[Federal Register Volume 68, Number 196 (Thursday, October 9, 2003)]
[Proposed Rules]
[Pages 58293-58295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-25560]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AL54


Loan Guaranty: Hybrid Adjustable Rate Mortgages

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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SUMMARY: The Department of Veterans Affairs (VA) proposes to amend its 
loan guaranty regulations by making two changes to conform to the 
Veterans Benefits Act of 2002. To implement section 303 of the law, VA 
proposes to incorporate into the regulations a new authority for hybrid 
adjustable rate mortgages. This will allow VA to guarantee loans with 
interest rates that remain fixed for a period of not less than the 
first three years of the loan, after which the rate can be adjusted 
annually. To implement section 307 of the law, VA proposes to increase 
the fee paid for assuming a VA guaranteed loan from .50 percent to 1.00 
percent of the loan amount. The fee increase is already being carried 
out under the authority of the statute.

DATES: Comments must be received on or before November 10, 2003.

ADDRESSES: Mail or hand deliver written comments to: Director, 
Regulations Management (00REG1), Department of Veterans Affairs, 810 
Vermont Avenue, NW., Room 1068, Washington, DC 20420; or fax comments 
to (202) 273-9026; or e-mail comments to [email protected]. 
Comments should indicate that they are submitted in response to ``RIN 
2900-AL54.'' All written comments received will be available for public 
inspection at the above address in the Office of Regulations 
Management, Room 1063B, between the hours of 8 a.m. and 4:30 p.m., 
Monday through Friday (except holidays). Please call (202) 273-9515 for 
an appointment.

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

SUPPLEMENTARY INFORMATION:

A. Background

    Under 38 U.S.C. chapter 37, VA guarantees loans made by private 
lenders to veterans for the purchase, construction, and refinancing of 
homes owned and occupied by veterans. Prior to fiscal year 1993, VA had 
authority to guarantee fixed rate mortgages only. During fiscal years 
1993, 1994, and 1995 VA was authorized to guarantee loans with 
adjustable interest rates. These rates were adjusted on an annual 
basis, except that the first adjustment had to occur no sooner than 12 
months nor later than 18 months from the date of the borrower's first 
mortgage payment. Authority for these loans expired at the end of 
fiscal year 1995.
    Section 303 of Pub. L. 107-330 authorizes a demonstration project 
during fiscal years 2004 and 2005, whereby VA will guarantee loans with 
hybrid adjustable interest rates. Effective October 1, 2003, or as soon 
thereafter as practicable, VA proposes to guarantee loans that have 
interest rate adjustment provisions that (1) specify an initial rate 
that is fixed for a period of not less than the first three years of

[[Page 58294]]

the loan; and (2) provide for an initial adjustment in the interest 
rate at the end of the initial fixed rate period. While the initial 
adjustment may not occur until 36 months after the first payment is 
due, it is not required to occur prior to any set date.
    In connection with its previous adjustable rate mortgage program VA 
issued regulations which are currently at 38 CFR 36.4311. VA proposes 
to amend that section to provide for a hybrid adjustable rate mortgage 
with adjustment provisions that conform to the requirements of section 
303 of Pub. L. 107-330.

B. Proposed Rule

    This proposed rule would make changes to the time at which the 
initial interest rate must occur and minor changes to the wording of 
the regulations. Except for these changes the proposed regulations are 
the same as those for the previous adjustable rate mortgage program. 
They provide that the interest rate adjustments: (1) Correspond to 
changes in the weekly average yield on one year Treasury bills adjusted 
to a constant maturity; (2) be made by adjusting the monthly payment on 
an annual basis; (3) be limited with respect to any single annual 
interest rate adjustment, to a maximum increase or decrease of 1 
percentage point; and (4) be limited, over the term of the mortgage, to 
a maximum increase of 5 percentage points above the initial contract 
interest rate.
    Because the new program is proposed to become effective October 1, 
2003, VA proposes to add the words ``Effective October 1, 2003,'' to 
the beginning of the introductory text of paragraph (d) of Sec.  
36.4311.
    VA proposes to change the time at which the initial interest rate 
adjustment must occur, as required by Pub. L. 107-330. Section 
36.4311(d)(2) provides ``that the first adjustment may occur no sooner 
than 12 months nor later than 18 months from the date of the borrower's 
first mortgage payment.'' This proposed rule would amend the first 
sentence of this paragraph by changing ``12 months'' to ``36 months'' 
and by deleting the words ``nor later than 18 months.''
    Because VA no longer sets maximum interest rates this proposed rule 
would remove from paragraph (d)(4) of Sec.  36.4311 the second sentence 
which reads, ``The rate must be reflective of adjustable rate 
lending.'' The interest rate on all VA loans is negotiated between the 
borrower and the lender.
    VA proposes to change language concerning the pre-loan disclosure 
in paragraph (d)(6) of Sec.  36.4311. This proposed rule would remove 
the second part of the first sentence, which states that the lender 
must explain the nature of the obligation ``no later than on the date 
upon which the lender provides the prospective borrower with an 
application,'' and in its place add ``at the time of loan 
application.'' This change is necessary to conform with industry 
practice whereby lenders make a copy of the loan application available 
to the borrower for review prior to the actual beginning of the loan 
application process. This proposed rule would also remove the language 
that states a copy of the signed certification shall be ``included in 
the loan submission to VA'' and in its place add ``furnished to VA upon 
request.'' This change is necessary to conform to current practice 
whereby paper copies of loan application papers are retained by lenders 
until such time as they are requested by VA.
    The VA guaranteed hybrid adjustable rate mortgage with the above 
features will be similar to the adjustable rate mortgages eligible for 
Federal Housing Administration (FHA) insurance. This should facilitate 
pooling of these mortgages together in Government National Mortgage 
Association (GNMA) mortgage-backed securities pools.
    Because there has been no activity in the manufactured home loan 
program for the past several years, this pilot program for VA hybrid 
adjustable rate mortgages will not be made available for manufactured 
homes under the provisions of 38 U.S.C. 3712. However, manufactured 
housing which qualifies as conventional housing under the provisions of 
38 U.S.C. 3710 (a)(9) will be eligible.
    Section 307 of Pub. L. 107-330 increases the fee payable to VA by a 
person assuming a VA guaranteed loan from .50 percent to 1.00 percent 
of the loan amount. VA is making conforming changes to 38 CFR 36.4312 
to reflect the increase. Under the provisions of Pub. L. 107-330, this 
increase is effective for the period beginning December 13, 2002, and 
ending September 30, 2003.

Administrative Procedure Act

    Section 6(a)(1) of Executive Order 12866 indicates that, in most 
cases, a comment period should be ``not less than 60 days.'' However, 
section 303 of Pub. L. 107-330 only permits a limited, 2 year test 
program for Hybrid ARMs between October 1, 2003 and September 30, 2005. 
We believe that this proposed rule is essential to the efficient and 
consistent implementation of the Hybrid Adjustable Rate Mortgage 
demonstration program created by that section. In order to avoid delays 
in implementing this program, we believe it is important that final 
regulations be published expeditiously. For this reason, we have 
shortened the comment period for this rulemaking action to 30 days.

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 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 such effect 
on State, local, or tribal governments, or the private sector.

Paperwork Reduction Act

    This document contains no provisions constituting a collection of 
information under the Paperwork Reduction Act (44 U.S.C. 3501-3521).

Executive Order 12866

    This document has been reviewed by the Office of Management and 
Budget 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. The addition of hybrid adjustable rate mortgages will 
benefit lenders by providing an additional loan product for use in 
making VA-guaranteed loans. Therefore, 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 numbers 
applicable to this rule are 64.114 and 64.119.

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: August 20, 2003.
Anthony J. 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.

[[Page 58295]]

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 36.4311 is amended by:
    a. Revising paragraph (d) introductory text;
    b. In paragraph (d)(2), removing ``12 months nor later than 18 
months'', and adding, in it's place, ``36 months'';
    c. Revising paragraph (d)(4) introductory text;
    d. In paragraph (d)(5) introductory text, removing ``no later than 
on the date upon which the lender provides the prospective borrower 
with a'', and adding, in its place, ``at the time of''; and by 
removing, ``included in the loan submission to VA'', and adding, in its 
place, ``furnished to VA upon request''; and
    e. Revising the authority citation at the end of the section.
    The revisions read as follows:


Sec.  36.4311  Interest rates.

* * * * *
    (d) Effective October 1, 2003, adjustable rate mortgage loans which 
comply with the requirements of this paragraph (d) are eligible for 
guaranty.
* * * * *
    (4) Initial rate and magnitude of changes. The initial contract 
interest rate of an adjustable rate mortgage shall be agreed upon by 
the lender and the veteran. Annual adjustments in the interest rate 
shall correspond to annual changes in the interest rate index, subject 
to the following conditions and limitations:
* * * * *
(Authority: 38 U.S.C. 3707A, 3710)

    3. In Sec.  36.4312, paragraph (e)(2), in the first sentence, is 
amended by removing ``one-half of''; and by revising the authority 
citation at the end of the paragraph to read as follows:


Sec.  36.4312  Charges and fees.

* * * * *
(Authority: 38 U. S. C 3729(b))

[FR Doc. 03-25560 Filed 10-8-03; 8:45 am]
BILLING CODE 8320-01-P