[Federal Register Volume 59, Number 37 (Thursday, February 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4145]


[[Page Unknown]]

[Federal Register: February 24, 1994]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AG14

 

Loan Guaranty: Implementation of Public Law 102-547

AGENCY: Department of Veterans Affairs.

ACTION: Proposed regulatory amendments.

-----------------------------------------------------------------------

SUMMARY: The Department of Veterans Affairs (VA) is proposing to amend 
its loan guaranty regulations to comply with certain provisions of the 
Veterans Home Loan Program Amendments of 1992 and the Onmibus Budget 
Reconciliatory Act of 1993. VA proposes to amend its regulations to 
provide for the guarantee of loans for reservists and members of the 
national guard, loans where the interest rate has been negotiated 
between the borrower and the lender, adjustable rate mortgages, and 
energy efficient mortgages. VA also proposes to amend its regulations 
to reflect a reduced funding fee for interest rate reduction 
refinancing loans, and a revised guaranty percentage for these loans as 
well as an increased funding fee on most guaranteed loans, and an 
increased funding fee for second and subsequent use of the loan 
guaranty benefit, except for interest rate reduction refinancing loans. 
These changes will increase the types of loans available to veterans 
and the categories of veterans eligible for VA home loans.

DATES: Comments must be received on or before April 25, 1994. Comments 
will be available for public inspection until May 5, 1994. VA proposes 
to make these regulations effective 30 days after publication of the 
final regulations.

ADDRESSES: Interested persons are invited to submit written comments, 
suggestions or objections regarding this proposal to the Secretary of 
Veterans Affairs, 810 Vermont Avenue NW., Washington, DC 20420. All 
written comments will be available for public inspection in room 170, 
Veterans Service Unit, at the above address between the hours of 8 a.m. 
and 4:30 p.m., Monday through Friday (except holidays) until May 5, 
1994.

FOR FURTHER INFORMATION CONTACT: Ms. Judith Caden, Assistant Director 
for Loan Policy (264), Loan Guaranty Service, Veterans Benefits 
Administration, Department of Veterans Affairs, Washington, DC 20420, 
(202) 233-3042.

SUPPLEMENTARY INFORMATION: VA is proposing to incorporate into its 
regulations several changes to comply with certain provisions of Public 
Law 102-547 and Public Law 103-66.
    Prior to the enactment of Public Law 102-547 persons whose only 
military service consisted of active duty for training and inactive 
duty training in the reserve components of the Armed Forces did not 
qualify for loan guaranty benefits. Public Law 102-547 extends 
eligibility for VA-guaranteed home loans to certain members of the 
Selected Reserve as defined in 38 U.S.C. 3701(b)(5). This eligibility 
expires 7 years from the date of enactment of the law.
    38 U.S.C. 3729 requires that a funding fee be collected from each 
veteran obtaining a VA-guaranteed loan except for veterans who receive 
compensation or from a surviving spouse of a veteran who died from a 
service-connected disability. Public Law 102-547 requires that a higher 
funding fee be collected on loans to the newly eligible members of the 
Selected Reserve as defined in 38 U.S.C. 3701(b)(5) than on loans to 
other veterans. Effective October 1, 1993, Public Law 103-66, the 
Omnibus Budget Reconciliation Act of 1993, increased the funding fee by 
0.75 percent on all VA loans except interest rate reduction refinancing 
loans, vendee loans, direct loans, manufactured home loans under 38 
U.S.C. 3712, and loan assumptions. This new law also established an 
increased fee for second and subsequent use of the loan guaranty 
benefit, except for interest rate reduction refinancing loans. The 
increase in funding fees established by Public Law 103-66 will expire 
on September 30, 1998. VA is proposing to amend 38 CFR 36.4312 to add 
the funding fee structure for members of the Selected Reserves, and to 
provide for the higher funding fees required by Public Law 103-66, as 
discussed in the following paragraphs.
    Public Law 103-66 provides that on loans to veterans whose 
entitlement is not based on service in the Selected Reserve as defined 
in 38 U.S.C. 3701 (b)(5)(1), the funding fee shall be as follows:
    (1) For loans for the purchase or construction of a home on which 
the veteran does not make a down payment, the funding fee shall be 2.00 
percent of the total loan amount;
    (2) For loans where the veteran makes a down payment of 5 percent 
or more, but less than 10 percent, the funding fee shall be 1.5 percent 
of the loan amount;
    (3) For loans where the veteran makes a down payment of 10 percent 
or more, the funding fee shall be 1.25 percent of the total loan 
amount;
    (4) For refinancing loans except interest rate reduction 
refinancing loans under 38 U.S.C. 3710(a)(8) and 3710(b)(7), the 
funding fee shall be 2.00 percent of the total loan amount; and
    (5) For loans where the veteran uses entitlement for a second or 
subsequent time and does not make a downpayment, the funding fee shall 
be 3.00 percent of the total loan amount.
    Public Law 103-66 provides that on loans to veterans whose 
entitlement is based on service in the Selected Reserve as defined in 
38 U.S.C. 3701(b)(5) the funding fee shall be as follows:
    (1) For loans for the purchase or construction of a home on which 
the veteran does not make a down payment, the funding fee shall be 2.75 
percent of the total loan amount;
    (2) For loans where the veteran makes a down payment of 5 percent 
or more, but less than 10 percent, the funding fee shall be 2.25 
percent of the loan amount;
    (3) For loans where the veteran makes a down payment of 10 percent 
or more, the funding fee shall be 2.00 percent of the total loan 
amount;
    (4) For refinancing loans except interest rate reduction 
refinancing loans under 38 U.S.C. 3710(a)(8) and 3710(b)(7), the 
funding fee shall be 2.75 percent of the total loan amount; and
    (5) For loans where the veteran uses entitlement for a second or 
subsequent time and does not make a downpayment, the funding fee shall 
be 3.00 percent of the total loan amount.
    Prior to the enactment of Public Law 102-547 the Secretary was 
required to set a maximum interest rate which a veteran could pay when 
purchasing a home with a VA guaranteed loan, and the veteran was not 
permitted to pay discount points on the loan. Public Law 102-547 
authorizes the Secretary to elect either to require that VA-guaranteed 
loans bear interest at rates not to exceed the maximum rates 
established by the Secretary or to allow such loans to bear interest at 
rates agreed upon by the veteran and the lender. The law also 
authorizes the Secretary to change the election from time to time, and 
provides that when the Secretary has elected to have interest rates 
negotiated between the veteran and the lender, the veteran may pay 
reasonable discount points on the loan. Effective October 28, 1992, the 
Secretary elected to have interest rates negotiated between the veteran 
and the lender. VA proposes to amend 38 CFR 36.4212 and 36.4311 to 
reflect these changes.
    Public Law 102-547 generally prohibits financing discount points 
when interest rates are negotiated between the lender and veteran. 
However, Public Law 103-78, approved August 13, 1993, permits veterans 
to finance discount points on interest rate reduction refinancing 
loans. Accordingly, the proposed Secs. 36.4212(b) and 36.4311(b) 
prohibit discount points from being financed, except for interest rate 
reduction refinancing loans under 38 U.S.C. 3710(a)(8), 3710(b)(7) and 
3712(a)(1)(F).
    Prior to enactment of Public Law 102-547, VA was authorized to 
guarantee fixed rate mortgages only. Public Law 102-547 authorizes a 
demonstration project during fiscal years 1993, 1994, and 1995 whereby 
VA will guarantee loans with adjustable interest rates. The law 
provides that the interest rate adjustments on these loans shall: (1) 
Correspond to a specified national interest rate index approved in 
regulations by the Secretary, information on which is readily 
accessible to mortgagors from generally available published sources; 
(2) be made by adjusting the monthly payment on an annual basis; (3) be 
limited, with respect to any single annual interest rate adjustment, to 
a maximum increase or decrease of 1 percentage point; and (4) be 
limited, over the term of the mortgage, to a maximum increase of 5 
percentage points above the initial contract interest rate. VA proposes 
to amend 38 CFR 36.4311 to provide for an adjustable rate mortgage with 
these adjustment provisions. The regulations will also provide that the 
first interest rate adjustment may occur 12 to 18 months from the date 
of the borrower's first mortgage payment. The VA guaranteed adjustable 
rate mortgage with the above features will be similar to the Federal 
Housing Administration (FHA) adjustable rate mortgage. This should 
facilitate pooling of these mortgages together in Government National 
Mortgage Association (GNMA) mortgage-backed securities pools.
    Public Law 102-547 requires the Secretary to carry out a program to 
demonstrate the feasibility of guaranteeing mortgages for the 
acquisition of an existing dwelling and the cost of making energy 
efficiency improvements to the dwelling or for energy efficient 
improvements to a dwelling owned and occupied by a veteran. The law 
authorizes an addition to the purchase loan for the cost of energy 
efficient improvements. It provides that for a mortgage guaranteed 
under 38 U.S.C. 3710(d) the cost of the energy efficient improvements 
may be added to the loan amount provided the cost does not exceed (1) 
$3,000; or (2) $6,000, if the increase in the monthly payment for 
principal and interest does not exceed the likely reduction in monthly 
utility costs resulting from the energy efficiency improvements. VA 
proposes to amend 38 CFR 36.4336 to provide that a loan for an energy 
efficient mortgage guaranteed under 38 U.S.C. 3710(d) may exceed the 
reasonable value of the property by the cost of the energy efficient 
improvements as stated above. This demonstration program for financing 
the cost of energy efficiency improvements will expire on December 31, 
1995.
    The law provides that the amount of the guaranty for an energy 
efficient mortgage guaranteed under 38 U.S.C. 3710(d) will be in the 
same proportion as would have been provided if the energy efficiency 
improvements were not added to the loan amount. It also provides that 
there be no additional charge to the veteran's entitlement as a result 
of the increased loan amount. VA proposes to amend 38 CFR 36.4302 to 
conform to these changes.
    Public Law 102-547 reduces the funding fee for interest rate 
reduction refinancing loans guaranteed under sections 3710(a)(8), 
3710(a)(9)(B), and 3712(a)(1)(F) to 0.50 percent of the total loan 
amount. VA proposes to amend 38 CFR 36.4232, 36.4254 and 36.4312 to 
comply with the law. The law also provides that the guaranty amount for 
interest rate reduction refinancing loans shall not exceed the greater 
of the original guaranty amount or 25 percent of the loan amount. VA 
proposes to amend 38 CFR 36.4223 and 36.4302 to reflect this change.
    The provisions of Public Law 102-547 and Public Law 103-66 included 
in the appropriate regulations by this amendment have been implemented 
administratively.
    The Secretary hereby certifies that these proposed regulatory 
amendments will not, if promulgated, 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. The proposed amendments 
simply update VA regulations to incorporate the changes which have 
already been made by Public Law 102-547 and Public Law 103-66.
    The Catalog of Federal Domestic Assistance Program numbers are 
64.114 and 64.119.

List of Subjects in 38 CFR Part 36

    Condominiums, Handicapped, Housing Loan programs--housing and 
community development, Manufactured homes, Veterans.

    These amendments are proposed under Public Law 102-547 and the 
authority granted the Secretary by section 501(a) of title 38, United 
States Code.

    Approved: September 10, 1993.
Jesse Brown,
Secretary of Veterans Affairs.

    For the reasons set out in the preamble 38 CFR part 36, is amended 
as set forth below.

PART 36--LOAN GUARANTY

    1. The authority citation for part 36 Secs. 36.4201 through 36.4287 
continues to read as follows:

    Authority: Sections 36.4201 through 36.4287 issued under 38 
U.S.C. 501(a), 3712.

    2. Section 36.4212 is revised to read as follows:


Sec. 36.4212  Interest rates and late charges.

    (a) In guaranteeing or insuring loans under 38 U.S.C. chapter 37 
the Secretary may elect to require that such loans bear interest at a 
rate that is (1) agreed upon by the veteran and the lender, or (2) 
established by the Secretary. The Secretary may, from time to time, 
change the election under this paragraph by publishing a notice in the 
Federal Register.
    (b) For loans bearing an interest rate agreed upon by the veteran 
and the lender, the veteran may pay reasonable discount points in 
connection with the loan. The discount points may not be included in 
the loan amount, except for interest rate reduction refinancing loans 
under 38 U.S.C. 3712 (a)(1)(F).
    (c) The rate of interest in instruments securing the indebtedness 
for all loans may be expressed in terms of add-on or discount.
    (d) Interest in excess of the rate reported by the lender when 
requesting evidence of guaranty or insurance shall not be payable on 
any advance, or in the event of any delinquency of default; Provided, 
That a late charge not in excess of an amount equal to 4 percent on any 
installment paid more than 15 days after due date shall not be 
considered a violation of this limitation.
    (e) The interest rate of loans for the purpose of an interest rate 
reduction (38 U.S.C. 3712(a)(1)(f)) must be less than the interest rate 
of the VA loan being refinanced.
    (f) Adjustable rate mortgage loans which comply with the 
requirements of this paragraph are eligible for guaranty.
    (1) Interest rate index. Changes in the interest rate charged on an 
adjustable rate mortgage must correspond to changes in the weekly 
average yield on one year (52 week) Treasury bills adjusted to a 
constant maturity. Yields on one year Treasury bills at `constant 
maturity' are interpolated by the United States Treasury from the daily 
yield curve. This curve, which relates the yield on the security to its 
time to maturity, is based on the closing market bid yields on actively 
traded one year Treasury bills in the over-the-counter market. The 
weekly average one year constant maturity Treasury bill yields are 
published by the Federal Reserve Board of the Federal Reserve System. 
The Federal Reserve Statistical Release Report H.15 (519) is released 
each Monday. These one year constant maturity Treasury bill yields are 
also published monthly in the Federal Reserve Bulletin, published by 
the Federal Reserve Board of the Federal Reserve System, as well as 
quarterly in the Treasury Bulletin, published by the Department of the 
Treasury.
    (2) Frequency of interest rate changes. Interest rate adjustments 
must occur on an annual basis, except that the first adjustment may 
occur not sooner than 12 months nor later than 18 months from the date 
of the borrower's first mortgage payment. To set the new interest rate, 
the lender will determine the change between the initial (i.e., base) 
index figure and the current index figure. The initial index figure 
shall be the most recent figure available before the date of mortgage 
loan origination. The current index figure shall be the most recent 
index figure available 30 days before the date of each interest rate 
adjustment.
    (3) Method of rate changes. Interest rate changes may only be 
implemented through adjustments to the borrower's monthly payments.
    (4) Initial rate and magnitude of changes. The initial contract 
interest rate of an adjustable rate mortgage shall be agreed upon by 
the lender and the veteran. The rate must be reflective of adjustable 
rate lending. Annual adjustments in the interest rate shall be set at a 
certain spread or margin over the interest rate index prescribed in 
paragraph (f)(1) of this section. Except for the initial rate, this 
margin shall remain constant over the life of the loan. Annual 
adjustments to the contract interest rate shall correspond to annual 
changes in the interest rate index, subject to the following conditions 
and limitations:
    (i) No single adjustment to the interest rate may result in a 
change in either direction of more than one percentage point from the 
interest rate in effect for the period immediately preceding that 
adjustment. Index changes in excess of one percentage point may not be 
carried over for inclusion in an adjustment in a subsequent year. 
Adjustments in the effective rate of interest over the entire term of 
the mortgage may not result in a change in either direction of more 
than five percentage points from the initial contract interest rate.
    (ii) At each adjustment date, changes in the index interest rate, 
whether increases or decreases, must be translated into the adjusted 
mortgage interest rate, rounded to the nearest one-eighth of one 
percent, up or down. For example, if the margin is 2 percent and the 
new index figure is 6.06 percent, the adjusted mortgage interest rate 
will be 8 percent. If the margin is 2 percent and the new index figure 
is 6.07 percent, the adjusted mortgage interest rate will be 8\1/8\ 
percent.
    (5) Pre-loan disclosure. The lender shall explain fully and in 
writing to the borrower, no later than on the date upon which the 
lender provides the prospective borrower with a loan application, the 
nature of the obligation taken. The borrower shall certify in writing 
that he or she fully understands the obligation and a copy of the 
signed certification shall be placed in the loan folder and included in 
the loan submission to VA. Such lender disclosure must include the 
following items:
    (i) The fact that the mortgage interest rate may change, and an 
explanation of how changes correspond to changes in the interest rate 
index;
    (ii) Identification of the interest rate index, its source of 
publication and availability;
    (iii) The frequency (i.e., annually) with which interest rate 
levels and monthly payments will be adjusted, and the length of the 
interval that will precede the initial adjustment;
    (iv) A hypothetical monthly payment schedule that displays the 
maximum potential increases in monthly payments to the borrower over 
the first five years of the mortgage, subject to the provisions of the 
mortgage instrument.
    (6) Annual disclosure. At least 25 days before any adjustment to a 
borrower's monthly payment may occur, the lender must provide a notice 
to the borrower which sets forth the date of the notice, the effective 
date of the change, the old interest rate, the new interest rate, the 
new monthly payment amount, the current index and the date it was 
published, and a description of how the payment adjustment was 
calculated. A copy of the annual disclosure shall be made a part of the 
lender's permanent record on the loan.
    3. Section 36.4223 is amended by revising paragraph (a)(4) to read 
as follows:


Sec. 36.4223   Interest rate reduction refinancing loan.

    (a) * * *
    (4) The dollar amount of the guaranty of the 38 U.S.C. 
3712(a)(1)(F) loan may not exceed the greater of the original guaranty 
amount of the loan being refinanced, or 25 percent of the loan.
* * * * *
    4. Section 36.4232 is amended by revising paragraph (e)(1) to read 
as follows:


Sec. 36.4232   Allowable fees and charges; manufactured home unit.

* * * * *
    (e)(1) Subject to the limitations set out in paragraphs (e)(4) and 
(e)(5) of this section, a fee must be paid to the Secretary. A fee of 1 
percent of the total amount must be paid in a manner prescribed by the 
Secretary before a manufactured home unit loan will be eligible for 
guaranty. Provided, however, that the fee shall be 0.50 percent of the 
total loan amount for interest rate reduction refinancing loans 
guaranteed under section 3712(a)(1)(F). All or part of the fee may be 
paid in cash at loan closing or all or part of the fee may be included 
in the loan without regard to the reasonable value of the property or 
the computed maximum loan amount, as appropriate. In computing the fee, 
the lender will disregard any amount included in the loan to enable the 
borrower to pay such fee.
* * * * *
    5. Section 36.4254 is amended by revising paragraph (d)(1) to read 
as follows:


Sec. 36.4254   Fees and charges.

* * * * *
    (d)(1) Notwithstanding the provisions of paragraph (c) of this 
section and subject to the limitations set out in paragraphs (d)(4) and 
(d)(5) of this section, a fee must be paid to the Secretary. A fee of 1 
percent of the total loan amount must be paid to the Secretary before a 
combination manufactured home and lot loan (or a loan to purchase a lot 
upon which a manufactured home owned by the veteran will be placed) 
will be eligible for guaranty. Provided, however, that the fee shall be 
0.50 percent of the total loan amount for interest rate reduction 
refinancing loans guaranteed under Sec. 3712(a)(1)(F). All or part of 
such fee may be paid in cash at loan closing or all or part of the fee 
may be included in the loan without regard to the reasonable value of 
the property or the computed maximum loan amount, as appropriate. In 
computing the fee, the lender will disregard any amount included in the 
loan to enable the borrower to pay such fee.
* * * * *
    6. The authority citation for part 36, Secs. 36.4300 through 
36.4375 continues to read as follows:

    Authority: Sections 36.4300 through 36.4375 issued under 38 
U.S.C. 501(a).

    7. In Sec. 36.4302, paragraph (a) is amended by adding the words 
``except as provided in paragraphs (b) and (c)'' after ``38 U.S.C. 
3710''; paragraph (b) is revised; paragraphs (c), (d), (e) (f), (g), 
(h), (i) and (j) are redesignated paragraphs (d), (e) (f), (g), (h), 
(i), (j) and (k) respectively; a newly designated paragraph (c) is 
added; newly redesignated (e) introductory text is republished; and the 
newly redesignated paragraph (e)(1) is revised to read as follows:


Sec. 36.4302   Computation of guaranties or insurance credits.

* * * * *
    (b) With respect to an interest rate reduction refinancing loan 
guaranteed under 38 U.S.C. 3710 (a)(8) or (b)(7) the dollar amount of 
guaranty may not exceed the greater of the original guaranty amount of 
the loan being refinanced, or 25 percent of the refinancing loan 
amount.
    (c) With respect to a loan for an energy efficient mortgage 
guaranteed under 38 U.S.C. 3710(d) the amount of the guaranty will be 
in the same proportion as would have been provided if the energy 
efficiency improvements were not added to the loan amount, and there 
will be no additional charge to the veteran's entitlement as a result 
of the increased guaranty amount.
* * * * *
    (e) Subject to the provisions of paragraph (g) of Sec. 36.4303, the 
following formulas shall govern the computation of the amount of the 
guaranty or insurance entitlement which remains available to an 
eligible veteran after prior use of entitlement:
    (1) If a veteran previously secured a nonrealty (business) loan, 
the amount of nonrealty entitlement used is doubled and subtracted from 
$36,000. The sum remaining is the amount of available entitlement for 
use except that (i) entitlement may be increased by up to $10,000 if 
the loan amount exceeds $144,000 and the loan is for purchase or 
construction of a home, purchase of a condominium, or for an interest 
rate reduction refinancing loan, and (ii) entitlement for manufactured 
home loans that are to be guaranteed under 38 U.S.C. 3712 may not 
exceed $20,000.
* * * * *
    8. Section 36.4311 is revised to read as follows:


Sec. 36.4311   Interest rates.

    (a) In guaranteeing or insuring loans under 38 U.S.C. chapter 37 
the Secretary may elect to require that such loans bear interest at a 
rate that is (1) agreed upon by the veteran and the lender, or (2) 
established by the Secretary. The Secretary may, from time to time, 
change the election under this paragraph by publishing a notice in the 
Federal Register. Provided, however, that the interest rate of loans 
for the purpose of an interest rate reduction (38 U.S.C. 3710 (a)(8) or 
(b)(7)) must be less than the interest rate of the VA loan being 
refinanced.
    (b) For loans bearing an interest rate agreed upon by the veteran 
and the lender, the veteran may pay reasonable discount points in 
connection with the loan. The discount points may not be included in 
the loan amount, except for interest rate reduction refinancing loans 
under 38 U.S.C. 3710(a)(8) and 3710(b)(7). For loans bearing an 
interest rate agreed upon by the veteran and the lender the provisions 
of Sec. 36.4312, paragraphs (d)(6) and (7) do not apply.
    (c) Interest in excess of the rate reported by the lender when 
requesting evidence of guaranty or insurance shall not be payable on 
any advance, or in the event of any delinquency or default: Provided, 
That a late charge not in excess of an amount equal to 4 percent on any 
installment paid more than 15 days after due date shall not be 
considered a violation of this limitation.
    (d) Adjustable rate mortgage loans which comply with the 
requirements of this paragraph are eligible for guaranty.
    (1) Interest rate index. Changes in the interest rate charged on an 
adjustable rate mortgage must correspond to changes in the weekly 
average yield on one year (52 week) Treasury bills adjusted to a 
constant maturity. Yields on one year Treasury bills at `constant 
maturity' are interpolated by the United States Treasury from the daily 
yield curve. This curve, which relates the yield on the security to its 
time to maturity, is based on the closing market bid yields on actively 
traded one year Treasury bills in the over-the-counter market. The 
weekly average one year constant maturity Treasury bill yields are 
published by the Federal Reserve Board of the Federal Reserve System. 
The Federal Reserve Statistical Release Report H.15 (519) is released 
each Monday. These one year constant maturity Treasury bill yields are 
also published monthly in the Federal Reserve Bulletin, published by 
the Federal Reserve Board of the Federal Reserve System, as well as 
quarterly in the Treasury Bulletin, published by the Department of the 
Treasury.
    (2) Frequency of interest rate changes. Interest rate adjustments 
must occur on an annual basis, except that the first adjustment may 
occur no sooner than 12 months nor later than 18 months from the date 
of the borrower's first mortgage payment. To set the new interest rate, 
the lender will determine the change between the initial (i.e., base) 
index figure and the current index figure. The initial index figure 
shall be the most recent figure available before the date of mortgage 
loan origination. The current index figure shall be the most recent 
index figure available 30 days before the date of each interest rate 
adjustment.
    (3) Method of rate changes. Interest rate changes may only be 
implemented through adjustments to the borrower's monthly payments.
    (4) Initial rate and magnitude of changes. The initial contract 
interest rate of an adjustable rate mortgage shall be agreed upon by 
the lender and the veteran. The rate must be reflective of adjustable 
rate lending. Annual adjustments in the interest rate shall be set at a 
certain spread or margin over the interest rate index prescribed in 
paragraph (d)(1) of this section. Except for the initial rate, this 
margin shall remain constant over the life of the loan. Annual 
adjustments to the contract interest rate shall correspond to annual 
changes in the interest rate index, subject to the following conditions 
and limitations:
    (i) No single adjustment to the interest rate may result in a 
change in either direction of more than one percentage point from the 
interest rate in effect for the period immediately preceding that 
adjustment. Index changes in excess of one percentage point may not be 
carried over for inclusion in an adjustment in a subsequent year. 
Adjustments in the effective rate of interest over the entire term of 
the mortgage may not result in a change in either direction of more 
than five percentage points from the initial contract interest rate.
    (ii) At each adjustment date, changes in the index interest rate, 
whether increases or decreases, must be translated into the adjusted 
mortgage interest rate, rounded to the nearest one-eighth of one 
percent, up or down. For example, if the margin is 2 percent and the 
new index figure is 6.06 percent, the adjusted mortgage interest rate 
will be 8 percent. If the margin is 2 percent and the new index figure 
is 6.07 percent, the adjusted mortgage interest rate will be 8\1/8\ 
percent.
    (5) Pre-loan disclosure. The lender shall explain fully and in 
writing to the borrower, no later than on the date upon which the 
lender provides the prospective borrower with a loan application, the 
nature of the obligation taken. The borrower shall certify in writing 
that he or she fully understands the obligation and a copy of the 
signed certification shall be placed in the loan folder and included in 
the loan submission to VA. Such lender disclosure must include the 
following items:
    (i) The fact that the mortgage interest rate may change, and an 
explanation of how changes correspond to changes in the interest rate 
index:
    (ii) Identification of the interest rate index, its source of 
publication and availability;
    (iii) The frequency (i.e., annually) with which interest rate 
levels and monthly payments will be adjusted, and the length of the 
interval that will precede the initial adjustment;
    (iv) A hypothetical monthly payment schedule that displays the 
maximum potential increases in monthly payments to the borrower over 
the first five years of the mortgage, subject to the provisions of the 
mortgage instrument.
    (6) Annual disclosure. At least 25 days before any adjustment to a 
borrower's monthly payment may occur, the lender must provide a notice 
to the borrower which sets forth the date of the notice, the effective 
date of the change, the old interest rate, the new interest rate, the 
new monthly payment amount, the current index and the date it was 
published, and a description of how the payment adjustment was 
calculated. A copy of the annual disclosure shall be made a part of the 
lender's permanent record on the loan.
    9. Section 36.4312 is amended by removing from paragraph (e)(3) the 
words ``in paragraphs (e)(4) and (e)(5)'' and replacing them with the 
words ``in paragraph (e)(4)''; by adding (e) introductory text; and by 
revising paragraph (e)(1) to read as follows:


Sec. 36.4312   Charges and fees.

* * * * *
    (e) Subject to the limitations set out in paragraph (e)(4) of this 
section, a fee must be paid to the Secretary.
    (1) The fee on loans to veterans shall be as follows.
    (i) On all interest rate reduction refinancing loans guaranteed 
under Sections 3710(a)(8) and 3710(b)(7) the fee shall be 0.50 percent 
of the total loan amount.
    (ii) On all refinancing loans other than those described in 
paragraph (e)(1)(i) of this section, the funding fee shall be 2.75 
percent of the loan amount for loans to veterans whose entitlement is 
based on service in the Selected Reserve under the provisions of 
section 3701(b)(5) of title 38, U.S.C., and 2 percent of the loan 
amount for loans to all other veterans, provided, however, that if the 
veteran is using entitlement for a second or subsequent time, the fee 
shall be 3 percent of the loan amount.
    (iii) Except for loans to veterans whose entitlement is based on 
service in the Selected Reserve under the provisions of section 
3701(b)(5) of title 38, U.S.C., the funding fee shall be 2 percent of 
the total loan amount for all loans for the purchase or construction of 
a home on which the veteran does not make a down payment, unless the 
veteran is using entitlement for a second or subsequent time, in which 
case the fee shall be 3 percent. On purchase or construction loans on 
which the veteran makes a down payment of 5 percent or more, but less 
than 10 percent, the amount of the funding fee shall be 1.50 percent of 
the total loan amount. On purchase or construction loans on which the 
veteran makes a down payment of 10 percent or more, the amount of the 
funding fee shall be 1.25 percent of the total loan amount.
    (iv) On loans to veterans whose entitlement is based on service in 
the Selected Reserve under the provisions of section 3701(b)(5) of 
title 38, U.S.C., the funding fee shall be 2.75 percent of the total 
loan amount on loans for the purchase or construction of a home on 
which the veteran does not make a down payment, unless the veteran is 
using entitlement for a second or subsequent time, in which case the 
fee shall be 3 percent. On purchase or construction loans on which 
veterans whose entitlement is based on service in the Selected Reserve 
make a down payment of 5 percent or more, but less than 10 percent, the 
amount of the funding fee shall be 2.25 percent of the total loan 
amount. On purchase or construction loans on which such veterans make a 
down payment of 10 percent or more, the amount of the funding fee shall 
be 2.00 percent of the total loan amount.
    (v) All or part of such fee may be paid in cash at loan closing or 
all or part of the fee may be included in the loan without regard to 
the reasonable value of the property or the computed maximum loan 
amount, as appropriate. In computing the fee, the lender will disregard 
any amount included in the loan to enable the borrower to pay such fee.
* * * * *
    10. Section 36.4336 is amended by revising paragraphs (a)(2)(i); 
and by adding a new paragraph (a)(4) to read as follows:


Sec. 36.4336  Eligibility of loans; reasonable value requirements.

    (a) * * *
    (1) * * *
    (2)(i) Except as to refinancing loans pursuant to 38 U.S.C. 3710 
(a)(8) or (b)(7) and energy efficient mortgages pursuant to 38 U.S.C. 
3710(d), the loan including any scheduled deferred interest added to 
principal, does not exceed the reasonable value of the property or 
projected reasonable value of a new home which is security for a 
graduated payment mortgage loan, as appropriate, as determined by the 
Secretary, and
* * * * *
    (4) A loan guaranteed under 38 U.S.C. 3710(d) which includes the 
cost of energy improvements may exceed the reasonable value of the 
property, provided, that the cost of the energy efficiency improvements 
does not exceed (1) $3,000; or (2) $6,000, if the increase in the 
monthly payment for principal and interest does not exceed the likely 
reduction in monthly utility costs resulting from the energy efficiency 
improvements.

[FR Doc. 94-4145 Filed 2-23-94; 8:45 am]
BILLING CODE 8320-01-P