[Federal Register Volume 59, Number 41 (Wednesday, March 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4667]


[[Page Unknown]]

[Federal Register: March 2, 1994]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AE60

 

Loan Guaranty: Acceptance of Partial Payments; Indemnification of 
Default

AGENCY: Department of Veterans Affairs.

ACTION: Proposed regulatory amendments.

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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 Indemnity and Restructuring Act of 1989. Changes 
made by this law which VA proposes to incorporate into the regulations 
by these amendments are: The addition of a requirement that the holder 
provide notice to the Secretary when refusing to accept partial payment 
on a loan in default; and a clarification of when a veteran has 
liability to the Secretary for a loss due to a loan default. These 
changes will ensure that no veteran loses a home because a loan holder 
returned partial payments in violation of VA requirements and will aid 
VA in obtaining the cooperation of veterans in reducing loan guaranty 
losses by pursuing alternatives to foreclosure.

DATES: Comments must be received on or before May 2, 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 11, 
1994.

FOR FURTHER INFORMATION CONTACT: Mr. Leonard A. Levy, Assistant 
Director for Loan Management (261), Loan Guaranty Service, Veterans 
Benefits Administration, Department of Veterans Affairs, Washington, DC 
20420, (202) 233-3668.

SUPPLEMENTARY INFORMATION: VA is proposing to incorporate into its 
regulations two changes to comply with provisions of Public Law 101-
237, the Veterans Home Loan Indemnity and Restructuring Act of 1989.
    Sections 36.4275(f) and 36.4315(b) of 38 CFR part 36 provide that 
except under certain conditions described in the regulations the holder 
must accept from the borrower partial payment on a loan in default. 
Public Law 101-237 requires the holder to notify the Secretary when 
refusing to accept partial payment and provides that the Secretary may 
require certain specific information in the notice. VA proposes to 
amend Secs. 36.4275(f) and 36.4315(b) to incorporate the requirement 
that the holder notify the Secretary within 10 days after refusing a 
partial payment. These sections will also be amended to require that 
the notice include the date of the tender, the amount tendered, the 
date the payment was returned, and the reason for the holder's refusal. 
This information will enable VA to verify that the lender's reason for 
refusal is in compliance with the regulations. Section 36.4323(e) 
provides that the veteran owes a debt to the United States equal to any 
amount paid by the Secretary on account of the veteran's liability for 
the loan. Public Law 101-237 provides that an individual obtaining a 
guaranteed or insured loan closed after December 31, 1989, shall have 
no liability to the Secretary for loss resulting from a default on the 
loan, except: (1) In the case of fraud, misrepresentation, or bad faith 
by the individual in obtaining the loan or in connection with the loan 
default; or (2) where under 38 U.S.C. 3729(b) an individual pays a fee 
or is exempt from paying a fee to assume a loan; or, (3) where an 
individual obtains a loan for any purpose specified in 38 U.S.C. 3712, 
which pertains to manufactured homes. VA proposes to amend 38 CFR 
36.4323 to reflect this change and to add a definition of bad faith to 
the loan guaranty regulations.
    The proposed definition of bad faith is largely consistent with 
that promulgated at 58 FR 3841 on January 12, 1993 (38 CFR 1.965). 
There are, however, some differences. Reasons for the differences 
include:
    1. The 38 CFR 1.965 definition is strictly for use by the Committee 
on Waivers and Compromises (COWC). The COWC has jurisdiction over 
waiver and compromise of all benefit overpayments, including Loan 
Guaranty debts, but within its jurisdiction the COWC only applies the 
definition of ``bad faith'' to define a condition which will bar waiver 
of an indebtedness which has been found to be valid. The COWC is not 
involved in determining whether a debt is valid.
    2. The examples included with the proposed definition in 38 CFR 
36.4202 and 4301 definition are strictly for use by Loan Guaranty and 
apply only to home loans. In Loan Guaranty ``bad faith'' is used in a 
number of contexts which are quite different from the way in which it 
is used by the COWC. For example: A Loan Guaranty finding of bad faith 
is a basis for establishing a valid debt against a veteran on a GI loan 
originated after December 31, 1989; it is also the standard for 
deciding a veteran's appeal of such a finding.

    Note: Appeal of the validity of a Loan Guaranty debt is 
processed by Loan Guaranty--the veteran has the right to file a 
subsequent Notice of Disagreement with the Board of Veterans 
Appeals.

    For another example: A finding of bad faith on a real estate loan 
originated before January 1, 1990, prevents Loan Guaranty from granting 
a pre-foreclosure waiver of VA's right to establish and collect a 
veteran's liability account under 38 CFR 36.4323(e)(1).
    3. Loan Guaranty debts differ from other overpayments in that the 
veteran often bears no direct role in their creation (i.e., foreclosure 
often occurs as a result of circumstances outside the veteran's 
control), in that the veteran has not profited personally by receiving 
a benefit (i.e., an overpayment) to which he or she was not entitled, 
and in that the amount of the debt which would ultimately be 
established can often be greatly reduced by the veteran cooperating 
with VA. Accordingly, for Loan Guaranty purposes ``bad faith'' must 
take into account the element of cooperation.
    As the examples illustrate, the definition will permit a finding of 
lack of ``bad faith'' when the veteran is willing to cooperate with VA 
but prevented from doing so by circumstances beyond his or her control 
(e.g., the veteran is willing to offer a deed in lieu of foreclosure, 
but his or her spouse refuses to sign).
    Many Loan Guaranty debts are established after foreclosure in cases 
where less costly alternatives could not be considered because the 
veteran did not respond to VA outreach efforts. This proposed 
regulation permits such a failure to respond to be deemed a ``failure 
to cooperate with VA representatives in resolving an insoluble default 
in a manner which will minimize the amount of claim payable.'' 
``Compelling reasons'' which would justify such failure would be heard 
by VA Loan Guaranty if offered after foreclosure inconnection with a 
veteran's dispute of the validity of an indebtedness. For example:
    Assume a debt is established against a veteran on a loan originated 
after December 31, 1989, because he or she did not respond to VA 
outreach efforts. After foreclosure, the veteran explains and documents 
that he or she did not contact VA and pursue alternatives to 
foreclosure because, at the time, there was insufficient family income 
available to obtain any other housing. The veteran therefore 
intentionally took advantage of the time required to complete 
foreclosure to provide shelter for his or her family.
    If the veteran questioned the validity of the debt by asserting 
that, under the circumstances, he or she did not show bad faith, the 
case would be reviewed by Loan Guaranty. (It could not be reviewed by 
the COWC because the COWC lacks jurisdiction over cases where the 
validity of debt is at issue.) Loan Guaranty could determine there were 
compelling reasons for the veteran's action, which would permit 
recission of the finding of bad faith, thereby invalidating the debt.
    The examples included with the definition are considered 
appropriate because Loan Guaranty debts arise from substantially 
different circumstances than other VA liability accounts. The proposed 
regulation is intended to clarify the types of conduct which would be 
considered ``bad faith'' with respect to Loan Guaranty debts. Comments 
are specifically invited on these points.
    Other changes required by Public Law 101-237 are being incorporated 
into the regulations through separate amendments. In addition, an 
amendment has been made to Sec. 36.4275 to conform to the requirements 
of the Fair Housing Act of 1988, 42 U.S.C. 3601 et seq. which make it 
unlawful to discriminate in residential housing transactions against 
any person because of familial status or handicap.

Paperwork Reduction Act

    Sections 36.4275 and 36.4315 of these regulations contain 
information collection requirements which will result in a reporting 
burden. The reporting burden is estimated to average 10 minutes per 
response for a total of 16,667 hours.
    The average estimated time per response includes the time for 
reviewing instructions, gathering and maintaining the data needed, and 
completing and reviewing the collection of information.
    As required by section 3504(h) of the Paperwork Reduction Act, the 
Department of Veterans Affairs is submitting to the Office of 
Management and Budget (OMB) a request that it approve this information 
collection requirement. Organizations and individuals desiring to 
submit comments for consideration by OMB on these proposed information 
collection requirements should address them to the Office of 
Information and Regulatory Affairs, OMB, room 3002, New Executive 
Office Building, Washington, DC 20503; Attention: Joseph F. Lackey.
    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 
update VA regulations to implement the changes made by Public Law 101-
237. The clarification of when a veteran has liability due to a loan 
default directly affects individual veterans, not small entities. 
Therefore, pursuant to 5 U.S.C. 605(b), these regulations are exempt 
from the initial and final regulatory analysis requirements of sections 
603 and 604.
    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 101-237 and the 
authority granted the Secretary by section 501(a) of title 38, United 
States Code.

    Approved: November 23, 1993.
Jesse Brown,
Secretary of Veterans Affairs.

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

PART 36--LOAN GUARANTY

    1. The authority citation for part 36, sections 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 36.4202 is amended by adding the term Bad faith to read 
as follows:


Sec. 36.4202  Definitions.

* * * * *
    Bad faith. Unfair or deceptive dealing by one who seeks to gain 
thereby at another's expense. Conduct in connection with an obligation 
arising from participation in the Loan Guaranty program exhibits bad 
faith if such conduct, although not undertaken with actual fraudulent 
intent, is undertaken with intent to seek an unfair advantage, with 
knowledge of the likely consequences, and results in a loss to the 
Government. Examples of bad faith include, but are not limited to, the 
following:
    (1) Property abandonment;
    (2) Failure to make payments on a VA-guaranteed loan, despite 
having the financial ability to make such payments; and,
    (3) Failure to cooperate with VA representatives in resolving an 
insoluble default in a manner which will minimize the amount of claim 
payable by the Government, absent compelling reasons which would 
justify such failure.
* * * * *
    3. Section 36.4275 is amended by removing the word ``mobile'' in 
the first sentence of paragraph (a)(1), and adding, in its place, the 
word ``manufactured''; by adding in paragraph (c) the words ``sex, 
handicap, familial status,'' after the word ``religion,''; by 
redesignating paragraph (f)(3) as paragraph (f)(4); and by adding a 
newly designated paragraph (f)(3) to read as follows:


Sec. 36.4275  Events constituting default and acceptability of partial 
payments.

* * * * *
    (f) * * *
    (3) The holder shall give notice to the Secretary within ten days 
after a partial payment has been returned to the obligor. The notice 
shall include the date of the tender, the amount tendered, the date the 
payment was returned, and the reason for the holder's refusal.
* * * * *
    4. The authority citation for part 36, sections 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).

    5. Section 36.4301 is amended by adding the term Bad faith to read 
as follows:


Sec. 36.4301  Definitions.

* * * * *
    Bad faith. Unfair or deceptive dealing by one who seeks to gain 
thereby at another's expense. Conduct in connection with an obligation 
arising from participation in the Loan Guaranty program exhibits bad 
faith if such conduct, although not undertaken with actual fraudulent 
intent, is undertaken with intent to seek an unfair advantage, with 
knowledge of the likely consequences, and results in a loss to the 
Government. Examples of bad faith include, but are not limited to, the 
following:
    (1) Property abandonment;
    (2) Failure to make payments on a VA-guaranteed loan, despite 
having the financial ability to make such payments; and,
    (3) Failure to cooperate with VA representatives in resolving an 
insoluble default in a manner which will minimize the amount of claim 
payable by the Government, absent compelling reasons which would 
justify such failure.
    6. In Sec. 36.4315, paragraph (b)(3) is redesignated paragraph 
(b)(4) and a newly designated paragraph (b)(3) is added to read as 
follows:


Sec. 36.4315  Notice of default and acceptability of partial payments.

* * * * *
    (b) * * *
    (3) The holder shall give notice to the Secretary within ten days 
after a partial payment has been returned to the obligor. The notice 
shall include the date of the tender, the amount tendered, the date the 
payment was returned, and the reason for the holder's refusal.
* * * * *
    7. In Sec. 36.4323, paragraphs (e)(1), (e)(2), (e)(3), and (e)(4) 
are redesignated paragraphs (e)(3), (e)(4), (e)(5), and (e)(6), 
respectively; the introductory text in paragraph (e) is revised and 
newly designated paragraphs (e)(1) and (e)(2) are added to read as 
follows:


Sec. 36.4323  Subrogation and indemnity.

* * * * *
    (e) Any amounts paid by the Secretary on account of a loan 
guaranteed for any purpose specified in section 3710 of title 38, 
United States Code, shall constitute a debt owing to the United States:
    (1) By the veteran if:
    (i) The loan closed on or before December 31, 1989; or
    (ii) The loan closed after December 31, 1989, and there has been 
fraud, misrepresentation, or bad faith by such veteran in obtaining the 
loan or in connection with the loan default; or
    (2) By any person who was approved to assume the loan pursuant to 
sections 3713 and 3714 of title 38, United States Code.
* * * * *
[FR Doc. 94-4667 Filed 3-1-94; 8:45 am]
BILLING CODE 8320-01-P