[Federal Register Volume 62, Number 195 (Wednesday, October 8, 1997)]
[Rules and Regulations]
[Pages 52503-52505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26614]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AI92


Loan Guaranty: Requirements for Interest Rate Reduction 
Refinancing Loans

AGENCY: Department of Veterans Affairs.

ACTION: Interim final rule.

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SUMMARY: This document amends the Department of Veterans Affairs (VA) 
loan guaranty regulations concerning the requirements for Interest Rate 
Reduction Refinancing Loans (IRRRLs) by generally limiting these loans 
to instances where the veteran's monthly mortgage payment will 
decrease, and by generally requiring that the loans being refinanced be 
current in their payments. This action is necessary to ensure that 
these loans are made only when they provide a real benefit to the 
veteran, and to protect the financial interest of the Government.

DATES: Effective Date: This rule is effective October 8, 1997. Comments 
must be received on or before December 8, 1997.

ADDRESSES: Mail or hand deliver written comments to: Director, Office 
of Regulations Management (02D), Department of Veterans Affairs, 810 
Vermont Avenue, NW, Room 1154, Washington, DC 20420. Comments should 
indicate that they are submitted in response to ``RIN 2900-AI92.'' All 
written comments received will be available for public inspection at 
the above address, Room 1158, between the hours of 8:00 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, 810 Vermont Avenue, NW, 
Washington, DC 20420, (202) 273-7368.

SUPPLEMENTARY INFORMATION: Under the 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 veteran under 38 
U.S.C. 101 and 3701 for the purpose of housing loans). This document 
amends VA's loan guaranty regulations by revising the requirements for 
VA-guaranteed Interest Rate Reduction Refinancing Loans (IRRRLs).
    IRRRLs are designed to assist veterans by allowing them to 
refinance an outstanding VA-guaranteed loan with a new loan at a lower 
rate. The provisions of 38 U.S.C. 3703(c)(3) and 3710(e)(1)(C) allow 
the veteran to do so without having to pay any out-of-pocket expenses. 
The veteran may include in the new loan the outstanding balance of the 
old loan plus reasonable closing costs, including up to two discount 
points. Over the years, IRRRLs have provided nearly one million 
veterans an opportunity to reduce the interest rates and, thus, the 
monthly payments on their home mortgages.
    We have recently learned that a small number of lenders have been 
urging veterans to apply for loans under conditions that increase the 
risk of loss to both the veteran and the Government, and do not provide 
the benefit that IRRRLs were enacted to give. In some cases, these 
loans involve exorbitant costs in relation to the small reduction in 
the interest rate. Thus, veterans actually experience an increase in 
their monthly payment notwithstanding the lower rate. In other cases, 
lenders are urging veterans to default on their current loan, then 
refinance the delinquent loan with a new loan including the past due 
interest and late charges.
    In one case, a veteran obtained a 30-year loan for a new home in 
Florida in October 1991. The fixed-rate mortgage was for $95,800 
(including funding fee) at the State bond program interest rate of 7.99 
percent with a principal and interest payment of $702.28. In March 1995 
he obtained an adjustable rate mortgage (ARM) IRRRL with an initial 
interest rate of 7.5 percent. This loan was for $103,950 and had an 
initial payment amount of $726.83. It included $8,912.54 in closing 
costs, including 5.5 discount points. In January 1997, the ARM interest 
rate had been adjusted to 8.25 percent, and he obtained another IRRRL 
for $111,090 at a fixed interest rate of 8.00 percent and a monthly 
payment of $815.14. Thus, in a little

[[Page 52504]]

over 5 years he increased his mortgage by $15,190 and his payment by 
$112.84 `` both increased by approximately 16 percent `` and he still 
has 30 years to pay.
    In order to assist veterans who were delinquent on their original 
loan to refinance to a lower rate, VA permitted them to include their 
past due payments in the new loan. Because loan instruments normally 
provide that any past due interest and late charges are capitalized and 
added to the loan balance, VA considered such past-due charges to be 
part of ``the balance of the loan being refinanced'', and, therefore, 
eligible to be refinanced under the provisions of 38 U.S.C. 3710(e)(1). 
Some lenders have abused this interpretation by actually encouraging 
veterans to skip a few payments on the old loan and use the cash saved 
by not making a timely payment for other purposes. One lender went so 
far as to suggest to prospective borrowers that they skip a few 
payments and use the money for a summer vacation.
    These types of abusive loan practices do not serve the best 
interests of the veterans involved. They also have an adverse effect on 
the financial interests of the Government. Since IRRRLs can already 
result in loans in excess of the value of the property, additional 
unwarranted increases in the amount by which the loan balance exceeds 
the market value of the property could 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 could cause a veteran to be 
unable to sell the home for an amount sufficient to pay off the loan 
balance.
    In order to insure that IRRRLs continue to provide a true benefit 
to the veteran, and to protect the financial interest of the 
Government, we are making the following changes to the IRRRL program by 
revising the provisions of 38 CFR 36.4306a and 36.4337(a).

Monthly Payment Reduction

    We generally will require that the monthly payment (principal and 
interest) on the new loan must be lower than the monthly payment on the 
loan being refinanced. This will prevent cases in which the veteran's 
monthly payment actually increases, even though the interest rate is 
lowered slightly, because extensive closing costs are included in the 
loan. This requirement does not apply to four situations where VA 
believes that other factors offset the risk of loss from an increase in 
monthly payment. These four situations are cases in which an ARM is 
being refinanced with a fixed-rate loan; cases in which the term of the 
new loan is shorter than the term of the loan being refinanced; cases 
in which the increase in monthly payment is attributable to the 
inclusion of energy efficient improvements, as provided in 
Sec. 36.4336(a)(4); and cases in which the Secretary approves the new 
loan, on a case-by-case basis, in order to prevent an imminent 
foreclosure. With regard to ARMs, there is already a possibility that 
the monthly payment will increase in future years. The certainty that 
the payment on the new loan will not increase in future years offsets 
the increased risk associated with the immediate increase over the 
veteran's current payment. VA may establish limits on the amount of 
such increase in future rule making. Although the monthly payments on 
shorter term loans are higher, they amortize faster, thus reducing the 
risk of loss to both the veteran and the Government. In future rule 
making, VA may address minimum term reduction. Current law allows 
veterans to include additional costs of energy efficient improvements 
in IRRRLs; thus, this exception merely continues current law. Finally, 
with regard to imminent foreclosure, the risk of loss to the Government 
and veteran from such foreclosure could be greater than permitting a 
new loan at a higher monthly payment. VA would have to approve each 
such loan on a case-by-case basis under existing credit underwriting 
standards set forth at 38 CFR 36.4337 to ensure that it is in the best 
interest of the Government and that the veteran is able to afford the 
new payment.

The Loan Must Be Current

    To prevent the lender from encouraging borrowers to ``skip'' 
mortgage payments and include them in the new loan, we are requiring 
that in any case where the loan being refinanced is delinquent, the new 
loan must be submitted to VA for prior approval. VA must determine that 
the veteran qualifies for the new loan under existing credit standards 
contained in 38 CFR 36.4337. Under these standards, a veteran must, 
among other things, demonstrate a proper regard for obligations. If it 
is found that the veteran purposely failed to make timely payment on 
the loan in order to use the cash for a vacation or similar 
discretionary spending, the new loan is unlikely to be approved.
    We are clarifying existing VA interpretation that delinquent 
interest and late charges are considered part of the balance of the 
loan being refinanced.

Credit Underwriting Standards

    We are also making a conforming amendment to 38 CFR 36.4337. That 
section contains the current credit underwriting standards. Currently, 
paragraph (a) of that section provides that the standards do not apply 
to IRRRLs. We are amending this to state the standards do not apply to 
IRRRLs unless under 38 CFR 36.4306a the loan must be submitted to VA 
for prior approval. As discussed above, loans to prevent imminent 
foreclosure where the monthly payment on the new loan exceeds the 
payments on the loan being refinanced, and cases where the loan being 
refinanced is delinquent, will now be required to be approved in 
advance.

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 treated fairly by 
lenders and to protect the financial interests of the Government as 
guarantor of these loans. Comments are being solicited for 60 days 
after publication of this document. VA may modify this rule in response 
to comments if appropriate.

Executive Order 12866

    This proposed rule has been reviewed by OMB under Executive Order 
12866.

Regulatory Flexibility Act

    Because no notice of proposed rule making 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 number is 
64.114)

List of Subjects in 38 CFR Part 36

    Condominiums, Handicapped, Housing, Indians, Individuals with 
disabilities, Loan programs--housing and community development, Loan 
programs-Indians, Loan programs--veterans, Manufactured homes, Mortgage 
insurance, Reporting and recordkeeping requirements, Veterans.

    Approved: August 25, 1997.
Hershel W. Gober,
Acting 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 continues to read as follows:


[[Page 52505]]


    Authority: 38 U.S.C. 501, 3701-3704, 3707, 3710-3714, 3719, 
3720, 3729, 3762, unless otherwise noted.

    2. In Sec. 36.4306a, paragraphs (a)(3) through (a)(5) are revised 
and paragraphs (a)(6) and (a)(7) are added, to read as follows:


Sec. 36.4306a  Interest rate reduction refinancing loan.

    (a) * * *
    (3) The monthly principal and interest payment on the new loan must 
be lower than the payment on the loan being refinanced, except when the 
term of the new loan is shorter than the term of the loan being 
refinanced; or the new loan is a fixed-rate loan that refinances a VA-
guaranteed adjustable rate mortgage; or the increase in the monthly 
payments on the loan results from the inclusion of energy efficient 
improvements, as provided by Sec. 36.4336(a)(4); or the loan is 
approved by the Secretary in advance after determining that the new 
loan is necessary to prevent imminent foreclosure and the veteran 
qualifies for the new loan under the credit standards contained in 
Sec. 36.4337.
    (4) The amount of the refinancing loan may not exceed:
    (i) An amount equal to the balance of the loan being refinanced, 
which must be current, except in cases described in paragraph (a)(5) of 
this section, and such closing costs as authorized by Sec. 36.4312(d) 
and a discount not to exceed 2 percent of the loan amount; 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, the amount referred to with respect to 
the loan under paragraph (a)(4)(i) of this section, plus the amount 
authorized by Sec. 36.4336(a)(4).

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

    (5) In any case where the loan being refinanced is delinquent, the 
new loan will be guaranteed only if it is approved by the Secretary in 
advance after determining that the veteran qualifies for the loan under 
the credit standards contained in Sec. 36.4337. In such cases, the term 
``balance of the loan being refinanced'' shall include any past due 
installments, plus allowable late charges.
    (6) The dollar amount of guaranty on the 38 U.S.C. 3710(a)(8) or 
(a)(9)(B)(i) loan may not exceed the original dollar amount of guaranty 
applicable to the loan being refinanced, less any dollar amount of 
guaranty previously paid as a claim on the loan being refinanced; and
    (7) The term of the refinancing loan (38 U.S.C. 3710(a)(8)) may not 
exceed the original term of the loan being refinanced plus ten years, 
or the maximum loan term allowed under 38 U.S.C. 3703(d)(1), whichever 
is less. For manufactured home loans that were previously guaranteed 
under 38 U.S.C. 3712, the loan term, if being refinanced under 38 
U.S.C. 3710(a)(9)(B)(i), may exceed the original term of the loan but 
may not exceed the maximum loan term allowed under 38 U.S.C. 
3703(d)(1).

(Authority: 38 U.S.C. 3703(c)(1), 3710(e)(1))
* * * * *
    3. In Sec. 36.4337, paragraph (a) is revised to read as follows:


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

    (a) Use of standards. 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. These standards do not apply to loans 
guaranteed pursuant to 38 U.S.C. 3710(a)(8) except for cases where the 
Secretary is required to approve the loan in advance under 
Sec. 36.4306a.

(Authority: 38 U.S.C. 3703, 3710)
* * * * *
[FR Doc. 97-26614 Filed 10-7-97; 8:45 am]
BILLING CODE 8320-01-P