[Federal Register Volume 60, Number 143 (Wednesday, July 26, 1995)]
[Rules and Regulations]
[Pages 38256-38262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18182]



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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AG14


Loan Guaranty: Implementation of Public Laws 102-547, 103-66, 
103-78, 103-325, 103-353, and 103-446

AGENCY: Veterans Benefits Administration, Department of Veterans 
Affairs.

ACTION: Final rule.

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SUMMARY: This document amends the Department of Veterans Affairs (VA) 
loan guaranty regulations to implement certain provisions of various 
public laws. VA is amending its regulations to provide for loans to 
Reservists and members of the National Guard, loans with negotiated 
interest rates, adjustable rate mortgages, restoration of entitlement 
in certain cases, energy efficient mortgages, and flood zone 
determination fees. VA is also amending its regulations in the areas of 
manufactured housing certifications, certain interest rate reduction 
refinancing loans, and conveyance of properties notwithstanding 
overbids. In addition, the regulations are amended to reflect a reduced 
funding fee for interest rate reduction refinancing loans and an 
increase in the maximum guaranty amount. These changes increase the 
types of loans available to veterans and the categories of veterans 
eligible for VA home loans.

EFFECTIVE DATE: This final rule is effective on August 25, 1995.

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) 273-7368.

SUPPLEMENTARY INFORMATION: On February 24, 1994, VA published in the 
Federal Register (59 FR 8881) proposed regulatory amendments 
implementing Public Laws 102-547, 103-66, and 103-78. The proposed 
amendments were published to change: [1] 38 CFR 36.4312, to add a 
funding fee structure for loans to members of the Selected Reserves; 
[2] Secs. 36.4212 and 36.4311, to allow VA guaranteed loans to bear 
interest at rates agreed upon by the veteran and the lender; [3] 
Secs. 36.4212(b) and 36.4311(b), to provide that discount points cannot 
be financed, except for interest rate reduction refinancing loans; [4] 
Secs. 36.4212 and 36.4311, to provide for VA guaranteed loans with 
adjustable interest rates; [5] Secs. 36.4302 and 36.4336, to provide 
for energy efficient mortgages; [6] Secs. 36.4232, 36.4254, and 
36.4312, to reduce the funding fee for interest rate reduction 
refinancing loans to 0.50 percent of the total loan amount; [7] 
Sec. 36.4312, to increase the funding fee on most guaranteed loans and 
for the second and subsequent use of the loan guaranty benefit, except 
for interest rate reduction refinancing loans; and [8] Secs. 36.4223 
and 36.4302, to revise the guaranty percentage for certain interest 
rate reduction refinancing loans. Please refer to the February 24, 
1994, Federal Register for a complete discussion of the proposed 
amendments. This document adopts the regulatory amendments as 
originally proposed, except for a technical change discussed below, 
revisions of authority citations, amendments reflecting statutory 
changes made by Public Laws 103-325, 103-353, and 103-446, and non-
substantive changes.
    VA received three comments on the proposed amendments. Two 
commenters noted that the veteran is permitted to finance discount 
points on interest rate reduction refinancing loans, and suggested that 
the veteran be allowed to finance discount points on purchase loans as 
well. This suggestion cannot be adopted because the financing of 
discount points on purchase loans is prohibited by statute; see 38 
U.S.C. 3703(c).
    A third commenter supported the amendments which allow VA to 
guarantee a loan above the reasonable value of the property for the 
purpose of adding energy efficient improvements to the home. This 
commenter recommended that language be added to the regulations 
requiring ``that financed energy improvements meet efficiency standards 
that exceed, by some pre-determined level, those otherwise applicable 
in the jurisdiction.''
    We do not believe it would be appropriate to require specific 
standards for energy efficient improvements. Local variations in 
climate, energy sources and energy efficiency requirements would make 
it difficult to implement and monitor the use of such standards. 
Furthermore, standards for energy efficient improvements could be 
perceived by program participants as unnecessarily complicating the 
lending process and have an adverse impact on this area of VA's home 
loan program.
    This commenter also suggested that prior to the closing of a VA 
guaranteed loan the purchaser be required to obtain an energy audit 
which would provide an estimate of home energy consumption and 
information about potential cost-effective improvements to reduce that 
consumption. VA is 

[[Page 38257]]
opposed to a mandatory energy audit. At this time, it is uncertain 
whether reliable energy audits can be obtained by home purchasers in 
all parts of the country for an affordable cost. Furthermore, the 
requirement could be perceived by program participants as unnecessarily 
complicating the lending process and increasing the cost of 
homeownership. However, the Certificate of Reasonable Value (VA Form 
26-1843) or the lender's Notice of Value is issued for each property to 
be purchased with a VA guaranteed loan. These notices do recommend that 
the veteran purchaser obtain such an audit.
    A technical change is being made to 38 CFR 36.4212(f)(2) and 
36.4311(d)(2) by adding a new sentence to each. The proposed 
regulations failed to specify what would be the effective date of the 
new interest rate on an adjustable rate mortgage. The additional 
sentence provides that when the rate is adjusted, the new rate will 
become effective the first day of the month following the adjustment 
date; the corresponding change in the monthly payment of principal and 
interest will occur one month later, because interest is collected in 
arrears. These changes reflect standard practice in the industry.
    This final rule also contains new provisions to incorporate changes 
made by Public Laws 103-325, 103-353 and 103-446.
    First, 38 CFR 36.4203(a) and 36.4302 are amended to reflect the 
change by Public Law 103-446 to 38 U.S.C. 3702 to permit a veteran's 
home or manufactured home loan entitlement to be restored, on a one-
time basis, if the veteran has repaid the prior VA loan in full, but 
has not disposed of the property securing that loan. After one such 
restoration, any future restoration of that entitlement will require 
the veteran to have disposed of all property previously financed with a 
VA loan using that entitlement.
    The manufactured home warranty requirements of Sec. 36.4231(b) are 
amended to reflect the provisions of Public Law 103-446 abolishing the 
requirement for VA inspections of the manufacturing process and onsite 
inspections of manufactured homes sold to veterans. Also, as required 
by Public Law 103-446, the provisions of Sec. 36.4231(b) are amended to 
provide that any manufactured home properly displaying a certificate of 
conformity with all applicable Federal manufactured home construction 
and safety standards is eligible for VA financing.
    Public Law 103-353 increased the maximum guaranty amount on loans 
greater than $144,000 from $46,000 to $50,750. This final rule 
accordingly amends 38 CFR 36.4302(a) and (d) to incorporate the 
increased guaranty amount for VA loans over $144,000.
    38 CFR 36.4306a(a) is amended to incorporate the changes made by 
Public Law 103-446 with regard to energy efficient improvement costs to 
be included in interest rate reduction refinancing loans (IRRRLs). 
Under the provisions of the new law, IRRRLs may now include additional 
funds for energy efficient improvements.
    This final rule also adds new provisions at the end of 
Secs. 36.4212(a) and 36.4311(a). Public Law 103-446 amended 38 U.S.C. 
3710(e) to provide that, for an adjustable rate mortgage being 
refinanced under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) by a 
fixed rate mortgage, the interest rate on the new loan may be higher 
than the current rate on the adjustable rate loan. The new language 
merely reflects the statutory change.
    This document amends 38 CFR 36.4320(a)(1)(ii)(B) to conform with 
new statutory language regarding the conveyance of property. Public Law 
103-446 amended 38 U.S.C. 3732(c)(7) to provide that VA may now accept 
conveyance of property securing a guaranteed loan from the loan holder 
notwithstanding the holder's overbid at the liquidation sale. This was 
previously allowed only where State law requirements resulted in an 
overbid. This change extends to all overbids, including those caused by 
lender or attorney error.
    Finally, the National Flood Insurance Reform Act of 1994, title V 
of Public Law 103-325, permits lenders to charge borrowers a reasonable 
fee for certain costs of determining whether the home or manufactured 
home is located in an area having special flood hazards. 38 CFR 
36.4232, 36.4254, and 36.4312 are amended accordingly.
    The Secretary hereby certifies that this final rule 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. The final rule essentially restates statutory provisions and 
reflects statutory requirements. Therefore, pursuant to 5 U.S.C. 
605(b), this final rule is exempt from the initial and final regulatory 
flexibility analysis requirements of Secs. 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.

    Approved: July 17, 1995.
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 is revised to read as follows:

    Authority: Sections 36.4201 through 36.4287 issued under 38 
U.S.C. 501, 3701-3704, 3707, 3710-3714, 3719, 3720, 3729, unless 
otherwise noted.

    2. Section 36.4203 is amended by revising the remainder of 
paragraphs (a)(2) and (a)(3 and adding new paragraph (a)(4) to read as 
follows:


Sec. 36.4203  Eligibility of the veteran for the manufactured home loan 
benefit under 38 U.S.C. 3712.

    (a) * * *
    (2)(i) The loan has been repaid in full or the Secretary has been 
released from liability as to the loan, or if the Secretary has 
suffered a loss on said loan, such loss has been paid in full; or
    (ii) A veteran-transferee has agreed to assume the outstanding 
balance on the loan and consented to the use of his or her entitlement 
to the extent the entitlement of the veteran-transferor had been used 
originally, and the veteran-transferee otherwise meets the requirements 
of 38 U.S.C. chapter 37.
    (3) In a case in which the veteran still owns a property purchased 
with a VA-guaranteed loan, the Secretary may, one time only, restore 
entitlement if:
    (i) The loan has been repaid in full, or, if the Secretary has 
suffered a loss on the loan, the loss has been paid in full; or
    (ii) The Secretary has been released from liability as to the loan 
and, if the Secretary has suffered a loss on the loan, the loss has 
been paid in full.
    (4) The Secretary may, in any case involving circumstances deemed 
appropriate, waive either or both of the requirements set forth in 
paragraphs (a)(1) and (a)(2)(i) of this section.

(Authority: 38 U.S.C. 3702, 3712)

    3. 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 either bear interest 
at a rate that is agreed upon by the veteran and the lender, or bear 
interest at a rate not in 

[[Page 38258]]
excess of a rate established by the Secretary. The Secretary may, from 
time to time, change that election by publishing a notice in the 
Federal Register. Provided, however, that the interest rate of a loan 
for the purpose of an interest rate reduction under 38 U.S.C. 
3712(a)(1)(F) must be less than the interest rate of the VA loan being 
refinanced. This paragraph (a) does not apply in the case of an 
adjustable rate mortgage being refinanced with a fixed rate loan.

(Authority: 38 U.S.C. 3703, 3712)

    (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).

(Authority: 38 U.S.C. 3703, 3712)

    (c) The rate of interest in instruments securing the indebtedness 
for all loans may be expressed in terms of add-on or discount.

(Authority: 38 U.S.C. 3710, 3712)

    (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 or default; Provided, 
that a late charge not in excess of an amount equal to 4 percent of any 
installment paid more than 15 days after due date shall not be 
considered a violation of this limitation.

(Authority: 38 U.S.C. 3712)

    (e) 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. The adjusted rate will become 
effective the first day of the month following the adjustment date; the 
first monthly payment at the new rate will be due on the first day of 
the following month. 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 (e)(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; and
    (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.

(Authority: 38 U.S.C. 3707, 3712)

    4. 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; and

(Authority: 38 U.S.C. 3703, 3712)

* * * * * 

[[Page 38259]]

    5. Section 36.4231 is amended by revising paragraph (b) to read as 
follows:


Sec. 36.4231  Warranty requirements.

* * * * *
    (b) Any manufactured housing unit properly displaying a 
certification of conformity to all applicable Federal manufactured home 
construction and safety standards pursuant to 42 U.S.C. 5415 shall be 
acceptable as security for a VA guaranteed loan.

(Authority: 38 U.S.C. 3712)
* * * * *
    6. In Sec. 36.4232, paragraph (a)(2) is amended by removing the 
period at the end thereof and by adding in its place a semi-colon; 
paragraphs (a)(5) and (a)(6) are amended by removing ``, and'' and by 
adding to each paragraph at the end thereof a semi-colon; and paragraph 
(a)(7) is amended by removing the period at the end thereof and adding 
in its place ``; and''. Section 36.4232 is also amended by adding a new 
paragraph (a)(8) and by revising paragraph (e)(1), to read as follows:


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

    (a) * * *
    (8) The actual amount charged for flood zone determinations, 
including a charge for a life-of-the-loan flood zone determination 
service purchased at the time of loan origination, if made by a third 
party who guarantees the accuracy of the determination. A fee may not 
be charged for a flood zone determination made by a Department of 
Veterans Affairs appraiser or for the lender's own determination.

(Authority: 38 U.S.C. 3712; 42 U.S.C. 4001 note, 4012a)
* * * * *
    (e)(1) Subject to the limitations set out in paragraph (e)(4) 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 38 U.S.C. 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 shall disregard any amount included in the loan to enable 
the borrower to pay such fee.

(Authority: 38 U.S.C. 3729(a))
* * * * *
    7. Section 36.4254 is amended by redesignating paragraph (a)(7) as 
paragraph (a)(8); and is further amended by adding a new paragraph 
(a)(7), by adding an authority citation following paragraph (a)(8), and 
by revising paragraph (d)(1), to read as follows:


Sec. 36.4254  Fees and charges.

    (a) * * *
    (7) The actual amount charged for flood zone determinations, 
including a charge for a life-of-the-loan flood zone determination 
service purchased at the time of loan origination, if made by a third 
party who guarantees the accuracy of the determination. A fee may not 
be charged for a flood zone determination made by a Department of 
Veterans Affairs appraiser or for the lender's own determination, and
    (8) * * *

(Authority: 38 U.S.C. 3712; 42 U.S.C. 4001 note, 4012a)
* * * * *
    (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 38 U.S.C. 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.

(Authority: 38 U.S.C. 3729(a))
* * * * *
    8. 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. 101, 501, 3701-3704, 3710, 3712-3714, 3720, 3279, 3732, 
unless otherwise noted.

    9. In Sec. 36.4302, paragraphs (c), (d), (e), (f), (g), (h), (i) 
and (j) are redesignated as paragraphs (d), (e), (f), (g), (h), (i), 
(j) and (l), respectively; and Sec. 36.4302 is further amended by 
revising paragraph (a)(4), by revising paragraph (b), by adding a new 
paragraph (c), by revising the newly redesignated paragraph (e), by 
revising newly redesignated paragraphs (j)(2), (j)(3), and (j)(4), and 
by adding a new paragraph (k), to read as follows:


Sec. 36.4302  Computation of guaranties or insurance credits.

    (a) * * *
    (4) The lesser of $50,750 or 25 percent of the original principal 
loan amount where the loan amount exceeds $144,000 and the loan is for 
the purchase or construction of a home or the purchase of a condominium 
unit.
    (b) With respect to an interest rate reduction refinancing loan 
guaranteed under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11), 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.

(Authority: 38 U.S.C. 3703, 3710)

    (c) With respect to a loan for an energy efficient mortgage 
guaranteed under 38 U.S.C. 3710(d), the amount of the guaranty shall be 
in the same proportion as would have been provided if the energy 
efficient improvements were not added to the loan amount, and there 
shall be no additional charge to the veteran's entitlement as a result 
of the increased guaranty amount.

(Authority: 38 U.S.C. 3703, 3710)
* * * * *
    (e) Subject to the provisions of Sec. 36.4303(g), 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 $14,750 if the loan 
amount exceeds $144,000 and the loan is for purchase or construction of 
a home or purchase of a condominium; and
    (ii) Entitlement for manufactured home loans that are to be 
guaranteed under 38 U.S.C. 3712 may not exceed $20,000.
    (2) If a veteran previously secured a realty (home) loan, the 
amount of realty (home) loan entitlement used is 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 $14,750 if the loan 
amount exceeds $144,000 and the loan is for purchase or construction of 
a home or purchase of a condominium; and 

[[Page 38260]]

    (ii) Entitlement for manufactured home loans that are to be 
guaranteed under 38 U.S.C. 3712 may not exceed $20,000.
    (3) If a veteran previously secured a manufactured home loan under 
38 U.S.C. 3712, the amount of entitlement used for that loan is 
subtracted from $36,000. The sum remaining is the amount of available 
entitlement for home loans and the sum remaining may be increased by up 
to $14,750 if the loan amount exceeds $144,000 and the loan is for 
purchase or construction of a home or purchase of a condominium. To 
determine the amount of entitlement available for manufactured home 
loans processed under 38 U.S.C. 3712, the amount of entitlement 
previously used for that purpose is subtracted from $20,000. The sum 
remaining is the amount of available entitlement for use for 
manufactured home loan purposes under 38 U.S.C. 3712.

(Authority: 38 U.S.C. 3703, 3712)
* * * * *
    (j) * * *
    (2)(i) The loan has been repaid in full or the Secretary has been 
released from liability as to the loan, or if the Secretary has 
suffered a loss on said loan, such loss has been paid in full; or
    (ii) A veteran-transferee has agreed to assume the outstanding 
balance on the loan and consented to the use of his or her entitlement 
to the extent the entitlement of the veteran-transferor had been used 
originally; or
    (3) The loan has been repaid in full, and the loan for which the 
veteran seeks to use entitlement is secured by the same property which 
secured the fully repaid loan; or
    (4) In a case in which the veteran still owns the property 
purchased with a VA-guaranteed loan, the Secretary may, one time only, 
restore entitlement used on that loan if:
    (i) the loan has been repaid in full or, if the Secretary has 
suffered a loss on the loan, the loss has been paid in full; or
    (ii) the Secretary has been released from liability as to the loan, 
and, if the Secretary has suffered a loss on the loan, the loss has 
been paid in full.
    (k) The Secretary may, in any case involving circumstances deemed 
appropriate, waive either or both of the requirements set forth in 
paragraphs (j)(1) and (j)(2)(i) of this section.

(Authority: 38 U.S.C. 3702(b), 3710)
* * * * *
    10. In Sec. 36.4306a, the introductory text of paragraph (a) and 
paragraph (a)(3) are revised, to read as follows:


Sec. 36.4306a  Interest rate reduction refinancing loan.

    (a) Pursuant to 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11), a 
veteran may refinance an existing VA guaranteed, insured, or direct 
loan to reduce the interest rate payable on the existing loan provided 
the following requirements are met:
* * * * *
    (3) The amount of the refinancing loan may not exceed:
    (i) An amount equal to the sum of the balance of the loan being 
refinanced and such closing costs as authorized by Sec. 36.4312(d) and 
a discount not to exceed a dollar amount determined in accordance with 
Sec. 36.4312(d)(7)(i); or
    (ii) In the case of a loan to refinance an existing VA guaranteed 
or direct loan and to improve the dwelling securing such loan through 
energy efficient improvements, an amount equal to the sum of the amount 
referred to with respect to the loan under paragraph (a)(3)(i) of this 
section and the amount authorized by Sec. 36.4336(a)(4);

(Authority: 38 U.S.C. 3710(a))
* * * * *
    11. 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 either bear interest 
at a rate that is agreed upon by the veteran and the lender, or bear 
interest at a rate not in excess of a rate established by the 
Secretary. The Secretary may, from time to time, change that election 
by publishing a notice in the Federal Register. However, the interest 
rate of a loan for the purpose of an interest rate reduction under 38 
U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) must be less than the 
interest rate of the VA loan being refinanced. This paragraph does not 
apply in the case of an adjustable rate mortgage being refinanced under 
38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) with a fixed rate loan.

(Authority: 38 U.S.C. 3703, 3710)

    (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), (a)(9)(B)(i), and (a)(11). For loans 
bearing an interest rate agreed upon by the veteran and the lender, the 
provisions of Sec. 36.4312(d)(6) and (d)(7) do not apply.

(Authority: 38 U.S.C. 3703, 3710)

    (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.

(Authority: 38 U.S.C. 3710)

    (d) Adjustable rate mortgage loans which comply with the 
requirements of this paragraph (d) 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 weeks) 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. The adjusted rate will become 
effective the first day of the month following the adjustment date; the 
first monthly payment at the new rate will be due on the first day of 
the following month. 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. 

[[Page 38261]]

    (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; and
    (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.

(Authority: 38 U.S.C. 3707, 3710)

    12. Section 36.4312 is amended by redesignating paragraph 
(d)(1)(viii) as paragraph (d)(1)(ix), and by removing from paragraph 
(e)(3) ``in paragraphs (e)(4) and (e)(5)'' and replacing it with ``in 
paragraph (e)(4)''. Section 36.4312 is further amended by adding a new 
paragraph (d)(1)(viii), by revising the authority citation following 
paragraph (d)(7)(iv), by adding introductory text to paragraph (e), and 
by revising paragraph (e)(1), to read as follows:


Sec. 36.4312  Charges and fees.

* * * * *
    (d) * * *
    (1) * * *
    (viii) The actual amount charged for flood zone determinations, 
including a charge for a life-of-the-loan flood zone determination 
service purchased at the time of loan origination, if made by a third 
party who guarantees the accuracy of the determination. A fee may not 
be charged for a flood zone determination made by a Department of 
Veterans Affairs appraiser or for the lender's own determination.
* * * * *
    (7) * * *
    (iv) * * *

(Authority: 38 U.S.C. 3703, 3710; 42 U.S.C. 4001 note, 4012a)
* * * * *
    (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 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11), 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 38 
U.S.C. 3701(b)(5), 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 38 U.S.C. 
3701(b)(5), 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 38 U.S.C. 3701(b)(5), 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 percent of 
the total loan amount.
    (v) 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.


[[Page 38262]]

(Authority: 38 U.S.C. 3729)
* * * * *
    13. Section 36.4320 is amended by revising paragraph (a)(1)(ii)(B) 
to read as follows:


Sec. 36.4320  Sale of security.

    (a) * * *
    (1) * * *
    (ii) * * *
    (B) The holder acquires the property, or the rights to the 
property, at the liquidation sale for an amount in excess of the 
specified amount, the indebtedness shall be credited with the proceeds 
of the sale. The holder may elect to convey the property to the 
Secretary under the terms of paragraph (a)(1)(ii)(A) of this section, 
unless a bid in excess of the specified amount was made pursuant to 
paragraph (a)(3) of this section.

(Authority: 38 U.S.C. 3732(c))
* * * * *
    14. Section 36.4336 is amended by revising paragraph (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) * * *
* * * * *
    (2)(i) Except as to refinancing loans pursuant to 38 U.S.C. 
3710(a)(8), (a)(9)(B)(i), (a)(11), 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 efficient improvements may exceed the reasonable value 
of the property. The cost of the energy efficient improvements that may 
be financed may not exceed $3,000; provided, however, that up to $6,000 
in energy efficient improvements may be financed 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 efficient 
improvements.

(Authority: 38 U.S.C. 3710)
* * * * *
[FR Doc. 95-18182 Filed 7-25-95; 8:45 am]
BILLING CODE 8320-01-P