragraph (f)(4)
It is expressly agreed that, notwithstanding any other provisions
of this contract, the purchaser shall not incur any penalty by
forfeiture of earnest money or otherwise be obligated to complete the
purchase of the property described herein, if the contract purchase
price or cost exceeds the reasonable value of the property established
by the Department of Veterans Affairs. The purchaser shall, however,
have the privilege and option of proceeding with the consummation of
this contract without regard to the amount of the reasonable value
established by the Department of Veterans Affairs.
(g) Processing and reporting a loan assumption. With respect to any
loan for which a commitment was made on or after March 1, 1988, the
Secretary must be notified whenever the holder receives knowledge of
disposition of the residential property securing a VA-guaranteed loan.
(1) If the seller applies for prior approval of the assumption of
the loan, then:
(i) A holder (or its authorized servicing agent) who is an
automatic lender must examine the creditworthiness of the purchaser and
determine compliance with the provisions of 38 U.S.C. 3714. The
creditworthiness review must be performed by the party that has
automatic authority. If both the holder and its servicing agent are
automatic lenders, then they must decide between themselves which one
will make the determination of creditworthiness, whether the loan is
current, and whether there is a contractual obligation to assume the
loan, as required by 38 U.S.C. 3714. If the actual loan holder does not
have automatic authority and
[[Page 91634]]
its servicing agent is an automatic lender, then the servicing agent
must make the determinations required by 38 U.S.C. 3714 on behalf of
the holder. The actual holder will remain ultimately responsible for
any failure of its servicing agent to comply with the applicable law
and VA regulations.
(A) If the assumption is approved and the transfer of the security
is completed, then the notice required by this paragraph (g) shall
consist of the credit package (unless previously provided in accordance
with paragraph (g)(1)(i)(B) of this section) and a copy of the executed
deed and/or assumption agreement as required by VA office of
jurisdiction. The notice shall be submitted to the Department with the
VA receipt for the funding fee provided for in Sec. 36.4313(e)(2).
(B) If the application for assumption is disapproved, the holder
shall notify the seller and the purchaser that the decision may be
appealed to the VA office of jurisdiction within 30 days. The holder
shall make available to that VA office all items used by the holder in
making the holder's decision in case the decision is appealed to VA. If
the application remains disapproved after 60 days (to allow time for
appeal to and review by VA), then the holder must refund $50 of any fee
previously collected under the provisions of Sec. 36.4313(d)(8). If
the application is subsequently approved and the sale is completed,
then the holder (or its authorized servicing agent) shall provide the
notice described in paragraph (g)(1)(i)(A) of this section.
(C) In performing the requirements of paragraph (g)(1)(i)(A) or (B)
of this section, the holder must complete its examination of the
creditworthiness of the prospective purchaser and advise the seller no
later than 45 days after the date of receipt by the holder of a
complete application package for the approval of the assumption. The
45-day period may be extended by an interval not to exceed the time
caused by delays in processing of the application that are documented
as beyond the control of the holder, such as employers or depositories
not responding to requests for verifications, which were timely
forwarded, or follow-ups on those requests.
(ii) If neither the holder nor its authorized servicing agent is an
automatic lender, the notice to VA shall include:
(A) Advice regarding whether the loan is current or in default;
(B) A copy of the purchase contract; and
(C) A complete credit package developed by the holder which the
Secretary may use for determining the creditworthiness of the
purchaser.
(D) The notice and documents required by this section must be
submitted to the VA office of jurisdiction no later than 35 days after
the date of receipt by the holder of a complete application package for
the approval of the assumption, subject to the same extensions as
provided in paragraph (g)(1)(i) of this section. If the assumption is
not automatically approved by the holder or its authorized agent,
pursuant to the automatic authority provisions, $50 of any fee
collected in accordance with Sec. 36.4313(d)(8) must be refunded. If
the Department of Veterans Affairs does not approve the assumption, the
holder will be notified and an additional $50 of any fee collected
under Sec. 36.4313(d)(8) must be refunded following the expiration of
the 30-day appeal period set out in paragraph (g)(1)(i)(B) of this
section. If such an appeal is made to the Department of Veterans
Affairs, then the review will be conducted at the Department of
Veterans Affairs office of jurisdiction by an individual who was not
involved in the original disapproval decision. If the application for
assumption is approved and the transfer of security is completed, then
the holder (or its authorized servicing agent) shall provide the notice
required in paragraph (g)(1)(i)(A) of this section.
(2) If the seller fails to notify the holder before disposing of
property securing the loan, the holder shall notify the Secretary
within 60 days after learning of the transfer. Such notice shall advise
whether or not the holder intends to exercise its option to immediately
accelerate the loan and whether or not an opportunity will be extended
to the transferor and transferee to apply for retroactive approval of
the assumption under the terms of this paragraph (g).
(The Office of Management and Budget has approved the information
collection requirements in this section under control numbers 2900-
0516, 2900-0521, and 2900-0909).
(Authority: 38 U.S.C. 3702, 3703, 3704, 3710, 3714, and 3729)
0
3. Revise and republish Sec. 36.4328 to read as follows:
Sec. 36.4328 Partial or total loss of guaranty or insurance.
(a) No liability on the guaranty or insurance due to forgery or
falsification of documents. VA will have no liability on account of a
guaranty or insurance of a loan, or any certificate or other evidence
thereof, if--
(1) A signature to the note, the mortgage, or any other loan papers
is a forgery;
(2) The application for guaranty or insurance is a forgery; or
(3) The certificate of discharge or the certificate of eligibility
is counterfeited or falsified or is not issued by the Government.
(b) Material misrepresentation by a lender. If a lender knew or
should have known of a material misrepresentation at the time of the
reporting of the loan to VA under Sec. 36.4303, VA may adjust the
maximum guaranty amount on the loan guaranty certificate or VA may
demand indemnification from the lender, as provided in paragraph (c) of
this section.
(1) Material misrepresentation is identified before VA issues the
loan guaranty certificate. VA will notify the lender of VA's findings
that the lender made a material misrepresentation when reporting the
loan and VA will issue the loan guaranty certificate with a maximum
guaranty amount of one dollar.
(2) Material misrepresentation is identified after VA issues the
loan guaranty certificate. VA will notify the originating lender of
VA's findings and that--
(i) If the originating lender is the current loan holder, the
maximum guaranty amount on the loan has been reduced to one dollar; or
(ii) If the originating lender is not the current loan holder, VA
is requiring the lender to indemnify VA for a guaranty or insurance
claim for the life of the loan, including any subsequent interest rate
reduction refinancing loans, as provided in paragraph (c) of this
section.
(3) Corrective action by lender. (i) When notifying the lender of
VA's findings under paragraph (b)(1) or (2) of this section, VA will
also identify corrective action(s), if any, VA determines necessary to
remediate the effects of the material misrepresentation. After VA
receives evidence confirming the effects of the material
misrepresentation have been remediated, VA may either restore the
guaranty to the full amount or cancel the indemnification, as
applicable.
(ii) If VA determines the effects of the material misrepresentation
cannot be remediated, VA will require the originating lender to
indemnify VA, as provided in paragraph (c) of this section.
(c) Indemnification after VA issues the loan guaranty certificate.
Except as provided in paragraph (b) of this section, for loans closed
on or after [EFFECTIVE DATE OF FINAL RULE], a
[[Page 91635]]
lender agrees to indemnify VA in accordance with the following:
(1) Violations of underwriting requirements. If VA determines the
originating lender made a material misrepresentation relating to the
credit underwriting of a loan pursuant to the provisions of Sec.
36.4340, the originating lender must abstain from filing a guaranty or
insurance claim in the event of a loan default and must indemnify VA
for any and all losses arising from or related to a guaranty or
insurance claim made on the loan within five years of the date of the
loan guaranty certificate, including any subsequent interest rate
reduction refinancing loans. Examples of a material misrepresentation
related to the provisions of Sec. 36.4340 include the lender's failure
to--
(i) Verify assets, employment, and credit reports (Sec.
36.4340(j));
(ii) Determine or accurately determine the veteran's acceptable
debt-to-income ratio (Sec. 36.4340(c)); or
(iii) Ensure residual income guidelines were met (Sec.
36.4340(e)).
(2) Non-underwriting related violations. If VA determines the
originating lender committed fraud or made an uncorrectable material
misrepresentation relating to noncompliance with requirements other
than those prescribed in Sec. 36.4340, the originating lender must
abstain from filing a guaranty or insurance claim in the event of a
loan default and must indemnify VA for any and all losses arising from
or related to a guaranty or insurance claim, for the life of the loan,
including any subsequent interest rate reduction refinancing loans.
(3) Notice of indemnification. The Secretary will notify the lender
when VA determines that a loan is subject to indemnification.
(d) Guaranty adjustments to holder--(1) Fraud in obtaining the
guaranty or insurance. There shall be no liability on account of a
guaranty or insurance, or any loan guaranty certificate, with respect
to a transaction in which VA determines the holder or holder's agent
participated in fraud in procuring the guaranty or insurance.
(2) Holder fraud in obtaining a claim payment on the guaranty or
insurance. There shall be no liability on a guaranty or insurance claim
if the holder commits fraud in obtaining a claim payment from VA on the
guaranty or insurance of a loan.
(3) Material misrepresentations related to the quantum or quality
of title. VA may adjust the amount of the guaranty or insurance, or any
loan guaranty certificate, if VA determines the holder knew or should
have known, at the time the holder reports the loan for guaranty claim,
of a material misrepresentation as to the quantum or quality of, or
title to, the property securing the loan such that the property would
not have been acceptable to prudent lending institutions, investors,
informed buyers, title companies, and attorneys, generally, in the
community in which the property is situated. VA will not, however,
adjust the guaranty or insurance amount for title exceptions enumerated
as acceptable under Sec. 36.4354(b), unless otherwise specified in
this subpart.
(4) Noncompliance with servicing requirements and material
misrepresentation in reporting. (i) VA may adjust the amounts payable
to the holder if VA determines--
(A) The holder failed to comply with the statutory requirements
under 38 U.S.C. chapter 37 or the implementing regulations concerning
guaranty or insurance of loans to veterans at 38 CFR part 36; or
(B) The holder knew or should have known of a material
misrepresentation in reporting to the Secretary or in submitting a
claim to VA for payment of the guaranty or insurance.
(ii) The burden of proof would be upon the holder to establish that
no increase of ultimate liability is attributable to such failure or
misrepresentation.
(iii) The amount of increased liability of the Secretary would be
offset by deduction from the amount of the guaranty or insurance
otherwise payable, or if based upon loss related to property that
secured the guaranteed loan, would be offset by crediting to the
indebtedness the amount of the impairment as proceeds of the sale of
security in the final accounting to the Secretary.
(iv) To the extent the loss resultant from the failure or
misrepresentation prejudices the Secretary's right of subrogation,
acceptance by the holder of the guaranty or insurance payment would
subordinate the holder's right to those of the Secretary.
(e) Liability after payment of guaranty or insurance, or VA loan
purchase. If after the payment on a guaranty or an insurance loss, or
after a loan is transferred pursuant to Sec. 36.4320(a), the Secretary
discovers any fraud, material misrepresentation, or failure to comply
with the regulations at 38 CFR part 36 and determines that an increased
loss to the Government resulted therefrom, then the transferor or
person to whom such payment was made shall be liable to the Secretary
for the amount of the loss caused by such fraud, material
misrepresentation, or failure.
(f) Additional remedies. Any action VA takes under this section may
be taken in addition to other remedies available to VA, such as
debarment and suspension pursuant to 38 U.S.C. 3704 and 2 CFR parts 180
and 801 or loss of automatic processing authority pursuant to 38 U.S.C.
3702, or other actions by the Government under any other law including
but not limited to title 18 U.S.C. and 31 U.S.C. 3732.
(Authority: 38 U.S.C. 3703, 3704, 3710, 3720, 3721, and 3732)
[FR Doc. 2024-26776 Filed 11-19-24; 8:45 am]
BILLING CODE 8320-01-P
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</html>Indexed from Federal Register on November 20, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.