[Federal Register Volume 61, Number 40 (Wednesday, February 28, 1996)]
[Rules and Regulations]
[Pages 7414-7415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4498]



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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AH90


Loan Guaranty: Limitation on Discount Points Financed in 
Connection with Interest Rate Reduction Refinancing Loans

AGENCY: Department of Veterans Affairs.

ACTION: Interim final rule.

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SUMMARY: This document amends VA's loan guaranty regulations concerning 
points allowed to be included in VA-guaranteed Interest Rate Reduction 
Refinancing Loans by limiting to two the amount of points that may be 
included in the loan. This action is necessary to help ensure that 
veterans are not overcharged with excessive points and to protect the 
interest of the Government against overinflated loans.

DATES: This rule is effective February 28, 1996. Comments must be 
received on or before April 29, 1996.

ADDRESSES: Mail written comments to: Director, Office of Regulations 
Management (02D), Department of Veterans Affairs, 810 Vermont Avenue, 
NW., Washington, DC 20420; or hand deliver written comments to: Office 
of Regulations Management, Room 1176, 801 Eye Street, NW., Washington, 
DC 20001. Comments should indicate that they are submitted in response 
to ``RIN 2900-AH90.'' All written comments received will be available 
for public inspection in the Office of Regulations Management, Room 
1176, 801 Eye Street, NW., Washington, DC 20001 between the hours of 8 
a.m. and 4:30 p.m., Monday through Friday (except holidays).

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: Under authority of 38 U.S.C. Chapter 37, VA 
guarantees loans made by lenders to eligible veterans to purchase, 
construct, improve, or refinance their homes (the term veteran as used 
in this document includes any individual defined as a 

[[Page 7415]]
veteran under 38 U.S.C. 101 and 3701 for the purpose of housing loans). 
This document amends VA's loan guaranty regulations concerning points 
allowed to be included in VA-guaranteed Interest Rate Reduction 
Refinancing Loans (IRRRLs) by limiting to two the amount of points that 
may be included in the loan.
    The provisions of 38 U.S.C. 3703(c)(3) and 3710(e)(1)(C) allow for 
IRRRLs to include ``reasonable'' points as may be authorized by the 
Secretary by regulation. One point equals one percent of the amount of 
the loan. Lenders allow a borrower to pay points and thereby reduce the 
interest rate.
    The regulations in effect prior to the effective date of this 
document allowed IRRRLs to include any amount of points negotiated 
between the veteran and the lender. This was based on the assumption 
that market forces would act to assure that veterans were not charged 
excessive points. While this generally has been true, recently a few 
lenders have not been constrained by market rates and have been able to 
convince veterans to agree to IRRRLs with excessive points. There have 
been cases in which IRRRLs include 5 or more points with the lender 
representing the loan as having ``at market'' terms even though a true 
``at market'' interest rate for such a loan generally would have called 
for no more than two points (because of excessive points there have 
even been some IRRRLs where the monthly payment increased even though 
the interest rate decreased).
    In addition to overcharging the veteran, excessive points often 
cause other negative impacts. IRRRLs sometime result in loans in excess 
of the value of the property. Accordingly, any additional increase in 
the amount by which the loan balance exceeds the market value of the 
property would further increase VA's loss in the event of default and 
payment of a claim under the guaranty. Also, an excessive increase in 
the loan amount may cause a veteran to be unable to sell the home for 
an amount sufficient to pay off the loan balance.
    We believe that limiting to two the amount of points that may be 
included in an IRRRL is appropriate. We believe that this will 
reasonably protect the veteran and the Government against overinflated 
IRRRLs and at the same time avoid unduly hampering veterans' ability to 
obtain IRRRLs at favorable terms. The inclusion of two points in 
refinanced loans has gained general market acceptance as the typical 
number of points included in loans obtained ``at market.'' In our view, 
limiting to two the amount of points that may be included in an IRRRL 
would not have much of an effect on IRRRLs other than to protect 
against the few lenders who are overcharging veterans and increasing 
VA's risk with above-market combinations of rates and points.
    This change in the regulations only concerns the amount of points 
that may be included in an IRRRL. A veteran could pay in excess of two 
points if the excess points were paid in cash.
    We considered amending the regulations to include a formula 
designed to restrict the amount of the loan in comparison with the 
value of the property and to ensure that veterans would not get 
overcharged. However, we believe such a formula would be too complex 
and difficult to enforce. Instead, we believe that we can best help to 
ensure that excessive points are not included in IRRRLs by limiting to 
two points the amount of points that may be included in the loan.

Administrative Procedure Act

    Pursuant to 5 U.S.C. 553, we have found good cause to dispense with 
notice and comment on this interim final rule and to dispense with a 
30-day delay of its effective date. These findings are based on the 
critical need to help ensure that veterans are not overcharged with 
excessive points and to protect the interests of the Government against 
overinflated loans. Comments are being solicited for 60 days after 
publication of this document. VA may modify this rule in response to 
comments, if appropriate.

Regulatory Flexibility Act

    Because no notice of proposed rulemaking was required in connection 
with the adoption of this interim final rule, no regulatory flexibility 
analysis is required under the Regulatory Flexibility Act (5 U.S.C. 601 
et seq.).

    The Catalog of Federal Domestic Assistance Program numbers are 
64.114 and 64.119.

List of Subjects in 38 CFR Part 36

    Condominiums, Housing, Individuals with disabilities, Loan 
programs--housing and community development, Manufactured homes, 
Veterans.

    Approved: February 13, 1996.
Jesse Brown,
Secretary of Veterans Affairs.

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

PART 36--LOAN GUARANTY

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

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

    2. Section 36.4223 is amended by revising paragraph (a)(3) to read 
as follows:


Sec. 36.4223  Interest rate reduction refinancing loan.

    (a) * * *
    (3) The amount of the refinancing loan may not exceed an amount 
equal to the sum of the balance of the loan being refinanced and such 
closing costs as authorized in Sec. 36.4232 or Sec. 36.4254, as 
appropriate, and a discount not to exceed 2 percent of the loan amount;

    (Authority: 38 U.S.C. 3703, 3712)
* * * * *
    3. The authority citation for part 36, Secs. 36.4300 through 
36.4375 continues to read as follows:

    Authority: Sections 36.4300 through 36.4375 issued under 38 
U.S.C. 101, 501, 3701-3704, 3710, 3712-3714, 3720, 3279, 3732, 
unless otherwise noted.

    4. Section 36.4306a is amended by revising paragraph (a)(3)(i) to 
read as follows:


Sec. 36.4306a  Interest rate reduction refinancing loan.

    (a) * * *
    (3) * * *
    (i) An amount equal to the balance of the loan being refinanced and 
such closing costs as authorized by Sec. 36.4312(d) and a discount not 
to exceed 2 percent of the loan amount; or
* * * * *
    (Authority: 38 U.S.C. 3703, 3710)

[FR Doc. 96-4498 Filed 2-27-96; 8:45 am]
BILLING CODE 8320-01-P