[Federal Register Volume 67, Number 195 (Tuesday, October 8, 2002)]
[Rules and Regulations]
[Pages 62646-62647]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25494]



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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AG20


Loan Guaranty: Net Value and Pre-Foreclosure Debt Waivers

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

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SUMMARY: We are amending the Loan Guaranty Regulations to change the 
formula for calculating the net value of property securing VA 
guaranteed loans being terminated and to add criteria for granting 
preforeclosure debt waivers. The changes regarding net value appear 
necessary to more accurately reflect current costs. The changes 
regarding waivers appear necessary to more accurately reflect statutory 
intent.

DATES: Effective Date: November 7, 2002.

FOR FURTHER INFORMATION CONTACT: Mr. Richard Fyne, Assistant Director 
for Loan Management (261), Loan Guaranty Service, Veterans Benefits 
Administration, Department of Veterans Affairs, Washington DC 20420, 
telephone (202) 273-7380.

SUPPLEMENTARY INFORMATION: In a document published in the Federal 
Register on August 1, 2000 (65 FR 46882), we proposed to amend the Loan 
Guaranty Regulations (38 CFR part 36) to change the formula for 
calculating the net value of property securing VA guaranteed loans 
being terminated and to add criteria for granting preforeclosure debt 
waivers.
    Under current law, when a VA guaranteed loan is reported as being 
in default, the Secretary is required to establish the ``net value'' of 
the property securing the guaranteed loan in default. ``Net value'' 
means the fair market value of the property minus certain costs that VA 
would incur to acquire, manage, and dispose of the property. The 
relationship between the net value of the property, the total 
indebtedness of the veteran at the time of loan termination, and the 
amount of VA's guaranty determines whether or not VA may acquire the 
property following foreclosure from the foreclosing loan holder. These 
factors also affect the Government's claim payment to the foreclosing 
holder under the guaranty. In addition, they will affect the amount of 
the veteran's debt to the Government under those circumstances where, 
by law, VA is entitled to establish a debt against a veteran. Moreover, 
they affect the VA's loss on the guaranty transaction which, in turn, 
will affect the veteran's ability to have previously-used entitlement 
restored.
    Previously, under Sec.  36.4301, VA computed ``net value'' using 
cost data for the proceeding three fiscal years. We proposed to change 
how VA computes ``net value.'' Instead of using three years' data, we 
proposed to use data only from the most recent fiscal year.
    We also proposed to make nonsubstantive changes to the definition 
of ``net value'' for purposes of clarification and conformance to 
statutory provisions.
    The comment period ended October 2, 2000. We received comments from 
one commenter, an association that represents mortgage lenders. These 
comments are discussed below. Based on the rationale set forth in the 
proposed rule and this document, we have adopted the provisions of the 
proposed rule as a final rule with a change in the definition of ``net 
value,'' explained below.
    Using data from 1995 through 2000, the commenter provided its 
fiscal analysis of the impact of the proposed rule on the mortgage 
industry if the proposed rule had been in effect. The analysis 
performed by the commenter revealed little change in using three years 
compared to one year. Even so, the commenter requested that VA not 
change the formula until after conducting a thorough analysis, 
including the impact on the number of no-bids (buy-downs) and 
consideration of ``anticipated changes in policies and procedures''.
    It is necessary to describe no-bids and buy-downs to address this 
concern. VA computes the net value of the property securing the loan in 
each case prior to termination. This is done to determine whether VA 
can lower its claim liability. If the difference between the loan 
indebtedness and the net value is less than VA's maximum claim 
liability on the case, then VA can reduce its liability by requiring 
the loan holder to credit the account with the net value of the 
property. The holder then can convey the property to VA in return for 
its net value.
    If the difference between the loan indebtedness and the net value 
is greater than VA's maximum claim liability, VA cannot reduce its 
liability. In that case VA does not specify in advance a minimum amount 
to be credited to the loan account, and the holder cannot convey the 
property to VA. The industry typically calls such cases no-bids.
    When a holder receives advice that a case is a no-bid, it may 
decide to voluntarily waive part of the loan indebtedness. This is done 
to reduce the difference between loan indebtedness and the net value to 
a point where the difference is less than VA's claim liability. Then VA 
can reduce its liability by requiring the loan holder to credit the 
remaining indebtedness with the net value, and the case is no longer a 
no-bid. The amount waived by the holder is called the buy-down.
    After giving careful consideration to the comment we have 
determined that further analyses is not warranted. The argument that we 
should give consideration to anticipated changes in policies and 
procedures is not a basis for giving further analysis before 
establishing a rule change. Furthermore, even if such an analysis were 
possible, VA's primary goal for this rule was to more accurately 
reflect in any future year the cost of acquiring, managing, and 
disposing of properties. Using the most recent data available would 
provide a better predictor of costs in the coming year.
    An example provided by the commenter of a policy change impacting 
net value was the potential cost of lead-based paint hazard reductions. 
The commenter expressed concern that moving from considering three 
years' data to one year's data would likely increase the number of no-
bids immediately after VA implemented the lead-based paint procedures. 
However, as we stated above, VA's primary goal is to accurately reflect 
the cost to VA of acquiring, managing, and disposing of properties. In 
the case of lead-based paint procedures, VA has decided not to 
significantly change procedures and therefore there should be no real 
changes in costs attributable to them. Just as implementing a new 
procedure like lead paint abatement could show an immediate impact on 
no-bids, future cost savings by VA resulting from legislation, 
regulations, or management efficiencies would be recognized more 
quickly, to the advantage of loan holders by VA adopting the proposed 
rule. Therefore VA continues to believe, as the commenter noted, that 
moving to annualized cost data would have a neutral impact over time.
    The definition of net value, in the proposed rule, requires VA to 
determine the costs of acquiring and disposing of property. One of the 
cost factors the proposed rule required VA to determine was losses on 
resale. The commenter requested that VA also include average resale 
gains in calculating a property's net value. The commenter asserted 
that this is consistent with the Department's stated goal of creating a 
net value that more accurately reflects current costs. Failure to 
recognize such gains would understate a property's net value and

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unfairly increase no-bids. We agree with the rationale set forth by the 
commenter, and have made an appropriate change to the final rule so 
that VA will consider losses and gains when calculating net value using 
the previous year's operating expenses.

Unfunded Mandates

    The Unfunded Mandates Reform Act requires, at 2 U.S.C. 1532, 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 government, 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

    This document has been reviewed by the Office of Management and 
Budget under Executive Order 12866.

Paperwork Reduction Act

    This document contains no provisions constituting a collection of 
information under the Paperwork Reduction Act (44 U.S.C. 3501-3520).

Regulatory Flexibility Act

    The Secretary hereby certifies that the adoption of the 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. The rule only affects VA guaranteed loan foreclosures. 
Such foreclosures represent only a small part of affected lenders' 
businesses. Moreover, the effect of the rule will be cost-neutral in 
almost all cases. Therefore, pursuant to 5 U.S.C. 605(b), the rule is 
exempt form the initial and final regulatory flexibility analysis 
requirements of sections 603 and 604.
    The Catalog of Federal Domestic Assistance Program numbers are 
64.114 and 64.118.

List of Subjects in 38 CFR Part 36

    Condominiums, Flood insurance, 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 12, 2002.
Anthony J. Principi,
Secretary of Veterans Affairs.


    For the reasons set out in the preamble, 38 CFR part 36 is amended 
as follows:

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. In Sec.  36.4301, the introductory text for the term ``Net 
Value'', and paragraph (3) are revised, to read as follows:


Sec.  36.4301  Definitions.

* * * * *
    Net value. The fair market value of real property, minus an amount 
representing the costs that the Secretary estimates would be incurred 
by VA in acquiring and disposing of the property. The number to be 
subtracted from the fair market value will be calculated by multiplying 
the fair market value by the current cost factor. The cost factor used 
will be the most recent percentage of the fair market value that VA 
calculated and published in the Notices section of the Federal Register 
(it is intended that this percentage will be calculated annually). In 
computing this cost factor, VA will determine the average operating 
expenses and losses (or gains) on resale incurred for properties 
acquired under Sec.  36.4320 which were sold during the preceding 
fiscal year and the average administrative cost to VA associated with 
the property management activity. The final net value derived from this 
calculation will be stated as a whole dollar amount (any fractional 
amount will be rounded up to the next whole dollar). The cost items 
included in the calculation will be:
* * * * *
    (3) Administrative costs. (i) An estimate of the total cost for VA 
of personnel (salary and benefits) and overhead (which may include 
things such as travel, transportation, communication, utilities, 
printing, supplies, equipment, insurance claims and other services) 
associated with the acquisition, management and disposition of property 
acquired under Sec.  36.4320 of this part. The average administrative 
costs will be determined by:
    (A) Dividing the total cost for VA personnel and overhead salary 
and benefits costs by the average number of properties on hand and 
adjusting this figure based on the average holding time for properties 
sold during the preceding fiscal year; then
    (B) Dividing the figure calculated in paragraph (3)(i)(A) of this 
definition by the VBA ratio of personal services costs to total 
obligations.
    (ii) The three cost averages will be added to the average loss (or 
gain) on property sold during the preceding fiscal year (based on the 
average property purchase price) and the sum will be divided by the 
average fair market value at the time of acquisition for properties 
which were sold during the preceding fiscal year to derive the 
percentage to be used in estimating net value.

    3. Section 36.4323 is amended by:
    A. In paragraph (e)(1)(v), removing ``liability.'' from the end of 
the paragraph and adding, in its place, ``liability; or''.
    B. Adding paragraph (e)(1)(vi).
    C. In paragraph (e)(4), revising the first sentence and the 
authority citation at the end of the paragraph.
    The addition and revisions read as follows:


Sec.  36.4323  Subrogation and indemnity.

* * * * *
    (e) * * *
    (1) * * *
    (vi) The obligor being released is not the current titleholder to 
the property and there are no indications of fraud, misrepresentation, 
or bad faith on the obligor's part in obtaining the loan or disposing 
of the property or in connection with the loan default.
* * * * *
    (4) Determinations made under paragraphs (e)(1) and (e)(2) of this 
section are intended for the benefit of the Government in reducing the 
amount of claim payable by VA and/or avoiding the establishment of 
uncollectible debts owing to the United States. * * *

(Authority: 38 U.S.C. 501, 3703(c)(1), 5302)
* * * * *
[FR Doc. 02-25494 Filed 10-7-02; 8:45 am]
BILLING CODE 8320-01-P