[Federal Register Volume 59, Number 186 (Tuesday, September 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23753]


[[Page Unknown]]

[Federal Register: September 27, 1994]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AF39

 

Loan Guaranty: Credit Underwriting Standards and Procedures for 
Processing VA Guaranteed Loans

agency: Department of Veterans Affairs.

action: Final regulatory amendments.

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summary: The Department of Veterans Affairs (VA) is amending its loan 
guaranty regulations by updating the credit underwriting standards and 
procedures for processing VA guaranteed home loans. Updating the 
standards and procedures to keep pace with current economic conditions 
will increase the likelihood that a veteran obtaining a VA guaranteed 
loan will be able to repay the loan.

effective date: These regulatory amendments are effective October 27, 
1994.

for further information contact: Ms. Judith Caden, Assistant Director 
for Loan Policy (264), Loan Guaranty Service, Veterans Benefits 
Administration, Department of Veterans Affairs, 810 Vermont Avenue NW., 
Washington, DC 20420, (202) 273-7366.

supplementary information: On September 29, 1993, VA published in the 
Federal Register (58 FR 50875) proposed regulatory amendments to 38 CFR 
36.4337. VA proposed to amend the credit underwriting standards and 
procedures for processing VA guaranteed home loans (1) by updating the 
figures in the residual income guidelines; (2) by requiring that income 
tax returns be submitted with applications for borrowers who are self-
employed, paid on a commission basis, employed in the building trades, 
or have seasonal jobs; (3) by providing more specific time frames for 
considering whether income from part-time employment, second jobs 
overtime, self-employment, and commissions may be considered stable and 
reliable; (4) by adding guidelines for underwriting cases involving 
foreclosures and Federally-related debts; and (5) by deleting the 
requirement that lenders check with VA regional offices on prior VA 
loans. VA also proposed to delete union dues from items considered job-
related expenses because these dues are part of the residual income 
figure. Please refer to the September 29, 1993 Federal Register for a 
complete discussion of the proposed amendments. VA is adopting the 
regulatory amendments as originally proposed except for the minor 
editorial and terminology changes discussed below.
    VA received three comments on the proposed amendments. One 
commenter favored all the amendments. The second, a national 
association representing certified public accountants, suggested that 
more accurate accounting terms be used to describe VA's financial 
requirements for self-employed borrowers. Specifically, the commenter 
noted that ``compile'' is the correct term to use to describe the case 
where an external accountant will ``prepare'' the financial statements, 
as required by section 36.4337(f)(7)(i). The commenter also pointed out 
that independent accountants do not ``certify the accuracy'' of 
financial statements, rather, the technically correct usage is to say 
that the accountant conducts an ``audit''. VA agrees that the 
commenter's suggested terminology is more precise. Accordingly, we are 
revising paragraph (f)(7)(i) of Sec. 36.4337 of the regulations to read 
that the profit and loss statement and balance sheet required for self 
employed applicants be ``compiled'', rather than ``prepared'', by an 
accountant. The words ``certified as accurate'' are also being deleted 
from the sentence which was proposed to read, ``In some cases the 
nature of the business or the content of the financial statement may 
necessitate an independent audit certified as accurate by the 
accountant.''
    The third commenter requested clarification of how a loan 
underwriter determines the stability and reliability of a self-employed 
applicant's income.
    The proposed new paragraph (f)(7) of Sec. 36.4337 states that 
``income from self-employment is generally considered stable when the 
applicant has been in business for at least 2 years and that income 
from less than 2 years of self-employment usually cannot be considered 
stable unless the applicant has had previous related employment and/or 
extensive specialized training.'' It also states that ``When an 
applicant has been self-employed less than 1 year, it will rarely be 
possible to demonstrate that the income is stable for qualifying 
purposes * * * .''
    As the regulations provide, VA does not require that in every case 
the self-employed applicant have a two-year period of continuous 
employment with no gaps. If the applicant has been self-employed for 
less than two years, it is appropriate in underwriting the loan to also 
consider the applicant's related employment or specialized training. 
For example, sufficient weight might be given to the fact that the 
applicant has had specialized training in his or her field of endeavor, 
and that therefore, the income from self-employment should be viewed as 
stable, even though it has been for less than 2 years. However, when 
the self-employment has been for less than one year, it would be very 
difficult to consider the income stable and reliable. In other words, 
in cases where the loan applicant has been self-employed for less than 
one year, it would not be possible to view his or her income as stable 
unless the applicant's training and/or related experience is such as to 
clearly show a very strong likelihood of success.
    This commenter also asked ``If the two-year history of employment 
applies, must it be continuous or should factors such as schooling or 
training be considered during that time even if no income resulted?''
    As noted above, the proposed regulations provide for the 
consideration of training and schooling when determining the adequacy 
of income from self-employment. Thus it is possible to consider income 
as stable and reliable with less than 2 years of continuous employment, 
provided gaps in employment are sufficiently explained by adequate 
documentation of schooling or training. It is clear that the language 
in paragraph (f)(7)(i) is adequate to prescribe the intended standard 
and, therefore, the paragraph will be published as originally proposed.
    VA is making an editorial change to paragraph (g) of the 
regulations. Language now contained in paragraph (f)(1) of the 
regulations explaining the requirements of the Equal Credit Opportunity 
Act, is being repeated in paragraph (g) for the purposes of clarity.
    Accordingly, except for the terminology and editorial changes 
already discussed, VA is publishing these regulations as originally 
proposed.
    The information collection requirement contained in paragraphs 
(f)(6), (f)(7) and (f)(9) of Sec. 36.4337 of these regulations has been 
approved by the Office of Management and Budget (OMB) under OMB control 
number 2900-0521.
    The Secretary hereby certifies that the proposed regulatory 
amendments will 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. These changes will not result in any 
major new administrative or procedural burdens on lenders or other 
program participants. They simply revise the criteria established by VA 
in determining whether home loans for veterans will be guaranteed by VA 
based on the veteran's income and credit history.

    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 program--housing and 
community development, Manufactured homes, Veterans.

    These amendments are made final under the authority granted the 
Secretary by section 501(a) of title 38, United States Code.

    Approved: August 15, 1994.
Jesse Brown,
Secretary for 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. 36.4300 through 36.4375 
is revised to read as follows:

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

    2. Section 36.4337 is revised to read as follows:


Sec. 36.4337  Underwriting standards, processing procedures, lender 
responsibility and lender certification

    (a) Use of standards. Except for refinancing loans guaranteed 
pursuant to 38 U.S.C. 3710(a)(8), the standards contained in paragraphs 
(c) through (j) of this section will be used to determine that the 
veteran's present and anticipated income and expenses, and credit 
history are satisfactory.
    (b) Waiver of standards. Use of the standards in paragraphs (c) 
through (j) of this section for underwriting home loans will be waived 
only in extraordinary circumstances when the Secretary determines, 
considering the totality of circumstances, that the veteran is a 
satisfactory credit risk.
    (c) Methods. The two primary underwriting tools that will be used 
in determining the adequacy of the veteran's present and anticipated 
income are debt-to-income ratio and residual income analysis. They are 
described in paragraphs (d) through (f) of this section. Ordinarily, to 
qualify for a loan, the veteran must meet both standards. Failure to 
meet one standard, however, will not automatically disqualify a 
veteran. The following shall apply to cases where a veteran does not 
meet both standards:
    (1) If the debt-to-income ratio is 41 percent or less, and the 
veteran does not meet the residual income standard, the loan may be 
approved with justification, by the underwriter's supervisor, as set 
out in paragraph (c)(4) of this section.
    (2) If the debt-to-income ratio is greater than 41 percent, (unless 
it is larger due solely to the existence of tax-free income which 
should be noted in the loan file) the loan may be approved with 
justification, by the underwriter's supervisor, as set out in paragraph 
(c)(4) of this section.
    (3) If the ratio is greater than 41 percent and the residual income 
exceeds the guidelines by at least 20 percent the second level review 
and statement of justification is not required.
    (4) In any case described by paragraphs (c)(1) and (c)(2) of this 
section, the lender must fully justify the decision to approve the loan 
or submit the loan to the Secretary for prior approval in writing. The 
lender's statement must not be perfunctory, but should address the 
specific compensating factors, as set forth in paragraph (c)(5), 
justifying the approval or submission of the loan. The statement must 
be signed by the underwriter's supervisor. It must be stressed that the 
statute requires not only consideration of a veteran's present and 
anticipated income and expenses, but also that the veteran be a 
satisfactory credit risk.
    Therefore, meeting both the debt-to-income ratio and residual 
income standards does not mean the loan is automatically approved. It 
is the lender's responsibility to base the loan approval or disapproval 
on all the factors present for any individual veteran. The veteran's 
credit must be evaluated based on criteria set forth in paragraph (g) 
of this section as well as a variety of compensating factors that 
should be evaluated.
    (5) The following are examples of acceptable compensating factors 
to be considered in the course of underwriting a loan:
    (i) Excellent long-term credit;
    (ii) Conservative use of consumer credit;
    (iii) Minimal consumer debt;
    (iv) Long-term employment;
    (v) Significant liquid assets;
    (vi) Downpayment or the existence of equity in refinancing loans;
    (vii) Little or no increase in shelter expense;
    (viii) Military benefits;
    (ix) Satisfactory homeownership experience;
    (x) High residual income; and
    (xi) Low debt-to-income ratio.
    (6) The list in paragraph (c)(5) is not exhaustive and the items 
are not in any priority order. Valid compensating factors should 
represent unusual strengths rather than mere satisfaction of basic 
program requirements. Compensating factors must be relevant to the 
marginality or weakness.
    (d) Debt-to-income-ratio. A debt-to-income ratio that compares the 
veteran's anticipated monthly housing expense and total monthly 
obligations to his or her stable monthly income will be computed to 
assist in the assessment of the potential risk of the loan. The ratio 
will be determined by taking the sum of the monthly Principal, 
Interest, Taxes and Insurance (PITI) to the loan being applied for, 
homeowners and other assessments such as special assessments, 
condominium fees, homeowners association fees, etc., and any long-term 
obligations divided by the total of gross salary or earnings and other 
compensation or income. The ratio should be rounded to the nearest two 
digits; e.g., 35.6 percent would be rounded to 36 percent. The standard 
is 41 percent or less. If the ratio is greater than 41 percent, (unless 
it is larger due solely to the existence of tax free income which 
should be noted in the loan file) the steps cited in paragraphs (c)(1) 
through (c)(6) of this section apply.
    (e) Residual income guidelines. The guidelines provided in this 
paragraph for residual income will be used to determine whether the 
veteran's monthly residual income will be adequate to meet living 
expenses after estimated monthly shelter expenses have been paid and 
other monthly obligations have been met. The guidelines for residual 
income are based on data supplied in the Consumer Expenditure Survey 
(CES) published by the Department of Labor's Bureau of Labor 
Statistics. Regional minimum incomes have been developed for loan 
amounts up to $69,999 and for loan amounts of $70,000 and above. It is 
recognized that the purchase price of the property may affect family 
expenditure levels in individual cases. This factor may be given 
consideration in the final determination in individual loan analyses. 
For example, a family purchasing in a higher-priced neighborhood may 
feel a need to incur higher than average expenses to support a 
lifestyle comparable to that in their environment, whereas a 
substantially lower-priced home purchase may not compel such 
expenditures. It should also be clearly understood from this 
information that no single factor is a final determinant in any 
applicant's qualification for a VA guaranteed loan. Once the residual 
income has been established, other important factors must be examined. 
One such consideration is the amount being paid currently for rental or 
housing expenses. If the proposed shelter expense is materially in 
excess of what is currently being paid, the case may require closer 
scrutiny. In such cases, consideration should be given to the ability 
of the borrower and spouse to accumulate liquid assets; such as cash 
and bonds, and to the amount of debts incurred while paying a lesser 
amount for shelter. For example, if an application indicates little or 
no capital reserves and excessive obligations, it may not be reasonable 
to conclude that a substantial increase in shelter expenses can be 
absorbed. Another factor of prime importance is the applicant's manner 
of meeting obligations. A poor credit history alone is a basis for 
disapproving a loan, as is an obviously inadequate income. When one or 
the other is marginal, however, the remaining aspect must be closely 
examined to assure that the loan applied for will not exceed the 
applicant's ability or capacity to repay. Therefore, it is important to 
remember that the figures provided below for residual income are to be 
used as a guide and should be used in conjunction with the steps 
outlined in paragraphs (c) through (j) of this section. The residual 
income guidelines are as follows:
    (1) Table of residual incomes by region (for loan amounts to 
$69,999 and below):

                   Table of Residual Incomes by Region                  
                 [For loan amounts of $69,999 and below]                
------------------------------------------------------------------------
           Family size*             Northeast  Midwest   South     West 
------------------------------------------------------------------------
1.................................      $375      $367     $367     $409
2.................................       629       616      616      686
3.................................       758       742      742      826
4.................................       854       835      835      930
5.................................       886       867      867      965
------------------------------------------------------------------------
*For families with more than five members, add $75 for each additional  
  member up to a family of seven.                                       

    (2) Table of residual incomes by region (for loan amounts of 
$70,000 and above):

                   Table of Residual Incomes by Region                  
                 [For loan amounts of $70,000 and above]                
------------------------------------------------------------------------
           Family size*             Northeast  Midwest   South     West 
------------------------------------------------------------------------
1.................................      $433      $424     $424     $472
2.................................       726       710      710      791
3.................................       874       855      855      952
4.................................       986       964      964     1074
5.................................      1021       999      999     1113
------------------------------------------------------------------------
*For families with more than five members, add $80 for each additional  
  member up to a family of seven.                                       

    (3) Geographic regions for residual income guidelines: Northeast--
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, 
Pennsylvania, Rhode Island and Vermont; Midwest--Illinois, Indiana, 
Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, 
Ohio, South Dakota and Wisconsin; South--Alabama, Arkansas, Delaware, 
District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, 
Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, 
Tennessee, Texas, Virginia, West Virginia; West--Alaska, Arizona, 
California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, 
Oregon, Utah, Washington and Wyoming.
    (4) Military adjustments: For loan applications involving an 
active-duty serviceperson or military retiree, the residual income 
figures will be reduced by a minimum of 5 percent if there is a clear 
indication that the borrower or spouse will continue to receive the 
benefits resulting from the use of facilities on a nearby military 
base. (This reduction applies to tables in paragraph (e).)
    (f) Stability and reliability of income. Only stable and reliable 
income of the veteran and spouse can be considered in determining 
ability to meet mortgage payments. Income can be considered stable and 
reliable if it can be concluded that it will continue during the 
foreseeable future.
    (1) Verification. Income of the borrower and spouse which is 
derived from employment and which is considered in determining the 
family's ability to meet the mortgage payments, payments on debts and 
other obligations, and other expenses, must be verified. If the spouse 
is employed and will be contractually obligated on the loan, the 
combined income of both the veteran and spouse is considered when the 
income of the veteran alone is not sufficient to qualify for the amount 
of the loan sought. In other than community property States, if the 
spouse will not be contractually obligated on the loan, Regulation B, 
promulgated by the Federal Reserve Board pursuant to the Equal Credit 
Opportunity Act prohibits any request for, or consideration of 
information concerning the spouse (including income, employment, 
assets, or liabilities), except that if the applicant is relying on 
alimony, child support, or maintenance payments from a spouse or former 
spouse as a basis for repayment of the loan, information concerning 
such spouse or former spouse may be requested and considered (see 
paragraph (f)(4) of this section). In community property States, 
information concerning a spouse may be requested and considered in the 
same manner as that for the applicant. The standards applied to income 
of the veteran are also applicable to that of the spouse. There can be 
no discounting of income on account of sex, marital status, or any 
other basis prohibited by the Equal Credit Opportunity Act. Income 
claimed by an applicant that is not or cannot be verified cannot be 
given considered when analyzing the loan. If the veteran or spouse has 
been employed by a present employer for less than 2 years, a 2-year 
history covering prior employment, schooling or other training must be 
secured. Any periods of unemployment must be explained. Employment 
verifications and pay stubs must be no more than 90 days old to be 
considered valid. For loans closed automatically, this requirement will 
be considered satisfied if the date of the employment verification is 
within 90 days of the date of the veteran's application to the lender.
    (2) Active duty applicants. (i) In the case of an active duty 
applicant, a military Leave & Earnings Statement is required and will 
be used instead of an employment verification. The statement must be no 
more than 90 days old and must be the original or a lender-certified 
copy of the original. For loans closed automatically, this requirement 
is satisfied if the date of the Leave and Earnings Statement is within 
90 days of the date of the borrower's application to the lender.
    (ii) For service members within 12 months of release from active 
duty one of the following is also required:
    (A) Documentation that the service member has in fact already 
reenlisted or extended his/her period of active duty to a date beyond 
the 12 month period following the projected closing of the loan.
    (B) Verification of a valid offer of local civilian employment 
following release from active duty. All data pertinent to sound 
underwriting procedures (date employment will begin, earnings, etc.) 
must be included.
    (C) A statement from the service member that he/she intends to 
reenlist or extend his/her period of active duty to a date beyond the 
12 month period following the projected loan closing date, and a 
statement from the service member's commanding officer confirming that 
the service member is eligible to reenlist or extend his/her active 
duty as indicated and that the commanding officer has no reason to 
believe that such reenlistment or extension of active duty will not be 
granted.
    (D) Other unusually strong positive underwriting factors, such as a 
downpayment of at least 10 percent, significant cash reserves, or clear 
evidence of strong ties to the community coupled with a nonmilitary 
spouse's income so high that only minimal income from the active duty 
service member is needed to qualify.
    (iii) Each active duty member who applies for a loan must be 
counseled through the use of VA Form 26-0592, Counseling Checklist for 
Military Homebuyers. Lenders must submit a signed and dated VA Form 26-
0592 with each prior approval loan application or automatic loan report 
involving a borrower on active duty.
    (3) Income reliability. Income received by the borrower and spouse 
is to be used only if it can be concluded that the income will continue 
during the foreseeable future and thus be properly considered in 
determining ability to meet the mortgage payments. There can be no 
discounting of income solely because it is derived from an annuity, 
pension or other retirement benefit, or from part-time employment. 
However, unless income from overtime work and part-time or second jobs 
can be accorded a reasonable likelihood that it is continuous and will 
continue in the foreseeable future, such income should not be used. 
Generally, the reliability of such income cannot be demonstrated unless 
the income has continued for 2 years. The hours of duty and other work 
conditions of the applicant's primary job, and the period of time in 
which the applicant was employed under such arrangement must be such as 
to permit a clear conclusion as to a good probability that overtime or 
part-time or secondary employment can and will continue. Income from 
overtime work and part-time jobs not eligible for inclusion as primary 
income may, if properly verified for at least 12 months, be used to 
offset the payments due on debts and obligations of an intermediate 
term, i.e., 6 to 24 months. Such income must be described in the loan 
file. The amount of any pension or compensation and other income such 
as dividends from stocks, interest from bonds, savings accounts, or 
other deposits, rents, royalties, etc., will be used as primary income 
if it is reasonable to conclude that such income will continue in the 
foreseeable future. Otherwise, it may be used only to offset 
intermediate-term debts, as above. Also, the likely duration of certain 
military allowances cannot be determined, and therefore will be used 
only to offset intermediate-term obligations. Such allowances are: Pro-
pay, flight or hazard pay, and overseas or combat pay, all of which are 
subject to periodic review and/or testing of the recipient to ascertain 
whether eligibility for such pay will continue. Only if it can be shown 
that such pay has continued for a prolonged period and can be expected 
to continue because of the nature of the recipient's assigned duties, 
will such income be considered as primary income. For instance, flight 
pay verified for a pilot can be regarded as probably continuous and 
thus should be added to the base pay. Income derived from service in 
the reserves or National Guard may be used if the applicant has served 
in such capacity for a period of time sufficient to evidence good 
probability that such income will continue. The total period of active 
and reserve service may be helpful in this regard. Otherwise, such 
income may be used to offset intermediate-term debts. There are a 
number of additional income sources whose contingent nature precludes 
their being considered as available for repayment of a long-term 
mortgage obligation. Temporary income items such as VA educational 
allowances and unemployment compensation do not represent stable and 
reliable income and will not be taken into consideration in determining 
the ability of the veteran to meet the income requirement of the 
governing law. As required by the Equal Opportunity Act Amendments of 
1976, Public Law 94-239, income from public assistance programs is used 
to qualify a loan if it can be determined that the income will probably 
continue for a substantial fraction of the term of the loan; i.e., one-
third or more. For instance, aid to dependent children being received 
for a 5-year old child that will continue until the child achieves 
majority would be used to qualify for a 30-year loan.
    (4) Alimony, child support, maintenance payments. If an applicant 
chooses to reveal income from alimony, child support, or maintenance 
payments (after first having been informed that any such disclosure is 
voluntary pursuant to the Federal Reserve Board's Regulation B), such 
payments are considered as income to the extent that the payments are 
likely to be consistently made. Factors to be considered in determining 
the likelihood of consistent payments include, but are not limited to: 
Whether the payments are received pursuant to a written agreement or 
court decree; the length of time the payments have been received; the 
regularity of receipt; the availability of procedures to compel 
payment; and the creditworthiness of the payor, including the credit 
history of the payor when available under the Fair Credit Reporting Act 
or other applicable laws. However, the Fair Credit Reporting Act (15 
U.S.C. 1681(b)) limits the permissible purposes for which credit 
reports may be ordered, in the absence of written instructions of the 
consumer to whom the report relates, to business transactions involving 
the subject of the credit report or extensions of credit to the subject 
of the credit report.
    (5) Military quarters allowance. With respect to off-base housing 
(quarters) allowances for service personnel on active duty, it is the 
policy of the Department of Defense (DoD) to utilize available on-base 
housing when possible. In order for a quarters allowance to be 
considered as continuing income, it is necessary that the applicant 
furnish written authorization from his or her commanding officer for 
off-base housing. This authorization should verify that quarters will 
not be made available and that the individual should make permanent 
arrangements for nonmilitary housing. DD Form 1747, Status of Housing 
Availability, is used by the Family Housing Office to advise personnel 
regarding family housing. The applicant's quarters allowance cannot be 
considered unless item b (Permanent) or d is completed on DD Form 1747, 
dated October 1990. of course, if the applicant's income less quarters 
allowance is sufficient, there is no need for assurance that the 
applicant has permission to occupy nonmilitary housing provided that a 
determination can be made that the occupancy requirements of the law 
will be met. Also, authorization obtain off-base housing will not be 
required when certain duty assignments would clearly qualify service 
personnel with families for quarters allowance. For instance, off-base 
housing authorizations need not be obtained for service personnel 
stationed overseas who are not accompanied by their families, 
recruiters on detached duty, or military personnel stationed in areas 
where no on-base housing exists. In any case in which no off-base 
housing authorization is obtained, an explanation of the circumstances 
justifying its omission must be included with the loan application 
except when it has been established by the VA facility of jurisdiction 
that the waiting lists for on-base housing are so long that it is 
improbable that individuals desiring to purchase off-base housing would 
be precluded from doing so in the foreseeable future. If stations make 
such a determination, a release shall be issued to inform lenders.
    (6) Commissions. When all or a major portion of the veteran's 
income is derived from commissions, it will be necessary to establish 
the stability of such income if it is to be considered in the loan 
analysis for the repayment of the mortgage debt and/or short-term 
obligations. In order to assess the value of such income, lenders 
should obtain written verification of the actual amount of commissions 
paid to date, the basis for the payment of such commissions and when 
commissions are paid; i.e., monthly, quarterly, semiannually, or 
annually. Lenders should also obtain signed and dated individual income 
tax returns, plus applicable schedules, for the previous 2 years, or 
for whatever additional period is deemed necessary to properly 
demonstrate a satisfactory earnings record. The length of the veteran's 
employment in the type of occupation for which commissions are paid is 
also an important factor in the assessment of the stability of the 
income. If the veteran has been employed for a relatively short time, 
the income should not normally be considered stable unless the product 
or service was the same or closely related to the product or service 
sold in an immediate prior position. Generally, income from commissions 
is considered stable when the applicant has been receiving such income 
for at least 2 years. Less than 2 years of income from commissions 
cannot usually be considered stable. When an applicant has received 
income from commissions for less than 1 year, it will rarely be 
possible to demonstrate that the income is stable for qualifying 
purposes; such cases would require in-depth development.
    (7) Self-employment. Generally, income from self-employment is 
considered stable when the applicant has been in business for at least 
2 years. Less than 2 years of income from self-employment cannot 
usually be considered stable unless the applicant has had previous 
related employment and/or extensive specialized training. When an 
applicant has been self-employed less than 1 year, it will rarely be 
possible to demonstrate that the income is stable for qualifying 
purposes; such cases would require in-depth development. The following 
documentation is required for all self-employed borrowers:
    (i) A profit and loss statement for the prior fiscal year (12-month 
accounting cycle), plus the period year to date since the end of the 
last fiscal year (or for whatever shorter period records may be 
available), and a current balance sheet showing all assets and 
liabilities. The profit and loss statement and balance sheet will be 
compiled by an accountant based on the financial records. In some cases 
the nature of the business or the content of the financial statement 
may necessitate an independent audit by the accountant. Depending on 
the situation, this data may be on the veteran and/or the business; and
    (ii) Copies of signed individual income tax returns, plus all 
applicable schedules for the previous 2 years, or for whatever 
additional period is deemed necessary to properly demonstrate a 
satisfactory earnings record, must be obtained. If the business is a 
corporation or partnership, copies of signed federal business income 
tax returns for the previous two years plus all applicable schedules 
for the corporation or partnership must be obtained; and
    (iii) If the business is a corporation or partnership, a list of 
all stockholders or partners showing the interest each holds in the 
business will be required. Some cases may justify a written credit 
report on the business as well as the applicant. When the business is 
of an unusual type and it is difficult to determine the probability of 
its continued operation, explanation as to the function and purpose of 
the business may be needed from the applicant and/or any other 
qualified party with the acknowledged expertise to express a valid 
opinion.
    (8) Recently discharged veterans. Loan applications received from 
recently discharged veterans who have little or no employment 
experience other than their military occupation and from veterans 
seeking VA guaranteed loans who have retired after 20 years of active 
military duty require special attention. The retirement income of the 
latter veterans in may cases may not be sufficient to meet the 
statutory income requirements for the loan amount sought. Many have 
obtained full-time employment and have been employed in their new jobs 
for a very short time.
    (i) It is essential in determining whether veterans in these 
categories qualify from the income standpoint for the amount of the 
loan sought, that the facts in respect to their present employment and 
retirement income be fully developed, and that each case be considered 
on its individual merits.
    (ii) In most cases the veteran's current income or current income 
plus his or her retirement income is sufficient. The problem lies in 
determining whether it can be properly concluded that such income level 
will continue for the foreseeable future. If the veteran's employment 
status is that of a trainee or apprentice, this will, of course, be a 
factor. In cases of the self-employed, the question to be resolved is 
whether there are reasonable prospects that the business enterprise 
will be successful and produce the required income. Unless a favorable 
conclusion can be made, the income from such source should not be 
considered in the loan analysis.
    (iii) If a recently discharged veteran has no prior employment 
history and the veteran's verification of employment shows he or she 
has not been on the job a sufficient time in which to become 
established, consideration should be given to the duties the veteran 
performed in the military service. When it can be determined that the 
duties a veteran performed in the service are similar or are in direct 
relation to the duties of the applicant's present position, such duties 
may be construed as adding weight to his or her present employment 
experience and the income from the veteran's present employment thus 
may be considered available for qualifying the loan, notwithstanding 
the fact that the applicant has been on the present job only a short 
time. This same principle may be applied to veterans recently retired 
from the service. In addition, when the veteran's income from 
retirement, in relation to the total of the estimated shelter expense, 
long-term debts and amount available for family support, is such that 
only minimal income from employment is necessary to qualify from the 
income standpoint, it would be proper to resolve the doubt in favor of 
the veteran. It would be erroneous, however, to give consideration to a 
veteran's income from employment for a short duration in a job 
requiring skills for which the applicant has had no training or 
experience.
    (iv) To illustrate the provisions of paragraph (f), it would be 
proper to use short-term employment income in qualifying a veteran who 
had experience as an airplane mechanic in the military service and the 
individual's employment after discharge or retirement from the service 
is in the same or allied field; e.g., auto mechanic or machinist. This 
presumes, however, that the verification of employment included a 
statement that the veteran was performing the duties of the job 
satisfactorily, the possibility of continued employment was favorable 
and that the loan application is eligible in all other respects. An 
example of nonqualifying experience is that of a veteran who was an Air 
Force pilot and has been employed in insurance sales on commission for 
a short time. Most cases, of course, fall somewhere between those 
extremes. It is for this reason that the facts of each case must be 
fully developed prior to closing the loan automatically or submitting 
the case to VA for prior approval.
    (9) Employment of short duration. The provisions of paragraph 
(f)(7) of this section are similarly applicable to applicants whose 
employment is of short duration. Such cases will entail careful 
consideration of the employer's confirmation of employment, probability 
of permanency, past employment record, the applicant's qualifications 
for the position, and previous training, including that received in the 
military service. In the event that such considerations do not enable a 
determination that the income from the veteran's current position has a 
reasonable likelihood of continuance, such income should not be 
considered in the analysis. Applications received from persons employed 
in the building trades, or in other occupations affected by climatic 
conditions, should be supported by documentation evidencing the 
applicant's total earnings to date and covering a period of not less 
than 1 year as well as signed and dated copies of complete income tax 
returns, including all schedules for the past 2 years or for whatever 
additional period is deemed necessary to properly demonstrate a 
satisfactory earnings record. If the applicant works out of a union, 
evidence of the previous year's earnings should be obtained together 
with a verification of employment from the current employer.
    (10) Rental-income. (i) Multi-unit subject property. When the loan 
pertains to a structure with more than a one-family dwelling unit, the 
prospective rental income will not be considered unless the veteran can 
demonstrate a reasonable likelihood of success as a landlord, and 
sufficient cash reserves are verified to enable the veteran to carry 
the mortgage loan payments (principal, interest, taxes, and insurance) 
without assistance from the rental income for a period of at least 6 
months. The determination of the veteran's likelihood of success as a 
landlord will be based on documentation of any prior experience in 
managing rental units, or other collection activities. The amount of 
rental income to be used in the loan analysis will be based on the 
prior rental history of the units as verified by the seller's financial 
records (e.g., prior years' tax returns) for existing structures or, 
for proposed construction, the appraiser's opinion of the property's 
fair monthly rental. Adjustments will be applied to reduce estimated 
gross rental income by proper allowances for operating expenses and 
vacancy losses.
    (ii) Rental of existing home. Proposed rental of a veteran's 
existing property may be used to offset the mortgage payment on that 
property, provided there is no indication that the property will be 
difficult to rent. If available, a copy of the rental agreement should 
be obtained. It is the responsibility of the loan underwriter to be 
aware of the condition of the local rental market. For instance, in 
areas where the rental market is very strong the absence of a lease 
should not automatically prohibit the offset of the mortgage by the 
proposed rental income.
    (iii) Other rental property. If income from rental property will be 
used to qualify for the new loan, the documentation required of a self-
employed applicant should be obtained together with evidence of cash 
reserves equaling 3 months PITI of the rental property. As for any 
self-employed earnings (see paragraph (f)(7) of this section), 
depreciation claimed may be added back in as income. In the case of a 
veteran who has no experience as a landlord, it is unlikely that the 
income from a rental property may be used to qualify for the new loan.
    (ll) Taxes and other deductions. Deductions to be applied for 
Federal income taxes ad Social Security may be obtained from the 
Employer's Tax Guide (Circular E) issued by the Internal Revenue 
Service (IRS). (For veterans receiving a mortgage credit certificate 
(MCC), see paragraph (f)(12) of this section.) Any State or local taxes 
should be estimated or obtained from charts similar to those provided 
by IRS which may be available in those States with withholding taxes. A 
determination of the amount paid or withheld for retirement purposes 
should be made and used when calculating deductions from gross income. 
In determining whether a veteran-applicant meets the income criteria 
for a loan, some consideration may be given to the potential tax 
benefits the veteran will realize if the loan is approved. This can be 
done by using the instructions and worksheet portion of IRS Form W-4, 
Employee's Withholding Allowance Certificate, to compute the total 
number of permissible withholding allowances. That number can then be 
used when referring to IRS Circular E and any appropriate similar State 
withholding charts to arrive at the amount of Federal and State income 
tax to be deducted from gross income.
    (12) Mortgage credit certificates. (i) The Internal Revenue Code, 
as amended by the Tax Reform Act of 1984, allows States and other 
political subdivisions to trade in all or part of their authority to 
issue mortgage revenue bonds for authority to issue MCCs. Veterans who 
are recipients of MCCs may realize a significant reduction in their 
income tax liability by receiving a Federal tax credit for a percentage 
of their mortgage interest payment on debt incurred on or after January 
1, 1985.
    (ii) Lenders must provide a copy of the MCC to VA with the home 
loan application. The MCC will specify the rate of credit allowed and 
the amount of certified indebtedness; i.e., the indebtedness incurred 
by the veteran to acquire a principal residence or as a qualified home 
improvement or rehabilitation loan.
    (iii) For credit underwriting purposes, the amount of tax credit 
allowed to a veteran under an MCC will be treated as a reduction in the 
monthly Federal income tax. For example, a veteran having a $600 
monthly interest payment and an MCC providing a 30-percent tax credit 
would receive a $180 (30% x $600) tax credit each month. However, 
because the annual tax credit, which amounts to $2,160 (12 x $180), 
exceeds $2,000 and is based on a 30-percent credit rate, the maximum 
tax credit the veteran can receive is limited to $2,000 per year (Pub. 
L. 98-369) or $167 per month ($2,00012). As a consequence of 
the tax credit, the interest on which a deduction can be taken will be 
reduced by the amount of the tax credit to $433 ($600-$167). This 
reduction should also be reflected when calculating Federal income tax.
    (iv) For underwriting purposes, the amount of the tax credit is 
limited to the amount of the veteran's maximum tax liability. If, in 
the example in paragraph (f)(12)(iii), the veteran's tax liability for 
the year were only $1,500, the monthly tax credit would be limited to 
$125 ($1,50012).
    (g) Credit. The conclusion reached as to whether or not the 
borrower and spouse are satisfactory credit risks must also be based on 
a careful analysis of the available credit data. Regulation B (Equal 
Credit Opportunity Act) requires that lenders include, in evaluating 
creditworthiness on a veteran's request, the credit history, when 
available, of any account reported in the name of the veteran's spouse 
or former spouse which the veteran can demonstrate reflects accurately 
the veteran's willingness or ability to repay. In other that community 
property States, if the spouse will not be contractually obligated on 
the loan, Regulation B, promulgated by the Federal Reserve Board 
pursuant to the Equal Credit Opportunity Act prohibits any request for, 
or consideration of information about the spouse concerning income, 
employment, assets or liabilities. In community property States, 
information concerning a spouse may be requested and considered in the 
same manner as that for the applicant.
    (1) Adverse data. If the analysis develops any derogatory credit 
information and, despite such facts, it is determined that the borrower 
and spouse are satisfactory credit risks, the basis for the decision 
must be explained. If a borrower and spouse have debts outstanding 
which have not been paid timely, or which they have refused to pay, the 
fact that the outstanding debts are paid after the acceptability of the 
credit is questioned or in anticipation of applying for new credit does 
not, of course, alter the fact that the record for paying debts has 
been unsatisfactory. With respect to unpaid debts, lenders may take 
into consideration a veterans's claim of bona fide or legal defenses. 
This is not applicable when the debt has been reduced to judgment.
    (2) Bankruptcy. When the credit information shows that the borrower 
or spouse has been discharged in bankruptcy under the ``straight'' 
liquidation and discharge provisions of the bankruptcy law, this would 
not in itself disqualify the loan. However, in such cases it is 
necessary to develop complete information as to the facts and 
circumstances concerning the bankruptcy. Generally speaking, when the 
borrower or spouse, as the case may be, has been regularly employed 
(not self-employed) and has been discharged in bankruptcy within the 
last 2 or 3 years, it probably would not be possible to determine that 
the borrower or spouse is a satisfactory credit risk unless both of the 
following requirements are satisfied:
    (i) The borrower or spouse has obtained credit subsequent to the 
bankruptcy and has met the credit payments in a satisfactory manner 
over a continued period, and
    (ii) The bankruptcy was caused by circumstances beyond control of 
the borrower or spouse, e.g., unemployment, prolonged strikes, medical 
bills not covered by insurance. The circumstances alleged must be 
verified. If a borrower or spouse is self-employed, has been 
adjudicated bankrupt, and subsequently obtains a permanent position, a 
finding as to satisfactory credit risk may be made provided there is no 
derogatory credit information prior to self-employment, there is no 
evidence of derogatory credit information subsequent to the bankruptcy, 
and the failure of the business was not due to misconduct. A bankruptcy 
discharged more than 5 years ago may be disregarded. A bankruptcy 
discharged between 3 and 5 years ago may be given some consideration, 
depending upon the circumstances of the bankruptcy and submission of 
evidence that the veteran has been paying his or her obligations in a 
timely manner.
    (3) Petition under Chapter 13 of Bankruptcy Law. A wage earner's 
petition under chapter 13 of the Bankruptcy Law filed by the borrower 
or spouse is indicative of an effort to pay their creditors. Some plans 
may provide for full payment of debts while others arrange for payment 
of scaled down debts. Regular payments are made to a court-appointed 
trustee over a 2- to 3-year period (or up to 5 years in some cases). 
When the borrowers have made all payments in a satisfactory manner, 
they may be considered as having reestablished satisfactory credit. 
When they apply for a home loan before completion of the payout period, 
favorable consideration may nevertheless be given if at least three-
fourths of the payments have been made satisfactorily and the Trustee 
or Bankruptcy Judge (Referee) approves of the new credit.
    (4) Foreclosures. (i) When the credit information shows that the 
veteran or spouse has had a foreclosure on a prior mortgage, e.g., a VA 
guaranteed, or HUD insured mortgage, this will not in itself disqualify 
the borrower from obtaining the loan. Lenders and field station 
personnel should refer to the preceding guidelines on bankruptcies for 
cases involving foreclosures. As with a borrower who has been 
adjudicated bankrupt, it is necessary to develop complete information 
as to the facts and circumstances of the foreclosure.
    (ii) When VA pays a claim on a VA guaranteed loan as a result of a 
foreclosure, the original veteran may be required to repay any loss to 
the Government. In some instances VA may waive the veteran's debt, in 
part or totally, based on the facts and circumstances of the case. 
However, guaranty entitlement cannot be restored unless the 
Government's loss has been repaid in full, regardless of whether or not 
the debt has been waived, compromised, or discharged in bankruptcy. 
Therefore, a veteran who is seeking a new VA loan after having 
experienced a foreclosure on a prior VA loan will in most cases have 
only remaining entitlement to apply to the new loan. The lender should 
assure that the veteran has sufficient entitlement for its secondary 
marketing purposes.
    (5) Federal debts. An applicant for a Federally-assisted loan will 
not be considered a satisfactory credit risk for such loan if the 
applicant is presently delinquent or in default on any debt to the 
Federal Government, e.g., a Small Business Administration loan, a U.S. 
Guaranteed Student loan, a debt to the Public Health Service, or where 
there is a judgment lien against the applicant's property for a debt 
owed to the Government. The applicant may not be approved for the loan 
until the delinquent account has been brought current or satisfactory 
arrangements have been made between the borrower and the Federal agency 
owed, or the judgment is paid or otherwise satisfied. Of course, the 
applicant must also be able to otherwise qualify for the loan from an 
income and remaining credit standpoint. Refinancing under VA's interest 
rate reduction refinancing provisions, however, is allowed even if the 
borrower is delinquent on the VA guaranteed mortgage being refinanced. 
Prior approval processing is required in such cases.
    (6) Absence of credit history. The fact that recently discharged 
veterans may have had no opportunity to develop a credit history will 
not preclude a determination of satisfactory credit. Similarly, other 
loan applicants may not have established credit histories as a result 
of a preference for purchasing consumer items with cash rather than 
credit. There are also cases in which individuals may be genuinely wary 
of acquiring new obligations following bankruptcy, consumer credit 
counseling (debt proration), or other disruptive credit occurrence. The 
absence of the credit history in these cases will not generally be 
viewed as an adverse factor in credit underwriting. However, before a 
favorable decision is made for cases involving bankruptcies or other 
derogatory credit factors, efforts should be made to develop evidence 
of timely payment of non-installment debts such as rent and utilities. 
It is anticipated that this special consideration in the absence of a 
credit history following bankruptcy would be the rare case and 
generally confined to bankruptcies which occurred over 3 years ago.
    (7) Long-term v. Short-term-debts. All known debts and obligations 
including any alimony and/or child support payments of the borrower and 
spouse must be documented. Significant liabilities to be deducted from 
the total income in determining ability to meet the mortgage payments 
are accounts that, generally, are of a relatively long-term; i.e., 6 
months or over. Other accounts for terms of less than 6 months must, of 
course, be considered in determining ability to meet family expenses. 
Certainly any account with less than 6 months' duration which requires 
payments so large as to cause a severe impact on the family's resources 
for any period of time must be considered in the loan analysis. For 
example, monthly payments of $300 on an auto loan with a remaining 
balance of $1,500 would be included in those obligations to be deducted 
from the total income regardless of the fact that the account can be 
expected to pay out in 5 months. It is clear that the applicant will, 
in this case, continue to carry the burden of those $300 payments for 
the first, most critical, months of the home loan. Similarly, when the 
credit information shows open accounts of several years' duration which 
are clearly of a revolving or open-end type, the regular monthly 
payment for such accounts should be considered as a long-term 
obligation to be deducted from income.
    (8) Requirements for verification. If the credit investigation 
reveals debts or obligations of a material nature which were not 
divulged by the applicant, lenders must be certain to obtain 
clarification as to the status of such debts from the borrower. A 
proper analysis is obviously not possible unless there is total 
correlation between the obligations claimed by the borrower and those 
revealed by a credit report or deposit verification. Conversely, 
significant debts and obligations reported by the borrower must be 
dated. If the credit report fails to provide necessary information on 
such accounts, lenders will be expected to obtain their own 
verifications of those debts directly from the creditors. Credit 
reports and verifications must be no more than 90 days old to be 
considered valid. For loans closed automatically, this requirement will 
be considered satisfied if the date of the credit report or 
verification is within 90 days of the date of the veteran's application 
to the lender. Of major significance are the applicant's rental history 
and outstanding, assumed, or recently retired mortgages, if any, 
particularly prior VA loans. Lenders should be sure ratings on such 
accounts are obtained; a written explanation is reburied when ratings 
are not available. A determination is necessary as to whether alimony 
and/or child support payments are required. Verification of the amount 
of such obligations should be obtained, although documentation 
concerning an applicant's divorce should not be obtained automatically 
unless it is necessary to verify the amount of any alimony or child 
support liability indicated by the applicant. If in the routine course 
of processing the loan application, however, direct evidence is 
received (e.g., from the credit report) that an obligation to pay 
alimony or child support exists (as opposed to mere evidence that the 
veteran was previously divorced), the discrepancy between the loan 
application and credit report can and should be fully resolved in the 
same manner as any other such discrepancy would be handled.
    (9) Job-related expenses. Known job-related expenses should be 
documented. This will include costs for any dependent care, significant 
commuting costs, etc. When a family's circumstances are such that 
dependent care arrangements would probably be necessary, it is 
important to determine the cost of such services in order to arrive at 
an accurate total of deductions.
    (10) Credit reports. Credit reports obtained by lenders on VA 
guaranteed loan applications must be in conformance with the 
Residential Mortgage Credit Report Standards formulated jointly by the 
Department of Veterans Affairs, Federal National Mortgage Association, 
Federal Home Loan Mortgage Corporation, Federal Housing Administration, 
Farmers Home Administration, credit repositories, repository affiliated 
consumer reporting agencies and independent consumer reporting 
agencies. The Residential Mortgage Credit Report is a detailed account 
of the credit, employment, and residence history as well as public 
records information concerning an individual. All credit reports 
obtained by the lender must be submitted to VA.
    (h) Borrower's personal and financial status. The number and ages 
of dependents have an important bearing on whether income after 
deduction of fixed charges is sufficient to support the family. Type 
and duration of employment of both the borrower and spouse are 
important as an indication of stability of their employment. The amount 
of liquid assets owned by the borrower or spouse, or both, is an 
important factor in determining that they have sufficient funds to 
close the loan, as well as being significant in analyzing the overall 
qualifications for the loan. (It is imperative that adequate cash 
assets from the veteran's own resources are verified to allow the 
payment of any difference between the sales price of the property and 
the loan amount, in addition to that necessary to cover closing costs, 
if the sales price exceeds the reasonable value established by VA (38 
CFR 36.4336(a)(3)). Verifications must be no more than 90 days old to 
be considered valid. For loans closed on the automatic basis, this 
requirement will be considered satisfied if the date of the deposit 
verification is within 90 days of the date of the veteran's application 
to the lender. Current monthly rental or other housing expense is an 
important consideration when compared to that to be undertaken in 
connection with the contemplated housing purchase.
    (i) Estimated monthly shelter expenses. It is important that 
monthly expenses such as taxes, insurance, assessments and maintenance 
and utilities be estimated accurately based on property location and 
type of house; e.g., old or new, large or small, rather than using or 
applying a ``rule of thumb'' to all properties alike. Maintenance and 
utility amounts for various types of property should be realistically 
estimated. Local utility companies should be consulted for current 
rates. The age and type of construction of a house may well affect 
these expenses. In the case of condominiums or houses in a planned unit 
development (PUD), the monthly amount of the maintenance assessment 
payable to a homeowners association should be added. If the amount 
currently assessed is less than the maximum provided in the covenants 
or master deed, and it appears likely that the amount will be 
insufficient for operation of the condominium or PUD, the amount used 
will be the maximum the veteran could be charged. If it is expected 
that real estate taxes will be raised, or if any special assessments 
are expected, the increased or additional amounts should be used. In 
special flood hazard areas, include the premium for any required flood 
insurance.
    (j) Lender responsibility. (1) Lenders are fully responsible for 
developing all credit information; i.e., for obtaining verifications of 
employment and deposit, credit reports, and for the accuracy of the 
information contained in the loan application.
    (2) Verifications of employment and deposits, and requests for 
credit reports and/or credit information must be initiated and received 
by the lender.
    (3) In cases where the real estate broker/agent or any other party 
requests any of this information, the report(s) must be returned 
directly to the lender. This fact must be disclosed by appropriately 
completing the required certification on the loan application or report 
and the parties must be identified as agents of the lender.
    (4) Where the lender relies on other parties to secure any of the 
credit or employment information or otherwise accepts such information 
obtained by any other party, such parties shall be construed for 
purposes of the submission of the loan documents to VA to be authorized 
agents of the lender, regardless of the actual relationship between 
such parties and the lender, even if disclosure is not provided to VA 
under paragraph (j)(3) of this section. Any negligent or willful 
representation by such parties shall be imputed to the lender as if the 
lender had processed those documents and the lender shall remain 
responsible for the quality and accuracy of the information provided to 
VA.
    (5) All credit reports secured by the lender or other parties as 
identified in paragraphs (j)(3) and (j)(4) of this section shall be 
provided to VA. If updated credit reports reflect materially different 
information than that in other reports such discrepancies must be 
explained by the lender and the ultimate decision as to the effects of 
the discrepancy upon the loan application fully addressed by the 
underwriter.
    (k) Lender certification. Lenders originating loans are responsible 
for determining and certifying to VA on the appropriate application or 
closing form that the loan meets all statutory and regulatory 
requirements. Lenders will affirmatively certify that loans were made 
in full compliance with the law and loan guaranty regulations as 
prescribed in this section.
    (1) Definitions. The definitions contained in part 42 of this 
chapter and the following definitions are applicable in this section.
    (i) Another appropriate amount. In determining the appropriate 
amount of a lender's civil penalty in cases where the Secretary has not 
sustained a loss or where two times the amount of the Secretary's loss 
on the loan involved does not exceed $10,000, the Secretary shall 
consider:
    (A) The materiality and importance of the false certification to 
the determination to issue the guaranty, or to approve the assumption;
    (B) The frequency and past pattern of such false certifications by 
the lender; and,
    (C) Any exculpatory or mitigating circumstances.
    (ii) Complaint includes the assessment of liability served pursuant 
to this subsection.
    (iii) Defendant means a lender named in the complaint.
    (iv) Lender includes the holder approving loan assumptions pursuant 
to 38 U.S.C. 3714.
    (2) Procedures for certification.
    (i) As a condition to VA issuance of a loan guaranty on all loans 
closed on or after October 27, 1994, and as a prerequisite to an 
effective loan assumption on all loans assumed pursuant to 38 U.S.C. 
3714 on or after October 27, 1994, the following certification shall 
accompany each loan closing or assumption package:
    ``The undersigned lender certifies that the (loan) (assumption) 
application, all verifications of employment, deposit, and other income 
and credit verification documents have been processed in compliance 
with 38 CFR part 36; that all credit reports obtained or generated in 
connection with the processing of this borrower's (loan) (assumption) 
application have been provided to VA; that, to the best of the 
undersigned lender's knowledge and belief the (loan) (assumption) meets 
the underwriting standards recited in chapter 37 of title 38 United 
States Code and 38 CFR part 36; and that all information provided in 
support of this (loan) (assumption) is true, complete and accurate to 
the best of the undersigned lender's knowledge and belief.''
    (ii) The certification shall be executed by an officer of the 
lender authorized to execute documents and act on behalf of the lender.
    (3) Any lender who knowingly and willfully makes a false 
certification required pursuant to Sec. 36.4337(k)(2) shall be liable 
to the United States Government for a civil penalty equal to two times 
the amount of the Secretary's loss on the loan involved or to another 
appropriate amount, not to exceed $10,000, whichever is greater.
    (l) Assessment of liability. (1) Upon an assessment confirmed by 
the Under Secretary for Benefits, in consultation with the 
Investigating Official, that a certification, as required in this 
section, is false, a report of findings of the Under Secretary for 
Benefits shall be submitted to the Reviewing Official setting forth:
    (i) The evidence that supports the allegations of a false 
certification and of liability;
    (ii) A description of the claims or statements upon which the 
allegations of liability are based;
    (iii) The amount of the VA demand to be made; and,
    (iv) Any exculpatory or mitigating circumstances that may relate to 
the certification.
    (2) The Reviewing Official shall review all of the information 
provided and will either inform the Under Secretary for Benefits and 
the Investigating Official that there is not adequate evidence, that 
the lender is liable, or serve a complaint on the lender stating:
    (i) The allegations of a false certification and of liability;
    (ii) The amount being assessed by the Secretary and the basis for 
the amount assessed;
    (iii) Instructions on how to satisfy the assessment and how to file 
an answer to request a hearing, including a specific statement of the 
lender's right to request a hearing by filing an answer and to be 
represented by counsel; and
    (iv) That failure to file an answer within 30 days of the complaint 
will result in the imposition of the assessment without right to appeal 
the assessment to the Secretary.
    (m) Hearing procedures. A lender hearing on an assessment 
established pursuant to this section shall be governed by the 
procedures recited at 38 CFR 42.8 through 42.47.
    (n) Additional remedies. Any assessment under this section may be 
in addition to other remedies available to VA, such as debarment and 
suspension pursuant to 38 U.S.C. 3704 and part 44 of this title 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. 3710).

(Information collection requirements contained in 36.4337 were 
approved by the Office of Management and Budget under control number 
2900-0521)

[FR Doc. 94-23753 Filed 9-26-94; 8:45 am]
BILLING CODE 8320-01-P-M