[Federal Register Volume 63, Number 48 (Thursday, March 12, 1998)]
[Rules and Regulations]
[Pages 12001-12007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6411]



[[Page 12001]]

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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AH23


Loan Guaranty: VA-Guaranteed Loans on the Automatic Basis, 
Withdrawal of Automatic Processing Authority, Record Retention 
Requirements, and Elimination of Late Reporting Waivers

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

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SUMMARY: This document amends the Department of Veterans Affairs (VA) 
loan guaranty regulations in the areas of automatic processing 
authority, late reporting, and record retention requirements.
    First, the criteria used to approve non-supervised lenders to 
process VA-guaranteed loans on the automatic basis are revised to 
reduce the experience requirements for lenders and their underwriters, 
thereby making it easier for them to qualify for automatic processing 
authority. High underwriting standards will be maintained by requiring 
that all VA-approved underwriters receive training in VA credit 
underwriting procedures.
    Second, the regulation provides that if a lender does not report 
the loan within 60 days following full disbursement, its report must be 
accompanied by a signed statement certifying that the loan is current 
and offering an explanation for the late reporting. This simplifies the 
prior procedure under which a lender had to formally request a waiver 
of the 60-day reporting requirement. VA will continue to guarantee the 
loan even if it is reported late. This will have no impact on whether 
or not VA guarantees the loan but would help VA determine whether 
action should be taken against a lender.
    Third, lenders are now required to retain all loan origination 
records for at least two years from the date of loan closing. The 
previous requirement was one year. This will improve VA's ability to 
monitor lender performance and conduct underwriting reviews.

DATES: Effective Date: April 13, 1998.

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: In a document published in the Federal 
Register on July 15, 1997 (62 FR 37824), VA proposed to amend its loan 
guaranty regulations concerning automatic processing authority, late 
reporting, and record retention requirements. Based on the rationale 
set forth in the proposed rule and this document, the changes are 
adopted as originally proposed.
    Please refer to the July 15, 1997, Federal Register for a complete 
discussion of the proposed amendments. Interested persons were given 60 
days to submit comments. The comment period ended September 15, 1997. 
VA received two comments regarding the proposed changes.
    The first commenter, an association which represents mortgage 
lenders, supported adoption of the proposed rule.
    The second commenter, a lender who actively participates in the VA 
Guaranteed Home Loan Program, expressed support for the proposed 
elimination of the waiver requirement for late reporting. However, they 
noted that there was no meaningful reduction in compliance burden for 
lenders, since the requirement to provide an explanation for the late 
reporting is retained. The commenter is correct. The purpose of the 
amendment was to reduce the burden currently placed on VA field 
stations of having to process formal waiver requests. This VA burden is 
reduced, while no new burdens are placed on lenders. However, it is 
still important for lenders to report loans to VA in a timely manner, 
and we are retaining the requirement that lenders explain why the loan 
was reported late. As stated in the proposal, ``the statement of the 
reasons for late reporting [must] continue to be submitted to VA so 
that these reasons for late reporting * * * could be considered in 
deciding if the lenders' personnel might need additional training or 
whether automatic lending authority should be withdrawn''. By generally 
reporting loans to VA within 60 days of disbursement, a lender can 
avoid the necessity of explaining the delay.
    The commenter also noted that the increase in the length of time a 
lender must retain loan origination records from one year to two years 
was potentially burdensome on lenders and served no valid purpose. We 
disagree. As noted in the preamble to the proposed regulations 
published in the Federal Register on July 15, 1997 (62 FR 37824), the 
purpose of this amendment was to enable VA monitoring unit audit teams 
to review loan records for as many lenders as necessary to properly 
administer the VA loan guaranty program. A two-year period provides a 
more realistic time in which to plan and complete these loan audits. 
Moreover, industry standards, including Federal Housing Administration 
(FHA) regulations and the Equal Credit Opportunity Act (ECOA), require 
that lenders keep loan origination records for at least 24 months. This 
amendment conforms VA's record retention requirement to industry 
standards. This will improve VA's ability to monitor loan performance 
and to identify lenders who may be having particular trouble 
underwriting loans.

Paperwork Reduction Act

    Information collection and recordkeeping requirements in 36.4303 
(a), (c), (d), (e), (f), (g), (i) and (l), and in 36.4330 (a) and (b); 
and in 38 CFR 36.4348 (b), (c) and (d) have been approved by the Office 
of Management and Budget (OMB) under the provisions of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501-3520) and have been assigned OMB 
control number 2900-0574. The information collection subject to this 
rulemaking concerns the information to be submitted for approval as a 
lender with automatic processing authority and contains material that 
further explains the quality of the information needed for approval.
    OMB assigns a control number for each collection of information it 
approves. VA may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. The valid OMB control number 
assigned to the collection of information in this final rule is 
displayed at the end of the affected section of the regulations.
    Interested persons were invited to submit comments on the 
collection of information. All comments received are discussed above.
    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. Industry norms for other lending programs already require lenders 
to comply with most of the standards set forth in this final rule. 
Further, activities concerning loans subject to the VA Loan Guaranty 
Program do not constitute a significant portion of activities of small 
businesses. 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 
64.106, 64.114, 64.118 and 64.119.

[[Page 12002]]

List of Subjects in 38 CFR Part 36

    Condominiums, Housing, Individuals with disabilities, Loan 
programs--housing and community development, Reporting and 
recordkeeping requirements, Veterans.

    Approved: February 24, 1998.
Togo D. West, Jr.,
Acting Secretary.

    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 continues to read as follows:

    Authority: Sections 36.4300 through 36.4375 issued under 38 
U.S.C. Secs. 101, 501, 3701-3704, 3710, 3712-3714, 3720, 3729, 3732, 
unless otherwise noted.

    2. Section 36.4303 is revised to read follows:


Sec. 36.4303  Reporting requirements.

    (a) With respect to loans automatically guaranteed under 38 U.S.C. 
3703(a)(1), evidence of the guaranty will be issuable to a lender of a 
class described under 38 U.S.C. 3702(d) if the loan is reported to the 
Secretary within 60 days following full disbursement and upon the 
certification of the lender that:
    (1) No default exists thereunder that has continued for more than 
30 days;
    (2) Except for acquisition and improvement loans as defined in 
Sec. 36.4301, any construction, repairs, alterations, or improvements 
effected subsequent to the appraisal of reasonable value, and paid for 
out of the proceeds of the loan, which have not been inspected and 
approved upon completion by a compliance inspector designated by the 
Secretary, have been completed properly in full accordance with the 
plans and specifications upon which the original appraisal was based; 
and any deviations or changes of identity in said property have been 
approved as required in Sec. 36.4304 concerning guaranty or insurance 
of loans to veterans;
    (3) The loan conforms otherwise with the applicable provisions of 
38 U.S.C. Chapter 37 and of the regulations concerning guaranty or 
insurance of loans to veterans.

(Authority: 38 U.S.C. 3703(c)(1))

    (b) Loans made pursuant to 38 U.S.C. 3703(a), although not entitled 
to automatic insurance thereunder, may, when made by a lender of a 
class described in 38 U.S.C. 3702(d)(1), be reported for issuance of an 
insurance credit.

(Authority: 38 U.S.C. 3702(d), 3703(a)(2))

    (c) Each loan proposed to be made to an eligible veteran by a 
lender not within a class described in 38 U.S.C. 3702(d) shall be 
submitted to the Secretary for approval prior to closing. Lenders 
described in 38 U.S.C. 3702(d) shall have the optional right to submit 
any loan for such prior approval. The Secretary, upon determining any 
loan so submitted to be eligible for a guaranty, or for insurance, will 
issue a certificate of commitment with respect thereto.
    (d) A certificate of commitment shall entitle the holder to the 
issuance of the evidence of guaranty or insurance upon the ultimate 
actual payment of the full proceeds of the loan for the purposes 
described in the original report and upon the submission within 60 days 
thereafter of a supplemental report showing that fact and:
    (1) The identity of any property purchased therewith,
    (2) That all property purchased or acquired with the proceeds of 
the loan has been encumbered as required by the regulations concerning 
guaranty or insurance of loans to veterans,
    (3) Except for acquisition and improvement loans as defined in 
Sec. 36.4301(c), any construction, repairs, alterations, or 
improvements paid for out of the proceeds of the loan, which have not 
been inspected and approved subsequent to completion by a compliance 
inspector designated by the Secretary, have been completed properly in 
full accordance with the plans and specifications upon which the 
original appraisal was based; and that any deviations or changes of 
identity in said property have been approved as required by 
Sec. 36.4304, and
    (4) That the loan conforms otherwise with the applicable provisions 
of 38 U.S.C. Chapter 37 and the regulations concerning guaranty or 
insurance of loans to veterans.

(Authority: 38 U.S.C. 3703(c)(1))

    (e) Upon the failure of the lender to report in accordance with the 
provisions of paragraph (d) of this section, the certificate of 
commitment shall have no further effect, or the amount of guaranty or 
insurance shall be reduced pro rata, as may be appropriate under the 
facts of the case: Provided, nevertheless, that if the loan otherwise 
meets the requirements of this section, said certificate of commitment 
may be given effect by the Secretary, notwithstanding the report is 
received after the date otherwise required.
    (f) For loans not reported within 60 days, evidence of guaranty 
will be issued only if the loan report is accompanied by a statement 
signed by a corporate officer of the lending institution which explains 
why the loan was reported late. The statement must identify the case or 
cases in issue and must set forth the specific reason or reasons why 
the loan was not submitted on time. Upon receipt of such a statement 
evidence of guaranty will be issued. A pattern of late reporting and 
the reasons therefore will be considered by VA in taking action under 
Sec. 36.4349.
    (g) Evidence of a guaranty will be issued by the Secretary by 
appropriate endorsement on the note or other instrument evidencing the 
obligation, or by a separate certificate at the option of the lender. 
Notice of credit to an insurance account will be given to the lender. 
Unused certificates of eligibility issued prior to March 1, 1946, are 
void. No certificate of commitment shall be issued and no loan shall be 
guaranteed or insured unless the lender, the veteran, and the loan are 
shown to be eligible. Evidence of guaranty or insurance will not be 
issued on any loan for the purchase or construction of residential 
property unless the veteran, or the veteran's spouse in the case of a 
veteran who cannot occupy the property because of active duty status 
with the Armed Forces, certifies in such form as the Secretary shall 
prescribe that the veteran, or spouse of the active duty veteran, 
intends to occupy the property as his or her home. Guaranty or 
insurance evidence will not be issued on any loan for the alteration, 
improvement, or repair of any residential property or on a refinancing 
loan unless the veteran, or spouse of an active duty servicemember, 
certifies that he or she presently occupies the property as his or her 
home. An exception to this is if the home improvement or refinancing 
loan is for extensive changes to the property that will prevent the 
veteran or the spouse of the active duty veteran from occupying the 
property while the work is being completed. In such a case the veteran 
or spouse of the active duty veteran must certify that he or she 
intends to occupy or reoccupy the property as his or her home upon 
completion of the substantial improvements or repairs. All of the 
mentioned certifications must take place at the time of loan 
application and closing except in the case of loans automatically 
guaranteed, in which case veterans or, in the case of an active duty 
veteran, the veterans' spouse shall make the required certification 
only at the time the loan is closed.

(Authority: 38 U.S.C. 3704(c))

    (h) Subject to compliance with the regulations concerning guaranty 
or

[[Page 12003]]

insurance of loans to veterans, the certificate of guaranty or the 
evidence of insurance credit will be issuable within the available 
entitlement of the veteran on the basis of the loan stated in the final 
loan report or certification of loan disbursement, except for 
refinancing loans for interest rate reductions. The available 
entitlement of a veteran will be determined by the Secretary as of the 
date of receipt of an application for guaranty or insurance of a loan 
or of a loan report. Such date of receipt shall be the date the 
application or loan report is date-stamped into VA. Eligibility derived 
from the most recent period of service:
    (1) Shall cancel any unused entitlement derived from any earlier 
period of service, and
    (2) Shall be reduced by the amount by which entitlement from 
service during any earlier period has been used to obtain a direct, 
guaranteed, or insured loan.
    (i) On property which the veteran owns at the time of application, 
or
    (ii) As to which the Secretary has incurred actual liability or 
loss, unless in the event of loss or the incurrence and payment of such 
liability by the Secretary, the resulting indebtedness of the veteran 
to the United States has been paid in full. Provided, That if the 
Secretary issues or has issued a certificate of commitment covering the 
loan described in the application for guaranty or insurance or in the 
loan report, the amount and percentage of guaranty or the amount of the 
insurance credit contemplated by the certificate of commitment shall 
not be subject to reduction if the loan has been or is closed on a date 
that is not later than the expiration date of the certificate of 
commitment, notwithstanding that the Secretary in the meantime and 
prior to the issuance of the evidence of guaranty or insurance shall 
have incurred actual liability or loss on a direct, guaranteed, or 
insured loan previously obtained by the borrower. For the purposes of 
this paragraph, the Secretary will be deemed to have incurred actual 
loss on a guaranteed or insured loan if the Secretary has paid a 
guaranty or insurance claim thereon and the veteran's resultant 
indebtedness to the Government has not been paid in full, and to have 
incurred actual liability on a guaranteed or insured loan if the 
Secretary is in receipt of a claim on the guaranty or insurance or is 
in receipt of a notice of default. In the case of a direct loan, the 
Secretary will be deemed to have incurred an actual loss if the loan is 
in default. A loan, the proceeds of which are to be disbursed 
progressively or at intervals, will be deemed to have been closed for 
the purposes of this paragraph if the loan has been completed in all 
respects excepting the actual ``payout'' of the entire loan proceeds.

(Authority: 38 U.S.C. 3702(a), 3710(c))

    (i) Any amounts that are disbursed for an ineligible purpose shall 
be excluded in computing the amount of guaranty or insurance credit.
    (j) Notwithstanding the lender has erroneously, but without intent 
to misrepresent, made certification with respect to paragraph (a)(1) of 
this section, the guaranty or insurance will become effective upon the 
curing of such default and its continuing current for a period of not 
less than 60 days thereafter. For the purpose of this paragraph a loan 
will be deemed current so long as the installment is received within 30 
days after its due date.
    (k) No guaranty or insurance commitment or evidence of guaranty or 
insurance will be issuable in respect to any loan to finance a contract 
that:
    (1) Is for the purchase, construction, repair, alteration, or 
improvement of a dwelling or farm residence;
    (2) Is dated on or after June 4, 1969;
    (3) Provides for a purchase price or cost to the veteran in excess 
of the reasonable value established by the Secretary; and
    (4) Was signed by the veteran prior to the veteran's receipt of 
notice of such reasonable value; unless such contract includes, or is 
amended to include, a provision substantially as follows:

    It is expressly agreed that, notwithstanding any other 
provisions of this contract, the purchaser shall not incur any 
penalty by forfeiture of earnest money or otherwise or be obligated 
to complete the purchase of the property described herein, if the 
contract purchase price or cost exceeds the reasonable value of the 
property established by the Department of Veterans Affairs. The 
purchaser shall, however, have the privilege and option of 
proceeding with the consummation of this contract without regard to 
the amount of the reasonable value established by the Department of 
Veterans Affairs.

(Authority: 38 U.S.C. 501, 3703(c)(1))

    (l) With respect to any loan for which a commitment was made on or 
after March 1, 1988, the Secretary must be notified whenever the holder 
receives knowledge of disposition of the residential property securing 
a VA-guaranteed loan.
    (1) If the seller applies for prior approval of the assumption of 
the loan, then:
    (i) A holder (or its authorized servicing agent) who is an 
automatic lender must examine the creditworthiness of the purchaser and 
determine compliance with the provisions of 38 U.S.C. 3714. The 
creditworthiness review must be performed by the party that has 
automatic authority. If both the holder and its servicing agent are 
automatic lenders, then they must decide between themselves which one 
will make the determination of creditworthiness, whether the loan is 
current and whether there is a contractual obligation to assume the 
loan, as required by 38 U.S.C. 3714. If the actual loan holder does not 
have automatic authority and its servicing agent is an automatic 
lender, then the servicing agent must make the determinations required 
by 38 U.S.C. 3714 on behalf of the holder. The actual holder will 
remain ultimately responsible for any failure of its servicing agent to 
comply with the applicable law and VA regulations.
    (A) If the assumption is approved and the transfer of the security 
is completed, then the notice required by this paragraph shall consist 
of the credit package (unless previously provided in accordance with 
paragraph (k)(1)(i)(B) of this section) and a copy of the executed deed 
and/or assumption agreement as required by VA office of jurisdiction. 
The notice shall be submitted to the Department with VA receipt for the 
funding fee provided for in Sec. 36.4312(e)(3) of this part.
    (B) If the application for assumption is disapproved, the holder 
shall notify the seller and the purchaser that the decision may be 
appealed to the VA office of jurisdiction within 30 days. The holder 
shall make available to that VA office all items used by the holder in 
making the holder's decision in case the decision is appealed to VA. If 
the application remains disapproved after 60 days (to allow time for 
appeal to and review by VA), then the holder must refund $50 of any fee 
previously collected under the provisions of Sec. 36.4312(d)(8) of this 
part. If the application is subsequently approved and the sale is 
completed, then the holder (or its authorized servicing agent) shall 
provide the notice described in paragraph (k)(1)(i)(A) of this section.
    (C) In performing the requirements of paragraphs (k)(1)(i)(A) or 
(k)(1)(i)(B) of this section, the holder must complete its examination 
of the creditworthiness of the prospective purchaser and advise the 
seller no later than 45 days after the date of receipt by the holder of 
a complete application package for the approval of the assumption. The 
45-day period may be extended by an interval not to exceed the time 
caused by delays in processing of the application that are documented 
as beyond the control of the holder, such as employers or

[[Page 12004]]

depositories not responding to requests for verifications, which were 
timely forwarded, or follow-ups on those requests.
    (ii) If neither the holder nor its authorized servicing agent is an 
automatic lender, the notice to VA shall include:
    (A) Advice regarding whether the loan is current or in default;
    (B) A copy of the purchase contract; and
    (C) A complete credit package developed by the holder which the 
Secretary may use for determining the creditworthiness of the 
purchaser.
    (D) The notice and documents required by this section must be 
submitted to the VA office of jurisdiction no later than 35 days after 
the date of receipt by the holder of a complete application package for 
the approval of the assumption, subject to the same extensions as 
provided in paragraph (k)(l)(i) of this section. If the assumption is 
not automatically approved by the holder or its authorized agent, 
pursuant to the automatic authority provisions, $50 of any fee 
collected in accordance with Sec. 36.4312(d)(8) of this part must be 
refunded. If the Department of Veterans Affairs does not approve the 
assumption, the holder will be notified and an additional $50 of any 
fee collected under Sec. 36.4312(d)(8) of this section must be refunded 
following the expiration of the 30-day appeal period set out in 
paragraph (k)(l)(i)(B) of this section. If such an appeal is made to 
the Department of Veterans Affairs, then the review will be conducted 
at the Department of Veterans Affairs office of jurisdiction by an 
individual who was not involved in the original disapproval decision. 
If the application for assumption is approved and the transfer of 
security is completed, then the holder (or its authorized servicing 
agent) shall provide the notice required in paragraph (k)(l)(i)(A) of 
this section.
    (2) If the seller fails to notify the holder before disposing of 
property securing the loan, the holder shall notify the Secretary 
within 60 days after learning of the transfer. Such notice shall advise 
whether or not the holder intends to exercise its option to immediately 
accelerate the loan and whether or not an opportunity will be extended 
to the transferor and transferee to apply for retroactive approval of 
the assumption under the terms of this paragraph.

(Authority: 38 U.S.C. 3714)
(The Information collection requirements in this section have been 
approved by the Office of Management and Budget under control number 
2900-0516)

    3. Section 36.4330 is revised to read as follows:


Sec. 36.4330  Maintenance of records.

    (a) The holder shall maintain a record of the amounts of payments 
received on the obligation and disbursements chargeable thereto and the 
dates thereof. This record shall be maintained until the Secretary 
ceases to be liable as guarantor or insurer of the loan. For the 
purpose of any accounting with the Secretary or computation of a claim, 
any holder who fails to maintain such record shall be presumed to have 
received on the dates due all sums which by the terms of the contract 
are payable prior to date of claim for default, and the burden of going 
forward with evidence and of ultimate proof of the contrary shall be on 
such holder.
    (b) The lender shall retain copies of all loan origination records 
on a VA-guaranteed loan for at least two years from the date of loan 
closing. Loan origination records include the loan application, 
including any preliminary application, verifications of employment and 
deposit, all credit reports, including preliminary credit reports, 
copies of each sales contract and addendums, letters of explanation for 
adverse credit items, discrepancies and the like, direct references 
from creditors, correspondence with employers, appraisal and compliance 
inspection reports, reports on termite and other inspections of the 
property, builder change orders, and all closing papers and documents.

(Authority: 38 U.S.C. 501, 3703(c)(1))

    (c) The Secretary has the right to inspect, examine, or audit, at a 
reasonable time and place, the records or accounts of a lender or 
holder pertaining to loans guaranteed or insured by the Secretary.

(The information collection requirements in this section have been 
approved by the Office of Management and Budget under control number 
2900-0515)

Sec. 36.4335  [Amended]

    4. In Sec. 36.4335, paragraphs (a) and (b) are removed; and 
paragraphs (c), (d), (e), (f), (g), and (h) are redesignated as 
paragraphs (a), (b), (c), (d), (e), and (f), respectively. In addition, 
the authority citation after the newly redesignated paragraph (e) is 
removed.
    5. In 36.4348, paragraphs (d), (e), and (f) are redesignated as 
paragraphs (e), (f), and (g), respectively; paragraphs (b), (c), and 
newly redesignated (e) are revised and a new paragraph (d) is added to 
read as follows:


Sec. 36.4348  Authority to close loans on the automatic basis.

* * * * *
    (b) Non-supervised lenders of the class described in 38 U.S.C. 
3702(d)(3) must apply to the Secretary for authority to process loans 
on the automatic basis. Each of the minimum requirements listed below 
must be met by applicant lenders.
    (1) Experience. The firm must meet one of the following experience 
requirements:
    (i) The firm must have been actively engaged in originating VA 
loans for at least two years, have a VA Lender ID number and have 
originated and closed a minimum of ten VA loans within the past two 
years, excluding interest rate reduction refinance loans (IRRRLs), that 
have been properly documented and submitted in compliance with VA 
requirements and procedures; or
    (ii) The firm must have a VA ID number and, if active for less than 
two years, have originated and closed at least 25 VA loans, excluding 
IRRRLs, that have been properly documented and submitted in compliance 
with VA requirements and procedures; or
    (iii) Each principal officer of the firm, who is actively involved 
in managing origination functions, must have a minimum of two recent 
years' management experience in the origination of VA loans. This 
experience may be with the current or prior employer. For the purposes 
of this requirement, principal officer is defined as president or vice 
president; or
    (iv) If the firm has been operating as an agent for a non-
supervised automatic lender (sponsoring lender), the firm must submit 
documentation confirming that it has a VA Lender ID number and has 
originated a minimum of ten VA loans, excluding IRRRLs, over the past 
two years. If active for less than two years, the agent must have 
originated at least 25 VA loans. The required documentation is a copy 
of the VA letter approving the firm as an agent for the sponsoring 
lender; a copy of the corporate resolution, describing the functions 
the agent was to perform, submitted to VA by the sponsoring lender; and 
a letter from a senior officer of the sponsoring lender indicating the 
number of VA loans submitted by the agent each year and that the loans 
have been properly documented and submitted in compliance with VA 
requirements and procedures.
    (2) Underwriter. A senior officer of the firm must nominate a full-
time qualified employee(s) to act in the firm's behalf as 
underwriter(s) to personally review and make underwriting decisions on 
VA loans to be closed on the automatic basis.
    (i) Nominees for underwriter must have a minimum of three years

[[Page 12005]]

experience in processing, pre-underwriting or underwriting mortgage 
loans. At least one recent year of this experience must have included 
making underwriting decisions on VA loans. (Recent is defined as within 
the past three years.) A VA nomination and current resume, outlining 
the underwriter's specific experience with VA loans, must be submitted 
for each underwriter nominee.
    (ii) Alternatively, if an underwriter does not have the experience 
outlined above, the underwriter must submit documentation verifying 
that he or she is a current Accredited Residential Underwriter (ARU) as 
designated by the Mortgage Bankers Association (MBA).
    (iii) If an underwriter is not located in the lender's corporate 
office, then a senior officer must certify that the underwriter reports 
to and is supervised by an individual who is not a branch manager or 
other person with production responsibilities.
    (iv) All VA-approved underwriters must attend a 1-day (eight-hour) 
training course on underwriter responsibilities, VA underwriting 
requirements, and VA administrative requirements, including the usage 
of VA forms, within 90 days of approval (if VA is unable to make such 
training available within 90 days, the underwriter must attend the 
first available training). Immediately upon approval of a VA 
underwriter, the office of jurisdiction will contact the underwriter to 
schedule this training at a VA regional office (VARO) of the 
underwriter's choice. This training is required for all newly approved 
VA underwriters, including those who qualified for approval based on an 
ARU designation, as well as VA-approved underwriters who have not 
underwritten VA-guaranteed loans in the past 24 months. Furthermore, 
and at the discretion of any VARO in whose jurisdiction the lender is 
originating VA loans, VA-approved underwriters who consistently approve 
loans that do not meet VA credit standards may be required to retake 
this training.
    (3) Underwriter Certification. The lender must certify that all 
underwriting decisions as to whether to accept or reject a VA loan will 
be made by a VA-approved underwriter. In addition each VA-approved 
underwriter will be required to certify on each VA loan that he or she 
approves that the loan has been personally reviewed and approved by the 
underwriter.
    (4) Financial Requirements. Each application must include the most 
recent annual financial statement audited and certified by a certified 
public accountant (CPA). If the date of the annual financial statement 
precedes that of the application by more than six months, the lender 
must also attach a copy of its latest internal financial statement. 
Lenders are required to meet either the working capital or the minimum 
net worth financial requirement as defined below.
    (i) Working Capital. A minimum of $50,000 in working capital must 
be demonstrated.
    (A) Working capital is a measure of a firm's liquidity, or the 
ability to pay its short-term debts. Working capital is defined as the 
excess of current assets over current liabilities. Current assets are 
defined as cash or other liquid assets convertible into cash within a 
1-year period. Current liabilities are defined as debts that must be 
paid within the same 1-year time frame.
    (B) The VA determination of whether a lender has the required 
minimum working capital is based on the balance sheet of the lender's 
annual audited financial statement. Therefore, either the balance sheet 
must be classified to distinguish between current and fixed assets and 
between current and long-term liabilities or the information must be 
provided in a footnote to the statement.
    (ii) Net Worth. Lenders must show evidence of a minimum of $250,000 
in adjusted net worth. Net worth is a measure of a firm's solvency, or 
its ability to exist in the long run, quantified by the payment of 
long-term debts. Net worth as defined by generally accepted accounting 
principles (GAAP) is total assets minus total liabilities. Adjusted net 
worth for VA purposes is the same as the adjusted net worth required by 
the Department of Housing and Urban Development (HUD), net worth less 
certain unacceptable assets including:
    (A) Any assets of the lender pledged to secure obligations of 
another person or entity.
    (B) Any asset due from either officers or stockholders of the 
lender or related entities, in which the lender's officers or 
stockholders have a personal interest, unrelated to their position as 
an officer or stockholder.
    (C) Any investment in related entities in which the lender's 
officers or stockholders have a personal interest unrelated to their 
position as an officer or stockholder.
    (D) That portion of an investment in joint ventures, subsidiaries, 
affiliates and/or other related entities which is carried at a value 
greater than equity, as adjusted. ``Equity as adjusted'' means the book 
value of the related entity reduced by the amount of unacceptable 
assets carried by the related entity.
    (E) All intangibles, such as goodwill, covenants not to compete, 
franchisee fees, organization costs, etc., except unamortized servicing 
costs carried at a value established by an arm's-length transaction and 
presented in accordance with generally accepted accounting principles.
    (F) That portion of an asset not readily marketable and for which 
appraised values are very subjective, carried at a value in excess of a 
substantially discounted appraised value. Assets such as antiques, art 
work and gemstones are subject to this provision and should be carried 
at the lower of cost or market.
    (G) Any asset that is principally used for the personal enjoyment 
of an officer or stockholder and not for normal business purposes. 
Adjusted net worth must be calculated by a CPA using an audited and 
certified balance sheet from the lender's latest financial statements. 
``Personal interest'' as used in this section indicates a relationship 
between the lender and a person or entity in which that specified 
person (e.g., spouse, parent, grandparent, child, brother, sister, 
aunt, uncle or in-law) has a financial interest in or is employed in a 
management position by the lender.
    (5) Lines of credit. The lender applicant must have one or more 
lines of credit aggregating at least $1 million. The identity of the 
source(s) of warehouse lines of credit must be submitted to VA and the 
applicant must agree that VA may contact the named source(s) for the 
purpose of verifying the information. A line of credit must be 
unrestricted, that is, funds are available upon demand to close loans 
and are not dependent on prior investor approval. A letter from the 
company(ies) verifying the unrestricted line(s) of credit must be 
submitted with the application for automatic authority.
    (6) Permanent investors. If the lender customarily sells loans it 
originates, it must have a minimum of two permanent investors. The 
names, addresses and telephone numbers of the permanent investors must 
be submitted with the application.
    (7) Liaison. The lender applicant must designate an employee and an 
alternate to be the primary liaison with VA. The liaison officers 
should be thoroughly familiar with the lender's entire operation and be 
able to respond to any query from VA concerning a particular VA loan or 
the firm's automatic authority.
    (8) Other considerations. All applications will also be reviewed in 
light of the following considerations:
    (i) There must be no factors that indicate that the firm would not 
exercise the care and diligence required

[[Page 12006]]

of a lender originating and closing VA loans on the automatic basis; 
and
    (ii) In the event the firm, any member of the board of directors, 
or any principal officer has ever been debarred or suspended by any 
Federal agency or department, or any of its directors or officers has 
been a director or officer of any other lender or corporation that was 
so debarred or suspended, or if the lender applicant ever had a 
servicing contract with an investor terminated for cause, a statement 
of the facts must be submitted with the application for automatic 
authority.
    (9) Quality Control System. In order to be approved as a non-
supervised lender for automatic-processing authority, the lender must 
implement a written quality control system which ensures compliance 
with VA requirements. The lender must agree to furnish findings under 
its systems to VA on demand. The elements of the quality control system 
must include the following:
    (i) Underwriting policies. Each office of the lender shall maintain 
copies of VA credit standards and all available VA underwriting 
guidelines.
    (ii) Corrective measures. The system should ensure that effective 
corrective measures are taken promptly when deficiencies in loan 
origination's are identified by either the lender or VA. Any cases 
involving major discrepancies which are discovered under the system 
must be reported to VA.
    (iii) System integrity. The quality control system should be 
independent of the mortgage loan production function.
    (iv) Scope. The review of underwriting decisions and certifications 
must include compliance with VA underwriting requirements, sufficiency 
of documentation and soundness of underwriting judgments.
    (v) Appraisal quality. For lenders approved for the Lender 
Appraisal Processing Program (LAPP), the quality control system must 
specifically contain provisions concerning the adequacy and quality of 
real property appraisals. While the lender's quality control personnel 
need not be appraisers, they should have basic familiarity with 
appraisal theory and techniques so that they can select appropriate 
cases for review if discretionary sampling is used, and prescribe 
appropriate corrective action(s) in the appraisal review process when 
discrepancies or problems are identified. Copies of the lender's 
quality control plan or self-policing system evidencing appraisal 
related matters must be provided to the VA office of jurisdiction.
    (10) Courtesy closing. The lender-applicant must certify to VA that 
it will not close loans on an automatic basis as a courtesy or 
accommodation for other mortgage lenders, whether or not such lenders 
are themselves approved to close on an automatic basis without the 
express approval of VA. However, a lender with automatic authority may 
close loans for which information and supporting credit data have been 
developed on its behalf by a duly authorized agent.
    (11) Probation. Lenders meeting these requirements will be approved 
to close VA loans on an automatic basis for a 1-year period. At the end 
of this period, the lender's quality of underwriting, the completeness 
of loan submissions, compliance with VA requirements and procedures, 
and the delinquency and foreclosure rates will be reviewed.
    (12) Extensions of Automatic Authority. When a lender wants its 
automatic authority extended to another State, the request must be 
submitted, with the fee designated in paragraph (e)(5) of this section, 
to the VA regional office having jurisdiction in the State where the 
lender's corporate office is located.
    (i) When a lender wants its automatic authority to include loans 
involving a real estate brokerage and/or a residential builder or 
developer in which it has a financial interest, owns, is owned by, or 
with which it is affiliated, the following documentation must be 
submitted:
    (A) A corporate resolution from the lender and each affiliate 
indicating that they are separate entities operating independently of 
each other. The lender's corporate resolution must indicate that it 
will not give more favorable underwriting consideration to its 
affiliate's loans, and the affiliate's corporate resolution must 
indicate that it will not seek to influence the lender to give their 
loans more favorable underwriting consideration.
    (B) Letters from permanent investors indicating the percentage of 
all VA loans based on the affiliate's production originated by the 
lender over a 1-year period that are past due 90 days or more. This 
delinquency ratio must be no higher than the national average for the 
same period for all mortgage loans.
    (ii) When a lender wants its automatic authority extended to 
additional States, the lender must indicate how it plans to originate 
VA loans in those States. Unless a lender proposes a telemarketing 
plan, VA requires that a lender have a presence in the State, that is, 
a branch office, an agent relationship, or that it is a reasonable 
distance from one of its offices in an adjacent State, i.e., 50 miles. 
If the request is based on an agency relationship, the documentation 
outlined in paragraph (b)(13) must be submitted with the request for 
extension.
    (13) Use of Agents. A lender using an agent to perform a portion of 
the work involved in originating and closing a VA-guaranteed loan on an 
automatic basis must take full responsibility by certification for all 
acts, errors and omissions of the agent or other entity and its 
employees for the work performed. Any such acts, errors or omissions 
will be treated as those of the lender and appropriate sanctions may be 
imposed against the lender and its agent. Lenders requesting an agent 
must submit the following documentation to the VA regional office 
having jurisdiction for the lender's corporate office:
    (i) A corporate resolution certifying that the lender takes full 
responsibility for all acts, errors and omissions of the agent that it 
is requesting. The corporate resolution must also identify the agent's 
name and address, and the geographic area in which the agent will be 
originating and/or closing VA loans; whether the agent is authorized to 
issue interest rate lock-in agreements on behalf of the lender; and 
outline the functions the agent is to perform. Alternatively, the 
lender may submit a blanket corporate resolution which sets forth the 
functions of any and all agents and identifies individual agents by 
name, address, and geographic area in separate letters which refer to 
the blanket resolution.
    (ii) When the VA regional office having jurisdiction for the 
lender's corporate office acknowledges receipt of the lender's request 
in writing, the agent is thereby authorized to originate VA loans on 
the lender's behalf.

(Authority: 38 U.S.C. 501(a), 3702(d))

    (c) A lender approved to close loans on the automatic basis who 
subsequently fails to meet the requirements of this section must report 
to VA the circumstances surrounding the deficiency and the remedial 
action to be taken to cure it. Failure to advise VA in a timely manner 
could result in a lender's loss of its approval to close VA loans on 
the automatic basis.

(Authority: 38 U.S.C. 501(a), 3702(d))

    (d) Annual recertification. Non-supervised lenders of the class 
described in 38 U.S.C. 3702(d)(3) must be recertified annually for 
authority to process loans on the automatic basis. The following 
minimum annual recertification requirements must be met by each lender 
approved for automatic authority:

[[Page 12007]]

    (1) Financial requirements. A lender must submit, within 120 days 
following the end of its fiscal year, an audited and certified 
financial statement with a classified balance sheet or a separate 
footnote for adjusted net worth to VA Central Office (264) for review. 
The same minimum financial requirements described in Sec. 36.4348(b)(5) 
must be maintained and verified annually in order to be recertified for 
automatic authority.
    (2) Processing annual lender data. The VA regional office having 
jurisdiction for the lender's corporate office will mail an annual 
notice to the lender requesting current information on the lender's 
personnel and operation. The lender is required to complete the form 
and return it with the appropriate annual renewal fees to the VA 
regional office.

(Authority: 38 U.S.C. 501(a), 3702(d))

    (e) Lender fees. To participate as a VA automatic lender, non-
supervised lenders of the class described in 38 U.S.C. 3702(d)(3) shall 
pay fees as follows:
    (1) $500 for new applications;
    (2) $200 for reinstatement of lapsed or terminated automatic 
authority;
    (3) $100 for each underwriter approval;
    (4) $100 for each agent approval;
    (5) A minimum fee of $100 for any other VA administrative action 
pertaining to a lender's status as an automatic lender;
    (6) $200 annually for certification of home offices; and
    (7) $100 annually for each agent renewal.
* * * * *
    5. In Sec. 36.4349, paragraph (a)(2) is revised and a parenthetical 
is added at the end of the section to read as follows:


Sec. 36.4349  Withdrawal of authority to close loans on the automatic 
basis.

    (a)(l) * * *
    (2) Automatic-processing authority may be withdrawn at any time for 
failure to meet basic qualifying and/or annual recertification 
criteria.
    (i) Non-supervised lenders. (A) Automatic authority may be 
withdrawn for lack of a VA-approved underwriter, failure to maintain 
$50,000 in working capital or $250,000 in adjusted net worth, or 
failure to file required financial information.
    (B) During the 1-year probationary period for newly approved 
lenders, automatic authority may be temporarily or permanently 
withdrawn for any of the reasons set forth in this section regardless 
of whether deficiencies previously have been brought to the attention 
of the probationary lender.
    (ii) Supervised lenders. Automatic authority will be withdrawn for 
loss of status as an entity subject to examination and supervision by a 
Federal or State supervisory agency as required by 38 U.S.C. 3702(d).

(Authority: 38 U.S.C. 501(a), 3702(d))
* * * * *
(The information collection requirements in this section have been 
approved by the Office of Management and Budget under control 
numbers 2900-0574)

[FR Doc. 98-6411 Filed 3-11-98; 8:45 am]
BILLING CODE 8320-01-P