[Federal Register Volume 66, Number 197 (Thursday, October 11, 2001)]
[Proposed Rules]
[Pages 51893-51895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25459]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AK76


Loan Guaranty: Prepurchase Counseling Requirements

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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SUMMARY: This document proposes to amend the Department of Veterans 
Affairs (VA) loan guaranty regulations that set forth underwriting 
standards for VA guaranteed loans. We propose to require first-time 
homebuyers to complete homeownership counseling. We also propose to add 
the completion of financial or homeownership counseling as a 
compensating factor for certain veterans who do not fully meet VA's 
underwriting standards. We believe these changes are necessary to 
ensure that homebuyers are satisfactory credit risks.

DATES: Comments must be received on or before December 10, 2001.

ADDRESSES: Mail or hand-deliver written comments to: Director, Office 
of Regulations Management (02D), Department of Veterans Affairs, 810 
Vermont Ave., NW., Room 1154, Washington, DC 20420; or fax comments to 
(202) 273-9289; or e-mail comments to [email protected]. 
Comments should indicate that they are submitted in response to ``RIN 
2900-AK76.'' All comments received will be available for public 
inspection in the Office of Regulations Management, Room 1158, between 
the hours of 8:00 a.m. and 4:30 p.m., Monday through Friday (except 
holidays).

FOR FURTHER INFORMATION CONTACT: R. D. Finneran, Assistant Director for 
Loan Policy and Valuation (262), Loan Guaranty Service, Veterans 
Benefits Administration, Department of Veterans Affairs, 810 Vermont 
Avenue, NW, Washington, DC 20420, (202) 273-7368.

SUPPLEMENTARY INFORMATION: This document proposes to amend the 
underwriting standards for VA guaranteed loans found in 38 CFR part 36. 
We propose to require first-time homebuyers to complete homeownership 
counseling. We also propose to add the completion of financial or 
homeownership counseling as a compensating factor for certain veterans 
who do not fully meet VA's underwriting standards. These proposed 
changes are designed to help ensure that veterans obtaining VA 
guaranteed loans are satisfactory credit risks as required by 38 U.S.C. 
3710 (b)(3).

Requirement for Homeownership Counseling for First-Time Homebuyers

    On March 25, 1999, the VA's Office of the Inspector General (IG) 
issued an audit report entitled Attributes of Defaulted VA Home Loans 
(Report No. 9R5-B10-047). In this report, the IG noted that there was a 
higher and earlier incidence of defaults for active duty military 
borrowers. The report recommended establishing a prepurchase counseling 
requirement for all active duty military homebuyers.
    After reviewing this report, the Veterans Benefits Administration 
(VBA) did not fully agree with that recommendation.
    Based on our experience, we find that first-time homebuyers are 
more likely to encounter financial difficulties due to lower incomes, 
less experience in managing personal finances and credit, and a lack of 
understanding the financial responsibilities and

[[Page 51894]]

obligations of homeownership. This is consistent with VBA data 
indicating that, between Fiscal Year (FY) 1993 and FY 2000, the 
foreclosure rates for first-time homebuyers was 4.23 percent, while the 
foreclosure rates for veterans with previous homeownership experience 
was 2.88 percent (the data are available from the individual listed 
under FOR FURTHER INFORMATION CONTACT). Accordingly, VBA believes the 
data relied on by the IG regarding active duty military result in part 
from the fact that a significant number of active duty military 
personnel obtaining VA housing loans are first-time buyers.
    Further, we do not think that it is equitable to subject military 
personnel with prior satisfactory homeownership experience to a 
requirement not imposed on veterans already separated from service.
    We discussed these concerns informally with the IG, and the IG 
concurred with the provisions of this proposed rule.
    Accordingly, we propose that as a condition of obtaining a VA-
guaranteed home loan, a first-time homebuyer must complete a 
homeownership counseling course.
    We also propose that the course, at a minimum, address the 
following subjects: the essentials of becoming a homebuyer, debt 
management, home maintenance, and available assistance for the 
homeowner who has trouble making payments. This is the essential 
information that we believe first-time buyers need to know in order to 
be prepared for the financial responsibilities of home ownership.
    We also propose that the homebuyer complete the course within 
twelve months preceding the date of the loan. This will help ensure 
that the veteran understands these issues at the time of purchase.
    We have indicated in the proposed rule that the course should take 
approximately three hours. We believe that this is a sufficient time 
period for understanding the necessary concepts.
    We also propose that the course may be individualized, in a 
classroom setting, computer-based, or a correspondence course. This 
will provide maximum flexibility and allow veterans in remote areas to 
obtain the necessary counseling.
    For informational purposes we noted that such courses can be 
obtained from: the U.S. Department of Housing and Urban Development 
(HUD), the Federal National Mortgage Association (Fannie Mae), the 
Federal Home Loan Mortgage Corporation (Freddie Mac), educational 
institutions and entities used by state or local government housing 
programs.
    The proposed rule requires that the veteran submit to the lender a 
certificate of completion from the counseling provider. This will 
ensure that the counseling was obtained.

Compensating Factor

    Under the current regulations for underwriting standards for VA 
guaranteed loans (38 CFR 36.4337(c)), the veteran must meet both a 
debt-to-income ratio and a residual income analysis. In those cases 
where a veteran does not fully meet both standards, but the veteran 
falls within parameters specified in the regulations, the lender may 
approve the loan or submit the loan to VA for prior approval if the 
lender fully justifies the decision. The lender's justification must 
cite specific compensating factors that justify its decision. This 
document proposes to amend the regulations by adding completion of 
financial or homeownership counseling within the past 12 months as a 
compensating factor.

Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995, as amended (44 U.S.C. 
3501-3520), this proposed rule includes information collection 
provisions in 38 CFR 36.4337. In accordance with section 3507(d) of the 
Act and 5 CFR 1320.11, VA has submitted a copy of this rulemaking 
action to OMB for its review of the collections of information.
    OMB assigns a control number to collections 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.
    Comments on the collections of information should be submitted to 
the Office of Management and Budget, Attention: Desk Officer for the 
Department of Veterans Affairs, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Director, Office of 
Regulations Management (02D), Department of Veterans Affairs, 810 
Vermont Avenue, NW., Washington, DC 20420. Comments should indicate 
that they are submitted in response to ``RIN 2900-AK76.''
    Title: Prepurchase Counseling Requirements.
    Summary of collection of information: In proposed 38 CFR 
36.4337(i), VA would require that, as a condition of obtaining a VA-
guaranteed home loan, a first-time homebuyer, within 12 months 
preceding the date of the loan, submit to their lender a certificate of 
completion of a homeownership counseling course.
    Description of need for information and proposed use of 
information: Pursuant to 38 U.S.C. 3710, VA has a statutory duty to 
determine that any veteran who obtains a VA-guaranteed home loan is a 
satisfactory credit risk. Our experience indicates that first-time 
homebuyers are more likely to encounter financial difficulties due to 
lower incomes, less experience in managing personal finances and 
credit, and a lack of understanding the financial responsibilities and 
obligations of homeownership. VA anticipates that requiring all first-
time homebuyers complete a course in homeownership counseling will make 
first-time homebuyers more aware of the responsibilities of 
homeownership and the importance of meeting financial obligations. In 
our experience, individuals with such knowledge are better credit 
risks.
    Description of likely respondents: Veterans who are first-time 
homebuyers.
    Estimated number of respondents: 101,955.
    Estimated frequency of responses: Once.
    Estimated total annual reporting and recordkeeping burden: 8,496 
hours.
    Estimated average burden per collection: 5 minutes.
    The Department considers comments by the public on proposed 
collections of information in--
     Evaluating whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Department, including whether the information will have practical 
utility;
     Evaluating the accuracy of the Department's estimate of 
the burden of the proposed collections of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collections of information on 
those who are to respond, including responses through the use of 
appropriate automated, electronic, mechanical, or other technological 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    OMB is required to make a decision concerning the collections of 
information contained in this proposed rule between 30 and 60 days 
after publication of this document in the Federal Register. Therefore, 
a comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. This does not affect the

[[Page 51895]]

deadline for the public to comment on the proposed rule.

Unfunded Mandates

    The Unfunded Mandates Reform Act requires (in section 202) that 
agencies prepare an assessment of anticipated costs and benefits before 
developing any rule that may result in an expenditure by State, local, 
or tribal governments, in the aggregate, or by the private sector of 
$100 million or more in any given year. This rule would have no 
consequential effect on State, local, or tribal governments.

Executive Order 12866

    The Office of Management and Budget has reviewed this proposed rule 
under Executive Order 12866.

Regulatory Flexibility Act

    The Secretary hereby certifies that this proposed 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. This proposed rule would affect only individuals. 
Accordingly, pursuant to 5 U.S.C. 605(b), this proposed rule is exempt 
from the initial and final regulatory flexibility analysis requirements 
of sections 603 and 604.

    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: July 10, 2001.
Anthony Principi,
Secretary of Veterans Affairs.
    For the reasons set out in the preamble, 38 CFR part 36 is proposed 
to be amended as set forth below.

PART 36--LOAN GUARANTY

    1. The authority citation for part 36 continues to read as follows:

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

    2. Section 36.4337 is amended by:
    a. Redesignating paragraphs (i) through (n) as paragraphs (j) 
through (o), respectively.
    b. In paragraphs (a), (b), and (e) introductory text, removing 
``(j)'' and adding, in its place, ``(k)''.
    c. In newly redesignated paragraph (k)(4), removing ``(j)(3)'' and 
adding, in its place, ``(k)(3)''; and in paragraph (k)(5), removing 
``(j)(3) and (j)(4)'' and adding, in its place, ``(k)(3) and (k)(4)''.
    d. In newly redesignated paragraph (l)(3), removing ``(k)(2)'' and 
adding, in its place, ``(l)(2)''.
    e. Revising paragraph (c)(5).
    f. Adding a new paragraph (i).
    The revision and addition read as follows:


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

* * * * *
    (c) * * *
    (5) The following are examples of acceptable compensating factors 
to be considered in the course of underwriting a loan:
    (i) Excellent long-term credit;
    (ii) Conservative use of consumer credit;
    (iii) Minimal consumer debt;
    (iv) Long-term employment;
    (v) Significant liquid assets;
    (vi) Downpayment or the existence of equity in refinancing loans;
    (vii) Little or no increase in shelter expense;
    (viii) Military benefits;
    (ix) Satisfactory homeownership experience;
    (x) Completion of financial or homeownership counseling program 
within twelve months preceding the date of the loan;
    (xi) High residual income;
    (xii) Low debt-to-income ratio;
    (xiii) Tax credits of a continuing nature, such as tax credits for 
child care; and
    (xiv) Tax benefits of homeownership.
* * * * *
    (i) Homeownership counseling. As a condition of obtaining a VA-
guaranteed home loan, a first-time homebuyer, within twelve months 
preceding the date of the loan, must complete a homeownership 
counseling course addressing, at a minimum, the following subjects: the 
essentials of becoming a homebuyer, debt management, home maintenance, 
and available assistance for the homeowner who has trouble making 
payments. The course should take approximately three (3) hours and may 
be individualized, in a classroom setting, computer-based, or a 
correspondence course. Courses meeting this criteria are available 
from: the U.S. Department of Housing and Urban Development (HUD), the 
Federal National Mortgage Association (Fannie Mae), the Federal Home 
Loan Mortgage Corporation (Freddie Mac), educational institutions, and 
entities used by state or local government housing programs. The 
veteran shall submit to the lender a certificate of completion from the 
counseling provider.
* * * * *
[FR Doc. 01-25459 Filed 10-10-01; 8:45 am]
BILLING CODE 8320-01-P