[Federal Register Volume 62, Number 16 (Friday, January 24, 1997)]
[Rules and Regulations]
[Pages 3610-3611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1656]


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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: Veterans Benefits Administration, Department of Veterans 
Affairs.

ACTION: Final rule.

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SUMMARY: This document adopts as a final rule, without change, an 
interim final rule that amends VA's loan guaranty regulations 
concerning points allowed to be included in Interest Rate Reduction 
Refinancing Loans. This rule limits to two the amount of discount 
points that may be included in the loan. This rule is necessary to help 
ensure that veterans are not overcharged with excessive points and to 
protect the Government against the danger of overinflated loans.

EFFECTIVE DATE: January 24, 1997.

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, 
Washington, DC 20420, (202) 273-7368.

SUPPLEMENTARY INFORMATION: On February 28, 1996, VA published in the 
Federal Register (61 FR 7414) an interim final rule with request for 
comments. The rule amended VA's loan guaranty regulations by limiting 
to two the amount of points that may be included in VA-guaranteed 
Interest Rate Reduction Refinancing Loans (IRRRLs). We requested that 
comments on the interim final rule be submitted on or before April 29, 
1996. We received 5 comments: from lenders, lender employees, and 
associations representing both veterans and lenders.
    The first commenter, a lender trade organization, observed that 
while VA had appropriately responded to an abusive practice, the 
establishment of a point ceiling still introduced an artificial 
limitation in the marketplace. This commenter asserted that lenders 
must be able to react quickly to swings in mortgage interest rates. The 
commenter further asserted that one mechanism used to accomplish this 
is the use of points, especially in a scenario where interest rates are 
changing rapidly. The commenter suggested that VA establish a mechanism 
to increase the two-point ceiling in times of significant changes in 
the mortgage marketplace.
    The second commenter, also a lender trade organization, noted that 
the rule would prohibit certain transactions that are beneficial to 
veterans, i.e., the practice of permitting a veteran to ``buy down'' 
the interest rate. The commenter further asserted that often the number 
of points charged in these cases is more than two and that allowing the 
veteran to take advantage of this option affords the veteran the 
fullest flexibility in the trade-off between interest rate and points. 
The commenter suggested that instead of limiting the number of points 
that can be financed, VA adopt an approach that limits the loan-to-
value ratio (LTV) of the loan, noting that lenders routinely determine 
and consider LTVs as part of the underwriting process. The commenter 
suggested VA combine an LTV limit with a prohibition on increasing the 
monthly payment, and thereby limit the Government's risk in a less 
restrictive fashion.
    The third commenter also thought that the rule was too restrictive, 
and suggested that VA allow lenders who set points in a responsible and 
competitive manner be allowed to continue to finance more than two 
points. The commenter asserted that VA should stop doing business with 
lenders found to be charging excessive discount points. This commenter 
also argued that lenders and borrowers need the availability of several 
pricing options, and that otherwise, when rates begin rising, lenders 
could be forced to charge a rate that was unacceptably high to the 
veteran and higher than it needed to be.
    The fourth commenter, a lender employee, argued that a case could 
be made for a limit of one point financed in the loan. The fifth 
comment was from an organization representing veterans. The commenter 
asserted that many veterans needing to refinance their mortgages lack 
the cash that would be needed to pay excess points, and, therefore, by 
limiting their ability to finance points, we are effectively forcing 
them to take a higher rate than they would otherwise be able to obtain 
if they were permitted to finance a greater amount of points.
    The suggestion that VA base its decision on how many points may be

[[Page 3611]]

added into the loan on the Loan to Value Ratio (LTV) does address the 
question of risk. However, in order to determine LTV an appraisal must 
be performed. One of the cornerstones of the IRRRL program is that an 
appraisal is not needed. If appraisals were required on IRRRLs the cost 
to veterans would increase, on average, by more than $300 per 
transaction (added into the loan) and the time needed to close the loan 
would be increased by up to three weeks. In light of the fact that we 
believe IRRRLs were intended to ``streamline'' refinances, we do not 
believe that the requirement of an appraisal is desirable or 
appropriate.
    When the legislation which authorized the IRRRL program was 
considered by the Congress in 1980, interest rates had recently been as 
high as 14 percent. Prior to April 1979, interest rates on VA home 
loans had never reached 10 percent. The purpose of the IRRRL was, and 
is, to allow veterans to make better use of their home loan benefit by 
taking advantage of reduced market interest rates. The program was not 
designed to allow veterans to artificially buy down the interest rate 
by including increased points in the loan. Instead it was to assist 
veterans who obtained VA loans during periods of high interest rates to 
lower those rates, and consequently their monthly mortgage payments, 
when market rates returned to more reasonable levels. It has also been 
suggested that VA allow lenders who set points in a ``responsible and 
competitive manner'' to continue financing more than two points and 
stop doing business with lenders found to be charging excessive 
discount points. We do not believe it is feasible to attempt to 
administer such an imprecise standard, both for individual loans and 
for determining which lenders would be permitted to continue 
participating in the VA program.
    Obviously, the fullest flexibility would allow for veterans to 
include any amount of points in the loan. However, the provisions of 38 
U.S.C. 3710(e)(1)(C)(i) which allow VA to limit the points included in 
a loan indicate that other factors may be more important. We believe 
that a limit of two points in the loan amount provides the appropriate 
balance needed to provide flexibility with respect to amounts of 
points, to protect veterans against overcharging with excessive points, 
and to protect the Government against overinflated loans.
    We understand and have considered the concerns of the commenters. 
However, we are not persuaded that any of the alternate approaches 
would be a satisfactory solution to the problem. None of the proposed 
alternatives offers a simpler alternative which affords the same degree 
of protection to veterans and the Government. The suggested alternative 
approaches would introduce new complications in the form of adjustable 
point ceilings, LTV ceilings, and new prohibitions on the size of the 
monthly payment. We prefer to retain the streamlined approach for these 
loans that made them so popular in the first place.
    We would also like to clarify a point of possible confusion. A 
number of lenders contacted VA by telephone in response to this action 
to inquire whether the two-point limit included the origination fee as 
one of the two allowable points. The answer is no. Under 38 CFR 
36.4312, a lender making a VA guaranteed loan is authorized to collect 
an ``origination fee'' of up to one percent of the loan amount as 
compensation for the miscellaneous cost of originating a loan. This fee 
is separate and apart from the charging of discount points, and can be 
included in the loan amount on an IRRRL as an allowable charge.
    VA appreciates the interest of the commenters and thanks them for 
their thoughtful remarks.
    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. 
601-612).
    Based on the rationale set forth in the interim rule document 
amending 38 CFR part 36 which was published at 61 FR 7414 on February 
28, 1996, we are adopting the provisions of the interim rule as a final 
rule without change.

    Approved: October 9, 1996.
Jesse Brown,
Secretary of Veterans Affairs.
[FR Doc. 97-1656 Filed 1-23-97; 8:45 am]
BILLING CODE 8320-01-P