[Federal Register Volume 70, Number 33 (Friday, February 18, 2005)]
[Proposed Rules]
[Pages 8472-8494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-3084]



[[Page 8471]]

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Part III





Department of Veterans Affairs





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38 CFR Part 36



Loan Guaranty: Loan Servicing and Claims Procedures Modifications; 
Proposed Rule

  Federal Register / Vol. 70, No. 33 / Friday, February 18, 2005 / 
Proposed Rules  

[[Page 8472]]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AL65


Loan Guaranty: Loan Servicing and Claims Procedures Modifications

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 related to several aspects of 
the servicing and liquidating of guaranteed housing loans in default, 
and submitting of guaranty claims by loan holders. Specific topics 
addressed include: Increased authority of servicers to implement loss-
mitigation options, incentive payments to servicers for successful 
alternatives to foreclosure implemented, establishing a system of 
measuring and ranking servicer performance, permitting loan holders to 
review liquidation appraisals, requiring holders to calculate the net 
value of the security property prior to foreclosure, establishing a 
timeframe for when foreclosure of a defaulted loan would be expected to 
have been completed, limiting the amount of interest and other fees and 
charges that may be included in a guaranty claim, establishing 
attorneys fees allowed to be included in the guaranty claim, 
establishing a deadline for the submission of guaranty claims, 
modifying the requirements for title evidence for properties conveyed 
to VA following foreclosure, modifying the requirements for how long a 
holder must maintain records relating to loans for which VA has paid a 
claim on the guaranty, and eliminating the requirement for the 
submission of legal procedural papers to VA.

DATES: Comments must be received on or before April 19, 2005.

ADDRESSES: Written comments may be submitted by: mail or hand-delivery 
to Director, Regulations Management (00REG1), Department of Veterans 
Affairs, 810 Vermont Ave., NW., Room 1068, Washington, DC 20420; fax to 
(202) 273-9026; e-mail to [email protected]; or, through http://www.Regulations.gov. Comments should indicate that they are submitted 
in response to ``RIN 2900-AL65.'' All comments received will be 
available for public inspection in the Office of Regulation Policy and 
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: Richard P. Fyne, Assistant Director 
for Loan Management (261), Veterans Benefits Administration, Department 
of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420, at 
202-273-7380, e-mail [email protected].

SUPPLEMENTARY INFORMATION: 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.
    In connection with this program, VA is conducting an internal, in-
depth review of the entire Loan Administration process. ``Loan 
Administration''ludes the servicing of existing loans, dealing with 
loans in default and loans being terminated, and the processing of 
claims by loan holders under the guaranty after defaulted loans have 
been foreclosed or otherwise terminated. Loan Administration also 
includes efforts by VA and private loan holders to assist homeowners 
whose loans are in default to cure the default, retain their home if 
possible, or find other means short of foreclosure. VA hopes to revise 
the Loan Administration process to reflect changes in the loan 
servicing industry in recent years, as well as advances in technology. 
VA is moving toward placing greater reliance on private-sector 
servicing in accordance with VA guidelines, with VA using advanced 
technology to oversee holder actions.
    VA is now proposing a number of changes to current procedures, 
including: giving servicers increased authority to implement loss-
mitigation alternatives to foreclosure and paying servicers an 
incentive bonus for each successful loss-mitigation intervention 
alternative to foreclosure implemented; establishing a performance-
based tier-ranking system for servicers; permitting qualified loan 
holders to review liquidation appraisals and establish the fair market 
value of the property; requiring loan holders to calculate the net 
value of properties securing loans prior to foreclosure; establishing 
timeframes for when VA would expect holders, exercising reasonable 
diligence, should be able to complete the foreclosure of defaulted 
loans; limiting the amount of interest and other fees and charges that 
may be included in a guaranty claim; establishing reasonable and 
customary attorney fees allowed to be claimed under the guaranty; 
establishing a deadline for holders to submit claims under the guaranty 
and to request reconsideration of denied claims; modifying the 
requirements for title evidence submitted to VA when the holder is 
conveying the property to VA following the liquidation sale; modifying 
the requirements for how long a holder must maintain records relating 
to loans for which VA has paid a claim on the guaranty; modifying the 
requirements for holders to report key events with regard to loans 
being serviced; and repealing the requirement for holders to provide VA 
with procedural papers in legal or equitable proceedings related to a 
loan on the security property.

Loss Mitigation Options/Alternatives to Foreclosure

    VA has always stressed the importance of loan holders and servicers 
finding alternatives to foreclosure. Under current regulations, 
however, holders generally need VA consent before they could accept a 
deed-in-lieu of foreclosure or approve a compromise sale. Further, 
holders have limited authority to modify existing loans without prior 
approval. VA is proposing to delegate more authority to servicers to 
approve these foreclosure alternatives by removing many existing 
restrictions on holders with regard to such alternatives to 
foreclosure, publishing clear rules for how holders may use such 
alternatives, and establishing a hierarchy of alternatives to use in 
determining which alternative should be considered and under what 
conditions they should be pursued.

Loan Modification

    VA is proposing to modify Sec.  36.4314 by removing restrictive and 
confusing conditions and providing clear and understandable rules to 
apply when considering whether or not to modify a loan to avoid 
termination. The industry has indicated that the current regulation is 
not in line with industry practices and this has resulted in both under 
use of this alternative to foreclosure and improper use in some cases.
    VA is also proposing to make a conforming amendment to Sec.  
36.4311(c). That section currently prohibits a loan holder from 
charging an interest rate in excess of the rate reported by the lender 
when the loan was made, on any advance or in the event of delinquency 
or default. The proposed amendment would make an exception to that 
prohibition to allow such an increased interest rate as permitted under 
the proposed amendments to Sec.  36. 4314.

Refunding

    VA is proposing to amend Sec.  36.4318 by adding language that 
would require servicers to provide VA with the necessary loan transfer 
documents, including all loan assignments, within

[[Page 8473]]

60 days from receipt of VA's decision to refund the loan and further 
provides for a penalty that may be imposed on servicers who continually 
fail to provide loan transfer documents timely. VA anticipates that the 
number of loans refunded by VA will be dramatically reduced because of 
the revisions being made to the loan modification authority and feels 
that 60 days is a reasonable amount of time for servicers to obtain and 
provide the documents required to VA.
    VA also proposes to amend Sec.  36.4330 relating to records 
retention. See the discussion under the heading ``Records Retention and 
Post-Audit,'' below.

Deeds-in-Lieu of Foreclosure and Compromise Sales

    Under Sec.  36.4324(a), a holder currently may not, without the 
prior consent of the VA, release a lien on the property securing the 
loan. There are, however, circumstance where VA believes that it is in 
the best interests of all concerned to permit a loan holder to take 
prompt action and allow a transfer of title to the property securing 
the loan to resolve a serious default short of actual foreclosure.
    One such case would be to allow the holder to accept a deed to the 
property tendered by the obligor. Another situation is what VA refers 
to as a ``compromise sale.'' This is when the property cannot be sold 
for an amount that will generate proceeds sufficient to repay the 
entire loan balance. Under current VA procedures, the holder must 
obtain prior VA approval to accept a deed-in-lieu of foreclosure or 
conduct a compromise sale.
    VA believes the delays caused by VA needing to review and approve 
such transactions in advance have resulted, in a number of cases, in 
missed opportunities to resolve defaults in a quick, cost-efficient 
manner. VA further believes that holders, given appropriate guidelines, 
can make proper decisions on approving deeds-in-lieu and compromise 
sales.
    Accordingly, VA is proposing paragraphs (f), (g), and (h) to the 
new 38 CFR 36.4319a. These paragraphs will delegate authority to 
servicers to approve a compromise sale of the property or accept a 
deed-in-lieu of foreclosure and will specify the conditions under which 
servicers may exercise that authority.
    Under the proposed Sec.  36.4319a(f), a holder would be permitted 
to approve a compromise sale if the holder determines the loan is 
insoluble, the net sale proceeds will equal or exceed the net value of 
the property as computed by the holder, and that the estimated guaranty 
payment it would receive following the compromise sale would not exceed 
the guaranty payment following an actual foreclosure. In addition, the 
holder would be required to ensure that the current owner of the 
property will not share in any of the sales proceeds. Finally, certain 
obligors will be required to execute a repayment agreement before the 
holder may approve the compromise sale. (See discussion of the proposed 
Sec.  36.4319a(h), below.)
    In the event all conditions specified in this proposed paragraph 
(f) cannot be met, but the holder believes a compromise sale would be 
in the best interest of the veteran and the Secretary, the holder may 
request advance approval from VA for a compromise sale.
    Under the proposed Sec.  36.4319a(g), holders would be permitted to 
accept deeds-in-lieu of foreclosure. VA regards compromise sales as 
preferable to deeds-in-lieu of foreclosure. Under a compromise sale, 
the property will be sold at approximately the fair market price, and 
VA will not be required to incur the expenses of acquiring, managing, 
and reselling the property. Therefore, the proposed paragraph (g) would 
require that, before a holder may accept a deed-in-lieu, the holder 
must consider a compromise sale and find it is not practical. As with 
compromise sales, the holder would be required to estimate that the 
guaranty payment it would receive following the deed-in-lieu would not 
exceed the guaranty payment following an actual foreclosure. In 
addition, the holder would be required to determine that the current 
owner can convey clear and marketable title of the property to VA. 
Finally, certain obligors will be required to execute a repayment 
agreement before the holder may approve the deed-in-lieu. (See 
discussion of the proposed Sec.  36.4319a(h), below.)
    Also, as with compromise sales, in the event all conditions 
specified in this proposed paragraph (g) cannot be met, but the holder 
believes a deed-in-lieu would be in the best interest of the veteran 
and the Secretary, the holder may request advance approval from VA for 
accepting a deed-in-lieu.
    VA also proposes to add a new Sec.  36.4319a(h) regarding repayment 
agreements. Under current Sec.  36.4323, which is not being modified in 
this regard by this proposed rule, certain individuals are deemed to be 
liable to the Government if VA is required to make a payment under the 
guaranty. Generally, veterans whose loans have closed on or before 
December 31, 1989, and individuals who have been approved to assume a 
veteran's loan so the veteran may be released from further liability on 
the loan under 38 U.S.C. 3713 and 3714 have such liability. The 
proposed paragraph (h) defines the term ``liable obligor'' to include 
such individuals. The proposed paragraph (h) would require liable 
obligors to execute an agreement to repay VA 50 percent of the debt 
that would otherwise be assessed under existing Sec.  36.4323. Reducing 
the obligor's debt to VA should help induce liable obligors to 
cooperate with holders in compromise sales and deeds-in-lieu.
    The repayment agreement would require that the first payment would 
be due on the first day of the first month which is one year after the 
deed-in-lieu is executed or the compromise sale is closed. For example, 
if the deed-in-lieu were executed October 23, 2004, the first payment 
would be due November 1, 2005. The obligation would bear interest as 
established by the Secretary under 38 U.S.C. 5315(b)(2). That statute 
mandates collecting interest on VA benefit debts. Interest would accrue 
from the date the first payment was due. The agreement would require 
equal monthly payments, with the total debt repaid within 5 years after 
the first payment was due.
    The signing of the required repayment agreement would not preclude 
a veteran from seeking to have the debt waived by VA pursuant to 38 
U.S.C. 5302.
    Finally, the proposed paragraph (h) would require a written notice, 
sent by VA to the obligor by certified mail, return receipt requested, 
of the actual amount of the debt, the rate of interest, the required 
monthly payment, the rate of interest, and the right of veterans to 
request waiver. This notice will be sent after VA pays the guaranty 
claim because the amount paid under the guaranty establishes the debt. 
In this case, the debt would normally be 50 percent of such claim 
payment, plus interest.
    VA is also proposing to add a new definition to 38 CFR 36.4301 for 
the term ``compromise sale.'' This term will mean a sale to a third 
party for an amount less than is sufficient to repay the unpaid balance 
on the loan where the holder has agreed in advance to release the lien 
in exchange for the proceeds of such sale. In addition, VA is proposing 
a conforming amendment to Sec.  36.4324.

Servicer Tier Rankings and Loss-Mitigation Incentive Payments

    In newly proposed 38 CFR 36.4316 VA proposes to rank servicers into 
four tiers, depending on their performance, with tier one being the 
highest rated and

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tier four the lowest. VA is modeling the tier ranking system after that 
used by the Federal Home Loan Mortgage Corporation (FHLMC), also known 
as Freddie Mac. Specific criteria are not yet established. VA is 
soliciting comments on criteria to be used in developing the tier 
rankings. A servicer's performance and tier ranking will not be 
publicly disclosed.
    For at least the first year, all servicers will be presumed to be 
in tier two, and eligible for loss-mitigation incentives paid for that 
level.
    After VA has collected data under the new reporting requirements 
(see discussion under ``Revised Reporting Requirements,'' below) for 
six months, VA intends to review the data and develop the criteria for 
ranking servicers. Those criteria will then be published in the Federal 
Register for notice and comment. VA expects that the computer system 
for such reporting will be operational by Summer 2005, and proposed 
rules for tier ranking will be published in early calendar year 2006. 
Those projected dates could be subject to adjustment due to technical 
delays in the development of the new system.
    Once VA has adopted final rules for tier rankings, VA will monitor 
and grade servicer performance on a quarterly basis, and annually 
adjust the tier ranking depending on the servicer's performance over 
the past four calendar quarters using those standards. All servicers 
will remain in tier two until their performance has been evaluated for 
four calendar quarters after final tier ranking rules have been 
adopted.
    VA is also proposing to add a new 38 CFR 36.4317 which provides for 
making incentive payments to loan servicers in tier ranks one through 
three upon their successful completion of certain foreclosure 
avoidance, loss-mitigation options. Currently, loan servicers receive 
incentive payments from the Department of Housing and Urban 
Development, Fannie Mae, Freddie Mac, and some private mortgage 
insurance companies for implementing various foreclosure-avoidance 
procedures on loans in serious default. As explained below, VA 
currently pays such incentives under limited circumstances.
    In July 1995, VA administratively instituted the Servicer Loss 
Mitigation Program (SLMP). Participation in SLMP has been voluntary. 
Under SLMP, VA pays participating servicers an incentive for deeds-in-
lieu of foreclosure and compromise sales. SLMP currently requires 
servicers to obtain VA consent before completing either of these 
alternatives to foreclosure.
    VA has received anecdotal evidence that some servicers place less 
emphasis on widespread use of foreclosure-avoidance measures on VA 
loans due to the fact that VA normally does not pay the incentives 
which have become the industry standard.
    A major goal of the VA housing loan program is to assist veterans 
in obtaining home financing, and doing so with the least risk of loss 
upon default to both the veteran and VA as guarantor of the loan and, 
ultimately, to the Federal Treasury. VA strives to avoid foreclosure 
whenever reasonably possible. If a means can be found to keep a veteran 
and the veteran's family in the home or, if that is not possible, to 
terminate the loan without foreclosure, VA wishes to pursue that 
alternative. This will be less costly to both VA and the veteran, will 
prevent the veteran's credit record from reflecting a foreclosure, and 
if necessary, allow the veteran a reasonable time to voluntarily vacate 
and move from the home.
    Therefore, VA is now proposing to expand the incentive payment 
program by increasing the number of options for which incentives will 
be paid, increasing the number of servicers that may qualify for 
incentives, and formalizing the rules regarding the amount of the 
incentive payments, the timing of the payments, and the tests for 
qualifying for such payments.
    Under the proposed Sec.  36.4317, VA will pay any servicer in tiers 
one, two, and three an incentive payment for successfully completing 
any of the following loss-mitigation options: repayment plan, special 
forbearance, loan modification, compromise sale, and deed-in-lieu of 
foreclosure. Only one incentive payment will be made with respect to a 
default required to be reported to the Secretary under the proposed new 
Sec.  36.4315a(d). That section would require reporting a default to VA 
within 5 business days after a loan has been delinquent for 61 days.
    The amount of the incentive payment is set forth in a chart 
contained in the proposed Sec.  36.4317(b), and will depend upon the 
servicer's tier ranking and the type of loss-mitigation action. The 
incentive payment will range from $1,000 (to a servicer in tier one for 
a compromise sale) to $120 (for a servicer in tier three for a 
repayment plan or special forbearance).
    The criteria for when a loss-mitigation option will be considered 
successfully completed are contained in the proposed Sec.  36.4317(c). 
A repayment plan would be deemed successful when four consecutive 
payments under the plan have been made or when the total delinquency 
has been repaid, whichever occurs sooner. Special forbearance will be 
deemed successful when the loan reinstates. A loan modification would 
be deemed completed when the modification agreement is signed and the 
loan reinstates. Finally, a compromise sale or deed-in-lieu of 
foreclosure will be deemed successful when the servicer submits a claim 
under the guaranty.
    Finally, Sec.  36.4317(d) provides that incentive payments for 
successful repayment plans, special forbearance, and loan modifications 
will be made to eligible servicers monthly. Payments for compromise 
sales and deeds-in-lieu of foreclosure will be paid with the guaranty 
claim.
    No incentive payment will be made to a servicer in tier four. 
While, as stated above, the exact criteria for ranking servicers are 
still being developed, VA anticipates that tier four will be reserved 
for servicers whose performance has been significantly and repeatedly 
below acceptable VA and industry standards. VA does not believe 
additional rewards should be provided to a servicer whose performance 
has been consistently below an acceptable level. The successful 
completion of loss-mitigation options by tier four servicers will, 
however, be considered in future rankings. Thus tier four servicers 
will have an incentive to successfully complete these options.

Revised Reporting Requirements

    VA is also proposing to significantly revise the requirements for 
holders to report the status of all guaranteed loans in their portfolio 
and also to report significant events in the servicing and termination 
of such loans.
    Currently, Sec.  36.4315(a) requires the holder to notify VA within 
45 days after the debtor is 60 days in default on a payment (in effect, 
not later than 105 days after the borrower fails to make a payment 
due). This section also requires reporting within 45 days after the 
obligor has failed to pay real estate taxes when due and such taxes 
have remained unpaid for at least 180 days, or the obligor has been in 
default on any other obligation under the loan for at least 90 days 
after receiving notice from the lender to comply with such requirement.
    Currently, Sec.  36.4316 establishes conditions under which 
servicers may, at their option, file the notice prescribed in Sec.  
36.4317, Notice of Intention to Foreclose. This section, as well as the 
related Sec.  36.4317, are being eliminated in their entirety because 
they will no longer be necessary under the reporting

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requirements defined in the new Sec.  36.4315(a).
    VA is proposing to delete the current default and foreclosure 
reporting requirements cited in paragraph (a) of Sec.  36.4315, and 
Sec. Sec.  36.4316, 36.4317. VA is proposing to add a new Sec.  
36.4315a which will establish the new servicer reporting requirements 
for all outstanding guaranteed loans.
    This new section will require all holders to report information 
electronically to VA by use of a computer. VA is currently developing a 
computer-based system for this purpose. It is contemplated that holders 
will have the option of using a variety of methods to input data to 
VA's system. These include:
    Data file exchange.
    Direct system interface.
    Direct input to VA through the Internet.
    More specific information regarding the use of this system will be 
provided later through industry releases, conferences, and training 
provided by VA prior to implementation. Holders will need to obtain a 
user identification and password from VA. Procedures for this will be 
announced at a later date.
    The existing paragraph (b) of Sec.  36.4315, pertaining to 
acceptance of partial payments by a holder, will remain in a renamed 
Sec.  36.4315, with minor, non-substantive editorial revisions.

Procedural Papers

    Currently, paragraph (a) of Sec.  36.4319 requires that, when a 
loan holder initiates or becomes a party to a legal or equitable 
proceeding involving a guaranteed housing loan or the property securing 
such loan, the holder provide VA with copies of all legal procedural 
papers related to such action. Paragraph (b) of that section requires 
the holder to provide VA with a copy of the notice of sale with respect 
to the property securing such loans at least 30 days prior to the 
liquidation sale or within 5 days after first publication, whichever is 
later. Paragraphs (c) through (e) of that section relate to service of 
such papers when the Secretary is a party to a legal proceeding.
    VA believes the requirement to provide VA with all such papers when 
VA is not a party to the litigation imposes an unnecessary paperwork 
burden on holders and their counsel. The vast majority of papers filed 
in legal proceedings are ordinarily of little benefit to VA. Should VA 
have a need to review certain documents, VA can make a specific request 
to the holder for copies of any specific documents VA needs to review. 
In addition, under the proposed reporting requirements, discussed 
above, holders would be required to inform VA within 5 business days 
after any bankruptcy or other legal, equitable, or administrative 
proceeding is filed that would materially affect the loan termination, 
the lien, or the security property.
    Accordingly, VA is proposing to delete paragraphs (a), (b), and (c) 
of Sec.  36.4319. VA is further proposing to rewrite the existing 
paragraph (d) of Sec.  36.4319, which would become paragraph (a), by 
requiring that any legal process in an action to which VA is a party, 
prior to VA entering an appearance, shall be served on the VA Regional 
Counsel, the Attorney General, and the United States Attorney having 
jurisdiction over the area where the court is located. Currently, this 
paragraph requires service on the Loan Guaranty Officer. VA believes 
these pleadings should be served on VA's counsel rather than the 
program official. Service on the Attorney General and United States 
Attorney are required by the Federal Rules of Civil Procedure. The 
existing paragraph (e), relating to service of papers after the 
Secretary's attorney in a legal proceeding has entered an appearance, 
is being redesignated as paragraph (b).
    Paragraph (f) of Sec.  36.4319 does not pertain to procedural 
papers. It is being deleted for the reasons explained under the 
heading, Time for Loan Termination and Limit on Interest and Charges, 
below.

Calculation of Net Value

    Under the governing statute, 38 U.S.C. 3732(c)(3), when VA receives 
a notice that a guaranteed loan in default is about to be terminated, 
VA is required to compute the ``net value'' of the property securing 
the guaranteed loan. The term ``net value'' is defined in 38 CFR 
36.4301. Generally, ``net value'' is the fair market value of the 
property minus the costs VA estimates it would incur to acquire and 
dispose of the property. Those costs are computed using the methodology 
contained in that definition. Currently, VA calculates the net value 
and provides this value in writing to the holder along with 
instructions regarding the holder's bid at the liquidation sale. Under 
detailed formulae contained in 38 U.S.C. 3732(c), the relationship 
between the veteran's total indebtedness at time of foreclosure, the 
net value of the property, and the amount that the holder bids or 
receives at the foreclosure sale determines the amount that VA will pay 
the loan holder on a guaranty claim and whether or not the holder has 
the option to convey the property to VA following foreclosure.
    The computation of the net value for a specific property involves a 
simple mathematical computation. All that is required is knowing the 
fair market value of the property and the percentage factor used by VA 
to represent the cost to VA of acquiring and disposing of the property. 
Multiplying the fair market value by the cost factor produces the 
amount to subtract from the fair market value and arrive at the net 
value. That percentage is determined annually by VA pursuant to 38 CFR 
36.4301 (definition of net value) and published in the Federal 
Register. Currently, that factor is 11.87 percent. If the property has 
a fair market value of $100,000, the net value would be calculated as 
follows:

Fair market value..........................................     $100,000
Cost factor (11.87 percent of $100,000)....................     (11,870)
  Net Value................................................       88,130
 

    Program participants have complained that VA has not been providing 
bidding instructions in a timely fashion. Program participants have 
also advised that delays on the part of the agency have resulted in 
delayed or postponed foreclosure sales and ultimately increased costs 
of loan termination to VA, the veteran, and the loan holder.
    Accordingly, VA is proposing to add a new Sec.  36.4319a, entitled 
``Loan Termination.'' This new section will require loan holders to 
calculate the net value of the security property for each loan being 
terminated. Under the proposed rule, at least 30 days prior to the 
scheduled or anticipated date of the liquidation sale, the loan holder 
must request that VA assign an appraiser to conduct a liquidation 
appraisal.
    Under existing regulations, Sec.  36.4301, the term ``liquidation 
sale'' includes voluntary deeds-in-lieu of foreclosure. VA is proposing 
to amend the definition of ``liquidation sale'' to clarify that such 
term includes a ``compromise sale'' (see the discussion under the 
heading, ``Deeds-in-lieu of Foreclosure and Compromise Sales,'' above). 
Following a compromise sale, the holder will submit a claim under the 
guaranty to VA for the unpaid balance on the loan.
    The liquidation appraisal will ordinarily be valid for 6 months. VA 
may, however, specify a shorter validity period on the appraisal if 
rapidly-changing market conditions make such shorter period in the best 
fiscal interests of the United States.
    At this point, one of two scenarios will occur. VA is proposing to 
permit certain loan holders, within guidelines being established by VA, 
to review the appraisal report and determine the fair

[[Page 8476]]

market value of the property (see the discussion under the heading, 
Servicer Appraisal Processing Program, below).
    If the holder is not eligible to participate in the Servicer 
Appraisal Processing Program (SAPP), VA will review the liquidation 
appraisal report and determine the fair market value of the property. 
VA will then inform the holder of such fair market value in writing.
    Once the holder has either been advised of or determined the fair 
market value of the security property, the holder will then calculate 
the net value using the published percentage-factor. The holder will 
then determine what to bid on the property at the liquidation sale, 
taking into account the net value of the property the holder has 
calculated, the obligor's total indebtedness, and the formulae 
contained in 38 U.S.C. 3732(c).
    The loan holder's accounting records will contain sufficient 
information to enable the holder to determine the total indebtedness. 
VA also proposes to insert in Sec.  36.4301 a definition of the term 
``Total Indebtedness.'' For purposes of 38 U.S.C. 3732(c), ``Total 
Indebtedness'' will mean the sum of the unpaid principal on the loan as 
of the date of the liquidation sale, accrued unpaid interest, subject 
to the maximum interest allowable (which is discussed below under the 
heading Time for Loan Termination and Limit on Interest and Charges) 
and fees and charges permitted to be included in the guaranty claim by 
the regulations.
    Because the statute contains clear guidance regarding how the 
guaranty is calculated and when the holder may convey the security to 
VA, there is no need for VA to provide bidding instructions in each 
case where there is an actual foreclosure proceeding or other 
liquidation sale. VA will, however, provide periodic training for all 
loan holders and servicers regarding net value calculation and bidding 
procedures.
    VA is also proposing a clarifying amendment to Sec.  36.4321 
regarding claim payments when the holder accepts a voluntary conveyance 
of the property in lieu of foreclosure. Under the formulae contained in 
38 U.S.C. 3732(c), in order for VA to compute the guaranty claim 
payable to the holder, it is necessary to know the amount for which the 
holder acquired the property at the liquidation sale. Unlike a 
traditional foreclosure sale, when a holder accepts such a voluntary 
conveyance there is no public bid or exchange of funds. Therefore, VA 
is proposing to add language to Sec.  36.4321(c)(2) stating that, in 
the case of a voluntary conveyance in lieu of foreclosure, the holder 
shall be deemed to have acquired the property at the liquidation sale 
for the lesser of the net value of the property or the obligor's total 
indebtedness.
    Editorial changes are also proposed to be made to Sec.  36.4320 to 
reflect that the holder will be computing the net value and to remove 
unnecessary language that merely repeats, without further elaboration, 
the formulae contained in 38 U.S.C. 3732(c). In addition, VA is 
proposing to delete the provision in Sec.  36.4320(c), which requires a 
holder to obtain advance approval from VA before accepting a deed-in-
lieu of foreclosure.

Servicer Appraisal Processing Program

    Under current procedures, prior to the liquidation sale loan 
holders request that VA assign an appraiser from the VA fee panel to 
perform a liquidation appraisal. VA then reviews this appraisal and 
determines the fair market value of the property. As explained above, 
this fair market value is used to calculate the net value of the 
property.
    As discussed above, industry representatives have complained that 
VA does not furnish timely bidding information. VA believes that 
permitting holders to complete the net value computation will help 
alleviate this situation. VA recognizes, however, that delays can still 
occur when VA obtains and reviews the liquidation appraisal. VA has 
received suggestions that VA move to another method of valuing 
properties at liquidation, such as broker price opinions and automated 
valuation models. VA carefully considered such alternatives, and 
concluded not to adopt an alternative valuation method at this time. VA 
believes by randomly assigning the valuation to a member of VA's fee 
panel, the opportunity for fraud and undue influence is greatly 
reduced. Further, VA already has a panel of appraisers in place. VA 
will continue to monitor the work of its fee appraisers, and emphasize 
the necessity of performing liquidation appraisals in a timely manner.
    Public Law 100-198, enacted December 21, 1987, authorized the 
Lender Appraisal Processing Program (LAPP) where VA could permit 
qualified lenders, under guidelines issued by VA, to review loan-
origination appraisals, ensure adherence to VA-published minimum 
property requirements, and set the reasonable value of properties for 
purposes of determining the maximum loan VA could guarantee. VA's 
experience is that the LAPP has worked well and often expedites the 
loan-origination process.
    Accordingly, VA is also proposing to establish a Servicer Appraisal 
Processing Program (SAPP), modeled after the LAPP guidelines, which are 
contained in Sec.  36.4344.
    Under the proposed SAPP, VA is proposing to delegate authority to 
qualified employees of the servicer to review liquidation appraisals 
and issue Notices of Value that establish the fair market value of the 
property for use when determining the net value of the property for 
liquidation purposes. The proposed SAPP will be similar to the current 
LAPP guidelines and will require the same qualifications for Staff 
Appraisal Reviewer approval.

Time for Loan Termination and Limit on Interest and Charges

    In computing the guaranty claim, as explained above under the 
heading ``Calculation of Net Value,'' when VA computes the amount 
payable under the guaranty, one of the statutory factors affecting this 
calculation is the obligor's total indebtedness. Under the legal 
instruments evidencing the loan, an obligor's total debt would 
ordinarily include all accrued but unpaid interest through the date of 
the liquidation sale. In addition, Sec.  36.4313 allows a holder to 
advance and include as part of the total indebtedness certain 
reasonable costs and charges. VA is permitted by 38 U.S.C. 3732(a)(3), 
however, to establish a date not later than the date of judgment or 
decree of foreclosure or sale, upon which the accrual of interest and 
other charges shall cease. Currently, Sec.  36.4319(f) provides that if 
the holder does not bring appropriate action to terminate the loan 
within 30 days after being requested to do so by VA, than VA may fix a 
date after which interest and other charges will no longer accrue.
    As part of the Loan Administration redesign process, VA has 
concluded that holders should be given a reasonably-objective standard 
for determining when the foreclosure of a defaulted loan would be 
expected to have been completed. VA further has concluded that the 
accrual of interest and other charges, for purposes of a guaranty 
claim, should cease after the holder has had such reasonable time to 
complete loan termination.
    VA is therefore proposing to repeal the existing Sec.  36.4319(f) 
which currently provides for an interest cut-off date.
    VA is also proposing to add a new Sec.  36.4319a that would require 
a holder of a loan in serious default to expeditiously and diligently 
pursue foreclosure as permitted under law once the decision to 
foreclose has been made. This section contains a table stating the 
length of time a holder, exercising reasonable diligence, should be 
able to complete the foreclosure in each State.

[[Page 8477]]

In formulating that table, VA will consider the published foreclosure 
timeframes for similar loans used by the U.S. Department of Housing and 
Urban Development (HUD), Fannie Mae, and Freddie Mac. VA will 
periodically review the continued reasonableness of such timeframes, 
and propose adjustments if needed, especially if changes in State law 
have a significant impact on the continued ability of holders to meet 
such timeframes.
    VA is also proposing to require holders to notify VA five business 
days prior to the foreclosure of any loan where the veteran has 
substantial equity in the property securing the loan. Holders will 
determine the equity by subtracting the total indebtedness on the 
guaranteed loan plus the balance owed on other liens of record from the 
fair market value of the property securing the loan. If the equity 
equals at least 25% percent of the fair market value of the security, 
this notice will be required.
    VA expects loan holders to aggressively work with veterans in 
default who have significant equity and attempt to find ways to avoid 
foreclosure. As discussed above, VA is also proposing to provide 
servicers incentives for the successful implementation of loss-
mitigation alternatives to foreclosure options. VA believes these loss-
mitigation servicing efforts are and will be generally successful. 
Nevertheless, VA is proposing to require this notice as a final effort 
to try to prevent a veteran needlessly losing substantial equity 
through foreclosure. This notice will enable VA to review the servicing 
history and ensure that every reasonable effort was made to avoid 
foreclosure.
    Once the holder has given VA this notice, the holder may proceed 
with the foreclosure unless specifically instructed by VA to do 
otherwise. VA does not intend that this requirement will give veterans 
who have substantial equity in the property any special rights or 
treatment, or that the notice will automatically trigger any delay in 
the foreclosure. It merely provides VA the opportunity to take one last 
look and intervene in cases where VA, in its sole judgment, considers 
such action to be appropriate.
    This proposal will also define the term ``business day'' to be 
Monday through Friday, inclusive, excluding Federal holidays.
    In lieu of the current procedure where VA notifies holders on a 
case-by-case basis of a cut-off date after which interest and fees will 
no longer be paid, VA is proposing to amend Sec.  36.4321 to provide 
that the maximum unpaid interest which will be allowed under a guaranty 
claim will be the lesser of total unpaid interest as of the liquidation 
sale or interest for the timeframe VA specified under the proposed 
Sec.  36.4319a(a) plus 180 days. VA is also proposing to amend Sec.  
36.4313 to state that advances and property expenses accruing more than 
the number of months VA specifies for liquidation to be completed plus 
180 days from the date of the first uncured default may not be included 
in the claim.
    VA may, however, permit additional interest, fees, and charges if 
the holder was unable to complete the foreclosure due to bankruptcy of 
the debtor, appeals of the foreclosure judgments, forbearance in excess 
of 30 days granted at the request of VA, or other factors beyond the 
control of the holder. The determination of whether to permit 
additional interest and charges to be included in the claim will be 
made by those officials specified in Sec.  36.4342(b). This rule will 
further provide that the Loan Guaranty Officer is authorized to 
redelegate the authority to make determinations to allow additional 
interest and other costs.
    VA wishes to note that establishing a maximum amount of interest 
allowable in a claim is not intended to be a deadline for initiating 
foreclosure. VA will include sufficient time in the foreclosure 
completion timeframes to allow a holder exercising reasonable diligence 
to complete the foreclosure without losing the right to include in the 
guaranty claim all unpaid interest and otherwise-allowable fees and 
charges.
    The proposed rule would also make editorial changes to paragraphs 
(b) and (c) of Sec.  36.4321 consistent with this proposed rule.

Attorneys Fees

    Currently, Sec.  36.4313(b)(5) permits a holder that has foreclosed 
a VA-guaranteed loan to include as part of their guaranty claim a 
reasonable amount for legal services necessary to terminate the loan. 
The amount of attorney fees which may be included in the claim may not 
exceed the lesser of 10 percent of the outstanding indebtedness or 
$850. The current regulation also permits additional fees approved in 
advance by VA. By administrative circular, VA has given blanket consent 
to field offices permitting some additional fees for bankruptcy. In 
addition, the current rule restricts the combined total of attorney 
fees and trustee fees allowed by Sec.  36.4313(b)(4) to $850.
    It has been the position of VA that the allowance of legal fees was 
never intended to limit the amount the loan holder may pay for legal 
services. It merely limited the amount that VA would reimburse the 
holder. As a practical matter, however, VA has been advised, on 
numerous occasions, that many loan holders effectively limit what they 
will pay counsel for legal services in connection with the termination 
of VA guaranteed loans to what VA will reimburse the holder. The legal 
fees VA permits are often significantly less than fees for similar 
services permitted under other Federal housing programs or by 
federally-chartered market investors. VA believes that, in some 
instances, attorneys give less priority to work related to the 
termination of VA guaranteed loans than to loans where attorney fees 
are greater. That can lead to costly delays.
    Under the proposed rule, Sec.  36.4313 will be amended to permit 
holders to include in their claim legal fees not to exceed the 
reasonable and customary charge for such services in the State where 
the property is located. VA will publish at least annually following 
publication of the final rule in the Federal Register a schedule 
listing the reasonable and customary fees for various services such as 
foreclosure actions, deeds-in-lieu of foreclosure, and bankruptcies for 
each State. In formulating this schedule, VA will consider the 
published allowance for attorney fees permitted for single-family loan 
terminations by HUD, Fannie Mae, and Freddie Mac.
    Upon publication of the final rule, the following schedule of 
allowable fees for services will be effective and will remain unless 
changed by publication in the Federal Register as stated in the above 
paragraph:
BILLING CODE 4191-02-P

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[[Page 8479]]


[GRAPHIC] [TIFF OMITTED] TP18FE05.007

BILLING CODE 4191-02-C

[[Page 8480]]

    The rule will retain the limit that the combined total of attorney 
fees and trustee fees may not exceed the maximum allowance for attorney 
fees.

Submitting Claims Under the Guaranty

    Under current regulations, the holder does not have any deadline 
for filing a claim with respect to a terminated guaranteed housing 
loan.
    The Federal Credit Reform Act of 1990, 2 U.S.C. 661, requires all 
Federal agencies to determine the actual cost of making and 
guaranteeing loans. For budgetary purposes, the cost is attributed to 
the ``cohort year'' in which the loan is guaranteed or made. For 
example, all costs related to a loan guaranteed by VA in Fiscal Year 
2002 are attributed to the funds appropriated for that year, regardless 
of when a particular loan is terminated or when a specific cost is 
actually paid. Agencies are required to re-estimate the costs annually 
of all loans guaranteed or made for each cohort year. The fact that a 
certain number of loans for a particular cohort year were terminated 
and the Government was required to pay a claim or acquire a property is 
important information needed to make the annual re-estimate.
    To ensure accuracy in the Federal budget process, VA needs to know 
within a reasonable time that specific loans for particular cohort 
years have been terminated and that costs will be incurred.
    VA recognizes that holders cannot file a claim immediately upon 
termination because the holders need time to receive all bills and 
reconcile their accounts. VA believes, however, that holders should be 
able to ascertain all necessary information and submit a claim within 1 
year of the completion of the loan termination process.
    Accordingly, VA is proposing to amend Sec.  36.4321 to require a 
holder to submit a guaranty claim electronically within 1 year of the 
completion of the liquidation sale. For purposes of this requirement, 
the liquidation sale will be considered completed when the last act 
required under state law is taken to either make the liquidation sale 
final, or obtain a judgment, a confirmation, or an approval of the 
sale, excluding any redemption period.
    When the holder accepts a voluntary conveyance in lieu of 
foreclosure, the liquidation sale will be deemed completed when the 
owner executes a deed to the holder or the holder's designee. In the 
case of a compromise sale, the liquidation sale will be deemed 
completed on the date of settlement.
    With respect to any loan where the liquidation sale was completed 
prior to the effective date of the final rule, the guaranty claim must 
be submitted within 1 year after the effective date of the final rule.
    If a holder files a claim within this one-year period and new 
information subsequently comes to light, this proposal would also 
permit supplemental claims based on this new information, provided that 
the supplemental claims are filed within this one-year window. No 
claims will be considered if they are filed after this one-year period 
has elapsed.
    This section will also permit a holder to request that the Loan 
Guaranty Officer reconsider any item in the claim that was denied, 
provided that such a request for reconsideration is made electronically 
within 30 days after the holder is advised that one or more items in 
their claim have been denied. This rule will further provide that the 
Loan Guaranty Officer is authorized to redelegate the authority to make 
a determination on a reconsideration.

Records Retention and Post-Audit

    In order to expedite claim payment, VA will not ordinarily require 
the routine submission and review of supporting documentation, such as 
copies of bills and receipts, prior to payment of guaranty claims. In 
order to ensure the fiscal integrity of the program, VA will, however, 
perform a full review, on a post-audit basis, of a random sample of 
claims filed by each servicer to ensure that amounts claimed are proper 
and fully supported. The size of the sample audited and the frequency 
of audits may be increased if VA finds a greater frequency of errors in 
claim submissions by a particular holder. VA anticipates that the size 
of the sample and the frequency of audit would be reduced for servicers 
in tier one, and increased for servicers in tiers three and four. In 
all cases, however, the size and frequency of audit will be based on a 
statistically valid sampling methodology, and the size of the sample 
and the frequency of audit would be immediately adjusted if significant 
errors or irregularities were discovered.
    Likewise, VA will not require holders to submit back-up 
documentation regarding their credit underwriting when holders modify 
existing loans under the proposed revision to Sec.  36.4314. However, 
VA will review the back-up documentation for a sample of modified loans 
as part of the routine post-audit process.
    Accordingly, in order to ensure VA is able to perform such audits 
and ensure the fiscal integrity of the loan guaranty program, VA is 
proposing to amend Sec.  36.4330, which pertains to maintenance of 
records. Currently, this section requires holders to maintain records 
of payments received on a loan and disbursements chargeable to such 
loan until the Secretary is no longer liable as guarantor of such loan. 
It also requires the lender to retain copies of all loan origination 
records for at least two years after loan closing. This section also 
grants VA the right to inspect, examine, or audit these records at a 
reasonable time and place.
    VA is proposing to modify that section to require that, if the 
Secretary pays a claim on a guaranty, the records currently required to 
be maintained by Sec.  36.4330(a) relating to payments received and 
disbursements chargeable to the loan be maintained electronically until 
3 years after the Secretary made such claim payment.
    Pursuant to the proposed amendments to Sec.  36.4314, VA is also 
proposing to require holders who modify loans to maintain the records 
supporting their decision to modify the loan for 3 years after the 
modification agreement is executed. Such records would include credit 
reports, verifications of income, employment, assets, liabilities, and 
other factors affecting the obligor's credit worthiness, work sheets, 
and any other documents supporting the holder's decision to modify the 
loan.

Title Evidence

    VA is proposing to standardize the documentation required as 
evidence of acceptable title to the Secretary. Currently, the 
documentation required may vary significantly depending on the property 
jurisdiction. In many cases, VA is requiring servicers to obtain title 
policies insuring the Secretary following the foreclosure. VA's 
experience has not demonstrated that obtaining title insurance is cost 
effective and this requirement is therefore being eliminated. VA is 
proposing that title evidence presented for conveyance of a property be 
standardized across all jurisdictions and reducing the amount of 
documentation required. VA will accept as evidence of title conveyance: 
a copy of the original mortgage, deed of trust, or other security 
instrument used for the terminated guaranteed loan, a copy of the deed 
or document evidencing transfer of interest and title at the 
foreclosure sale, and a Special Warranty Deed conveying title to the 
Secretary. The holder will be deemed to warrant marketability of the 
title to the property for 3 years after transfer to VA.
    VA is proposing to add a provision that, when property is conveyed 
to VA, title should be conveyed to the ``Secretary of Veterans Affairs, 
an

[[Page 8481]]

Officer of the United States.'' The name of the current incumbent 
Secretary should not be included unless State law requires naming a 
real person. This complies with internal guidance currently contained 
in VA operating manuals.
    VA is also proposing to delete, as obsolete, the language in Sec.  
36.4320(h)(5) (redesignated as paragraph (c)(5) in this proposed rule) 
stating that a violation of a restriction based on race, color, creed, 
or national origin will not cause the conveyance of the property to be 
unacceptable to VA. Court decisions and fair housing laws enacted since 
the current rule was originally issued shortly after World War II have 
made clear that any deed restrictions or recorded covenants purporting 
to restrict the ownership or occupancy of housing based upon race, 
color, religion, national origin, or any other prohibited 
classification are absolutely void and unenforceable, and any attempt 
to enforce such a restriction or otherwise discriminate in the sale, 
rental, financing, or providing of brokerage services with regard to 
residential real property is unlawful. Therefore, VA sees no need to 
continue to refer to such unfortunate historical relics in the title 
regulations.

Miscellaneous Servicing Procedures

    VA is also proposing to amend Sec.  36.4346 which pertains to 
servicing procedures for holders.
    VA proposes to amend paragraph (c) of that section to require the 
holder to provide an annual statement of interest paid, and taxes 
disbursed within 30 days following the end of the calendar year. This 
rule currently requires such statement within 60 days of the end of the 
calendar year. This amendment will conform Sec.  36.4346 to the 
requirements of 12 U.S.C. 2601, et. seq., the Real Estate Settlement 
Procedures Act (RESPA). Because VA assumes holders are now complying 
with RESPA requirements, VA does not believe this proposed change will 
have any impact on holders.
    VA is also proposing to amend paragraph (g)(1) of that section. 
That paragraph sets forth minimum collection actions holders must 
undertake when a guaranteed loan is in default. VA is proposing to 
delete the current requirement that the holder send a written notice to 
any borrower if a loan installment payment is not received within 17 
days after the due date. The current rule requires that this notice be 
mailed no later than the 20th day of the delinquency.
    VA is also proposing to require holders to send a new letter to 
certain delinquent borrowers. This new letter would be required to be 
sent if, within the first 6 months following the loan closing or the 
execution of a modification agreement under the proposed revision to 
Sec.  36.4314, the borrower is 45 days delinquent on a loan payment, 
or, in the case of any other default, a payment is 75 days delinquent. 
This letter must be mailed within 5 business days after the payment is 
delinquent for the time period stated in the preceding sentence. The 
letter shall contain at least the following information:
    (1) A toll-free telephone number and, if available, an e-mail 
address for contacting the servicer;
    (2) Explain the loss mitigation options that may be available to 
the borrower; and
    (3) Emphasize that the intent of loan servicing is to retain home 
ownership whenever possible.
    In addition, this letter must contain the following language:

    The delinquency of your mortgage loan is a serious matter that 
could result in the loss of your home. If you are the veteran whose 
entitlement was used to obtain this loan, you can also lose your 
entitlement to a future VA home loan guaranty. If you are not 
already working with us to resolve the delinquency, please call us 
to discuss your workout options. You may be able to make special 
payment arrangements that will reinstate your loan. You may also 
qualify for a repayment plan or loan modification.
    VA has guaranteed a portion of your loan and wants to ensure 
that you receive every reasonable opportunity to bring your loan 
current and retain your home. VA can also answer any questions you 
have regarding your entitlement. If you have access to the Internet 
and would like to obtain more information, you may access the VA Web 
site at http://www.va.gov. You may also learn where to speak to a VA 
Loan Administration representative by calling 1-800-827-1000.

    In addition, VA is proposing to amend the last sentence of 
paragraph (i)(2) of Sec.  36.4346, which concerns procedures for when a 
holder learns that the property securing a guaranteed loan may have 
been abandoned. Currently, this provision requires that, with respect 
to a loan more than 30 days delinquent, if the holder confirms that the 
property is abandoned, the holder must so notify VA within 15 days. VA 
is proposing to revise this provision to require the holder to report 
to VA within 5 business days of confirming that the property has been 
abandoned or subjected to extraordinary waste or hazard, and to 
immediately initiate action to protect the property and terminate the 
loan.
    Minor editorial and conforming amendments are also being made to 
this section.

Processing Release of Liability

    VA is also proposing to authorize all holders or their servicing 
agent who are authorized to process loans under the automatic 
processing authority to process releases of liability for loans 
originated prior to March 1, 1988. Authority has already been given to 
those certain holders or their servicing agents to process releases of 
liability for loans originating after March 1, 1988.

Paperwork Reduction Act of 1995

    Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521), a 
collection of information is set forth in the provisions of Sec. Sec.  
36.4314, 36.4315a, 36.4317, 36.4318, 36.4319, 36.4320, 36.4321, 
36.4323, 36.4324, and 36.4344a.
    OMB assigns control numbers 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, Regulations 
Management (00REG1)), Department of Veterans Affairs, 810 Vermont 
Avenue, NW., Washington, DC 20420. Comments should indicate that they 
are submitted in response to ``RIN 2900-AL65.''
    Title: Loan Guaranty--Loan Servicing and Claims Procedures 
Modifications.
    Summary of Collection of Information: Under these proposed 
regulatory amendments, parties servicing VA guaranteed loans must 
comply with the following program changes (broken down by regulation):
     Section 36.4314 `` Under this section, VA proposes 
requirements that loan servicers must apply to process loan 
modifications. Current provisions are ambiguous as to when servicers 
are required to process documentation of loan modifications.
     Section 36.4315a `` Proposed changes to this section would 
increase the reporting burden for (a) current loans, (b) loss 
mitigation actions, and (c) foreclosure alternatives considered for 
delinquent loans and certain specific loan events (e.g., servicing 
transfer) as they may occur. While these proposed changes would most 
likely result in an increase in the number of defaults being reported, 
due to changes in reporting processes attributable to technological 
advances, the current reporting burden

[[Page 8482]]

for Sec.  36.4315a(d) with regard to default reporting would be reduced 
from 10 minutes per loan to about 1 second per loan. As a result, the 
overall burden imposed by this section would be significantly reduced.
     Section 36.4317--This section proposes to establish an 
incentive system to encourage servicers to perform certain loss 
mitigation and foreclosure avoidance actions instead of VA performing 
these actions. Elimination of the currently-required Notice of 
Intention to Foreclose would eliminate an annual reporting burden of 
15,075 hours.
     Section 36.4318--This proposed change provides for the 
possible temporary suspension of property acquisition and claim 
payments, at the discretion of the Secretary, for certain servicers who 
continually fail to provide the loan transfer legal documents to VA in 
a timely manner. VA expects to exercise its authority to refund a loan 
only infrequently because of proposed changes discussed elsewhere in 
this publication. Therefore, we estimate that there will be a 95% 
reduction in the number of refunding cases completed annually. Since 
the refunding request carries certain paperwork burdens, estimated at 5 
minutes per case, we estimate that there will be a net decrease in this 
burden by 197 hours.
     Section 36.4319--Proposed changes to this section would 
result in a significant reduction in the reporting and recordkeeping 
burden to the public. First, under existing requirements, loan 
servicers are required to provide a copy of all legal notices or 
filings to the Secretary in all legal proceedings, including bankruptcy 
and foreclosure. VA proposes to eliminate this requirement. In 
addition, this proposal would also eliminate the requirement that a 
servicer send VA a completed VA FL 26-567 in every potential loan 
termination. The net decrease in the public's reporting and 
recordkeeping burden is estimated at just over 26,000 hours.
     Section 36.4320--This section proposes a modification in 
the way in which servicers may file an election to convey a property to 
VA and reduces the amount of information VA currently obtains from a 
servicer when properties are conveyed to VA. As a result of this 
proposed change, the net reporting burden would be decreased by 2,500 
hours annually.
     Section 36.4321--This proposal would change the manner in 
which claims are filed from paper submission to electronic data 
transfer, would reduce the amount of data and documentation required 
for servicers to file claims, and would limit the amount of time a 
servicer has to file a claim under guaranty. This proposal would not 
require any additional data collection beyond what is currently being 
collected, but would change the transfer media from paper to 
electronic. VA estimates that this change would reduce the annual net 
reporting burden by 22,297 hours.
     Section 36.4323--The proposed amendment to this section 
would extend authority to servicers who are authorized to process loans 
under the automatic processing authority to process releases of 
liability for loans originated prior to March 1, 1988. The change also 
allows servicers to collect processing fees at the same rate as 
authorized for processing releases of liability for loans originating 
after March 1, 1988. Current processes require servicers to complete 
and submit a statement of account to VA on each case (VA FL 26-559). 
This OMB-approved form letter carries a respondent burden of 10 
minutes. Since this form letter will no longer be required, the 
existing respondent burden would be reduced. However, since servicers 
would have to process releases of liabilities under this proposal, 
there will be an increased number of occurrences. We estimate an annual 
increased respondent burden of 2,067 hours.
     Section 36.4324--Pursuant to the proposed change to this 
section, VA would delegate authority to servicers to process partial 
releases without prior VA approval if specific conditions are met. 
Currently, servicers must provide VA with paper copies of all documents 
required for VA to make the decision. Under the proposed process, the 
servicer will not be obtaining and forwarding those documents to VA 
since the servicer will be making the decision. In those cases in which 
the servicer would have to obtain an appraisal and review and make a 
decision, there will be a new respondent burden. We anticipate an 
increased annual burden of 160 hours.
     Section 36.4344a--Proposed changes to this section would 
extend authority to those servicers currently authorized to process 
origination appraisals under the Lender Appraisal Processing Program 
(LAPP) to process liquidation appraisals under the new Servicer 
Appraisal Processing Program (SAPP). All requirements currently in 
place for LAPP will also be in place for SAPP. During Fiscal Year 2003 
VA processed a total of 43,504 liquidation appraisals. We estimate that 
75% of those appraisals (32,628) would be able to be processed by 
servicers meeting the eligibility criteria and estimate the processing 
and reporting time at one hour per case. This would result in an 
estimated annual burden of 32,628 hours.
    Description of Need for Information and Proposed Use of 
Information: The collections of information are necessary to meet the 
program requirements for servicing VA guaranteed home loans.
    Description of Likely Respondents: Companies who service housing 
loans guaranteed or insured by VA.
    Estimated Number of Respondents: 150.
    Estimated Frequency of Responses: 2,539,200.
    Estimated Average Burden Per Collection: 1 minute.
    Estimated Total Annual Reporting and Record Keeping Burden: 42,320.
    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 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.

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 governments, in the aggregate, or by the private sector, of 
$100 million or more in any given year. This final rule would have no 
such effect on State, local, or tribal governments, or the private 
sector.

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 would not 
have a

[[Page 8483]]

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 vast majority of VA loans are serviced by very large financial 
companies. Only a handful of small entities service VA loans and they 
service only a very small number of loans. This proposal, which only 
impacts veterans, other individuals obligors with guaranteed loans, and 
companies that service VA loans, will have very minor impact on a very 
small number of small entities servicing such loans. Therefore, 
pursuant to 5 U.S.C. 605(b), the 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 record keeping requirements, Veterans.

    Approved: March 1, 2004.
Anthony J. Principi,
Secretary of Veterans Affairs.

    Editorial Note: This document was received at the Office of the 
Federal Register February 14, 2005.

    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 36.4301 is amended by:
    A. Adding the term ``Compromise sale''.
    B. Revising the term ``Holder'' (the authority citation remains 
unchanged).
    C. Adding a sentence at the end of the term ``Liquidation Sale''.
    D. Removing the term ``Specified amount''.
    E. Adding the term ``Total Indebtedness''.
    The revisions and additions read as follows:


Sec.  36.4301  Definitions.

* * * * *
    Compromise sale. A sale to a third party for an amount less than is 
sufficient to repay the unpaid balance on the loan where the holder has 
agreed in advance to release the lien in exchange for the proceeds of 
such sale.
* * * * *
    Holder. The lender or any subsequent assignee or transferee of the 
guaranteed obligation or the authorized servicing agent (also referred 
to as ``the servicer'') of the lender or of the assignee or transferee.
* * * * *
    Liquidation sale. * * * This term also includes a compromise sale.
* * * * *
    Total indebtedness: For purposes of 38 U.S.C. 3732(c), the 
veteran's ``total indebtedness'' shall be the sum of: the unpaid 
principal on the loan as of the date of the liquidation sale, accrued 
unpaid interest permitted by Sec.  36.4321(a), and fees and charges 
permitted to be included in the guaranty claim by Sec.  36.4313.
* * * * *
    3. Section 36.4311 is amended by revising paragraph (c) to read as 
follows. The authority citation following paragraph (c) remains 
unchanged.


Sec.  36.4311  Interest rates.

* * * * *
    (c) Except as provided in Sec.  36.4314, interest in excess of the 
rate reported by the lender when requesting evidence of guaranty or 
insurance shall not be payable on any advance, or in the event of any 
delinquency or default: Provided, that a late charge not in excess of 
an amount equal to 4 percent on any installment paid more than 15 days 
after due date shall not be considered a violation of this limitation.
* * * * *
    4. Section 36.4313 is amended by:
    A. Revising paragraph (b)(5).
    B. Adding paragraph (f).
    The revision and addition read as follows:


Sec.  36.4313  Advances and other charges.

* * * * *
    (b) * * *
    (5)(i) Fees for legal services actually performed, not to exceed 
the reasonable and customary fees for such services in the State where 
the property is located, as determined by the Secretary.
    (ii) In determining what constitutes the reasonable and customary 
fees for legal services, the Secretary shall review allowances for 
legal fees in connection with the foreclosure of single-family housing 
loans, including bankruptcy-related services, issued by HUD, Fannie 
Mae, and Freddie Mac. The Secretary shall publish annually in the 
Federal Register a table setting forth the amounts determined to be 
reasonable and customary for such fees.
    (iii) In no event may the combined total paid for legal fees under 
paragraph (b)(5)(i) of this section and trustee's fees pursuant to 
paragraph (b)(4) of this section exceed the applicable maximum 
allowance for legal fees established under paragraph (b)(5)(ii) of this 
section.
* * * * *
    (f)(1) Fees and charges otherwise allowable by this section that 
accrue after the date specified in paragraph (f)(2) of this section may 
not be included in a claim under the guaranty.
    (2) The date referenced in paragraph (f)(1) of this section will be 
computed by adding to the date of the first uncured default the 
reasonable period that the Secretary has determined, pursuant to Sec.  
36.4319a(a) of this part, it should have taken to complete the 
foreclosure, plus 180 days. There will also be added to the time period 
specified in the previous sentence such additional time as the 
Secretary determines was reasonably necessary to complete the 
foreclosure if the Secretary determines the holder was unable to 
complete the foreclosure within the time specified in that section due 
to Bankruptcy proceedings, appeal of the foreclosure by the debtor, the 
holder granting forbearance in excess of 30 days at the request of the 
Secretary, or other factors beyond the control of the holder.

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

    5. Section 36.4314 is revised to read as follows:


Sec.  36.4314  Loan modifications.

    (a) Subject to the provisions of this section, the terms of any 
guaranteed loan may be modified by written agreement between the holder 
and the borrower, without prior approval of the Secretary, if all of 
the following conditions are met:
    (1) The loan is in default or default is imminent.
    (2) The event or circumstances that caused the default has been or 
will be resolved and it is not expected to re-occur.
    (3) The obligor is considered to be a reasonable credit risk, based 
on a review by the holder of the obligor's creditworthiness under the 
criteria specified in Sec.  36.4337, including a current credit report. 
The fact of the recent default will not preclude the holder from 
determining the obligor is now a satisfactory credit risk provided the 
holder determines that the obligor is able to resume regular mortgage 
installments when the modification becomes effective based upon a 
review of the obligor's current and anticipated income, expenses, and 
other obligations as provided in Sec.  36.4337.

[[Page 8484]]

    (4) At least 12 months must have elapsed since the closing date of 
the loan.
    (5) The current owner occupies the property securing the loan and 
is obligated to repay the loan.
    (6) All current owners of the property are parties to, and have 
agreed to the terms of, the loan modification.
    (7) The loan will be reinstated to performing status by virtue of 
the loan modification.
    (b) A loan can be modified no more than once in a 3-year period and 
no more than three times during the life of the loan.
    (c) All modified loans must bear a fixed-rate of interest, which 
may not exceed the lesser of--
    (1) A rate which is 100 basis points above the interest rate in 
effect on this loan just prior to the execution of the modification 
agreement, or
    (2) The Government National Mortgage Association (GNMA) current 
month coupon rate that is closest to par (100) in effect at the close 
of business on the business day immediately preceding the date the 
modification agreement is executed by the obligor plus 50 basis points.
    (d) The unpaid balance of the modified loan may be re-amortized 
over the remaining life of the loan. The loan term may extend the 
maturity date to the shorter of--
    (1) 360 months from the due date of the first installment required 
under the modification, or
    (2) 120 months after the original maturity date of the loan.
    (e) Only unpaid principal, accrued interest, and deficits in the 
taxes and insurance impound accounts may be included in the modified 
indebtedness. Late fees and other charges may not be capitalized.
    (f) Holders will ensure the first lien status of the modified loan. 
No current owner of the property will be released from liability as a 
result of executing the modification agreement without prior approval 
from VA. Releasing a current owner obligor from liability without prior 
approval will release the Secretary from liability under the guaranty.
    (g) The dollar amount of the guaranty may not exceed the greater of 
the original guaranty amount of the loan being modified or 25 percent 
of the loan being modified subject to the statutory maximum specified 
at 38 U.S.C. 3703(a)(1)(B).
    (h) The obligor may not receive any cash back from the 
modification.

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

    6. Section 36.4315 is revised to read as follows:


Sec.  36.4315  Acceptability of partial payments.

    A partial payment is a remittance on a loan in default (as defined 
in Sec.  36.4301) of any amount less than the full amount due under the 
terms of the loan and security instruments at the time the remittance 
is tendered.
    (a) Except as provided in paragraph (b) of this section, or upon 
the express waiver of the Secretary, the mortgage holder shall accept 
any partial payment and either apply it to the mortgagor's account or 
identify it with the mortgagor's account and hold it in a special 
account pending disposition. When partial payments held for disposition 
aggregate a full monthly installment, including escrow, they shall be 
applied to the mortgagor's account.
    (b) A partial payment may be returned to the mortgagor, within 10 
calendar days from date of receipt of such payment, with a letter of 
explanation only if one or more of the following conditions exist:
    (1) The property is wholly or partially tenant-occupied and rental 
payments are not being remitted to the holder for application to the 
loan account;
    (2) The payment is less than one full monthly installment, 
including escrows and late charge, if applicable, unless the lesser 
payment amount has been agreed to under a documented repayment plan;
    (3) The payment is less than 50 percent of the total amount then 
due, unless the lesser payment amount has been agreed to under a 
documented repayment plan;
    (4) The payment is less than the amount agreed to in a documented 
repayment plan;
    (5) The amount tendered is in the form of a personal check and the 
holder has previously notified the mortgagor in writing that only cash 
or certified remittances are acceptable;
    (6) A delinquency of any amount has continued for at least 6 months 
since the account first became delinquent and no written repayment plan 
has been arranged;
    (7) Foreclosure has been commenced by the taking of the first 
action required for foreclosure under local law; or
    (8) The holder's lien position would be jeopardized by acceptance 
of the partial payment.
    (c) A failure by the holder to comply with the provisions of this 
paragraph may result in a partial or total loss of guaranty or 
insurance pursuant to Sec.  36.4325(b), but such failure shall not 
constitute a defense to any legal action to terminate the loan.

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

    7. Section 36.4315a is added to read as follows:


Sec.  36.4315a  Servicer reporting requirements.

    (a)(1) Servicers of loans guaranteed by the Secretary shall report 
the information required by this section to the Secretary 
electronically. The Secretary shall assign a user identification and 
password for access to each entity currently servicing loans guaranteed 
under 38 U.S.C., chapter 37 on [effective date of final rule to be 
inserted]. Each report to the Secretary required by this section shall 
include the VA-assigned Servicer Identification Number.
    (2) Any other servicer may apply for a Servicer Identification 
Number and password by following the procedures at http://www.homeloans.va.gov.
    (b) Not later than the fifth business day of each month each 
servicer shall report to the Secretary the following information for 
each loan guaranteed by the Secretary currently being serviced by that 
entity:
    (1) The VA loan number;
    (2) The servicer's loan number;
    (3) The original veteran's name and social security number;
    (4) The unpaid principal balance; and
    (5) The next payment due date.
    (c) Servicers shall report to the Secretary within five business 
days after any of the following events occur:
    (1) Transfer of servicing;
    (2) Loan is assumed by another party;
    (3) An obligor has been released from liability;
    (4) Property taxes and hazard insurance has been paid;
    (5) Loans have been modified pursuant to Sec.  36.4314;
    (6) Any obligor on the loan requests or is deemed to be entitled to 
relief with regard to the loan under the Servicemembers Civil Relief 
Act;
    (7) Any obligor files a petition under the Bankruptcy Code, and 
when any significant events impacting the guaranteed loan or the 
security therefore occurs in a pending bankruptcy, including but not 
limited to a contested action, the approval of a plan, any hearing on 
relief from the automatic stay, the granting of a discharge to the 
debtor, dismissal of the bankruptcy case, and other orders of the 
court;
    (8) The holder receives notice of any legal, equitable, or 
administrative proceeding that might materially affect the termination 
of the loan, the lien, or the security for the loan;
    (9) The holder has released the lien on a part of the security for 
the loan pursuant to Sec.  36.4324; or
    (10) The loan has been paid in full.

[[Page 8485]]

    (d) The holder shall report to the Secretary within 5 business days 
after any loan has been delinquent for 61 days. This report will 
include the:
    (1) Information specified in paragraphs (b)(1) through (b)(3) of 
this section;
    (2) Date of first payment on the loan;
    (3) Date of last unpaid installment;
    (4) Names and social security numbers of present owners of the 
property;
    (5) Mailing address of present owners if different from the 
property;
    (6) Current or last known address of the original veteran;
    (7) Interest rate on the loan;
    (8) Amount and details of the current required installment; i.e., 
how much is allocated for principal and interest, how much for taxes, 
how much for insurance, and how much for any other purpose;
    (9) Late charges due;
    (10) Total delinquency amount, and how much is allocated for each 
item specified in paragraph (d)(8) of this section;
    (11) Summary of servicing actions taken since the loan went into 
default, including dates of actions, actions taken, and description of 
results or responses by obligors;
    (12) Property occupancy status;
    (13) Dates of property inspections and the results and findings of 
such inspections;
    (14) Income and credit information for all current obligors;
    (15) Obligor's contact information, including home and work phone 
numbers and e-mail addresses, if known; and
    (16) Reason(s) the obligor(s) defaulted.
    (e)(1) With respect to any default reported pursuant to paragraph 
(d) of this section, the servicer shall provide updates to the 
Secretary within five business days after any of the following events 
occur:
    (i) Contact with the borrower;
    (ii) Default cured;
    (iii) A repayment plan is under consideration by the servicer;
    (iv) A repayment plan has been denied by the servicer;
    (v) A repayment plan has been approved by the servicer;
    (vi) A partial payment has been returned to the borrower;
    (vii) A loan modification is under consideration by the servicer;
    (viii) A loan modification has been denied by the servicer;
    (ix) A loan modification has been approved by the servicer;
    (x) The servicer determines the loan default is insoluble;
    (xi) The servicer considers, denies, or approves any other loss 
mitigation options defined in Sec.  36.4317 of this part;
    (xii) The servicer referred the loan to legal counsel for 
foreclosure;
    (xiii) The date of a judicial foreclosure proceeding or a 
liquidation sale has been set;
    (xiv) The liquidation sale was held; and
    (xv) Any other event or occurrence that materially affects the loan 
or the security property over the course of servicing the default.
    (2) Such report shall include the information specified in 
paragraphs (b)(1) through (b)(3) of this section, plus a brief 
description of the event or action taken, the date such action was 
taken or event occurred, a statement of the reasons why the holder 
approved or rejected a particular course of action, the results of any 
contact with the obligor, judicial proceeding, the terms of any 
repayment plan or loan modification, and any other material fact 
concerning such event or occurrence.
    (f) When the holder determines that equity of at least 25% exists 
(see Sec.  36.4319a(e)), the holder shall report its equity 
calculations to the Secretary at least 5 business days prior to the 
foreclosure date. The equity calculations will include the fair market 
value of the property, the total indebtedness on the loan guaranteed by 
the Secretary, and the unpaid balance of all other liens of record on 
the property.
    (g) The servicer shall report to the Secretary not later than 15 
calendar days after the liquidation sale was held. Such report shall 
include the information specified in paragraphs (b)(1) through (b)(3) 
of this section, plus a brief description of the results of the sale, 
including the amount of sale proceeds, whether the holder acquired the 
property, and, if the holder acquired the property, whether the holder 
elects to convey the property to the Secretary pursuant to Sec.  
36.4320.

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

    8. Section 36.4316 is revised to read as follows:


Sec.  36.4316  Servicer Tier Ranking--Temporary Procedures.

    (a) The Secretary shall assign each servicer to a ``Tier Ranking'' 
based upon the servicer's performance in servicing guaranteed loans. 
There shall be four tiers, known as tier one, tier two, tier three, and 
tier four, with tier one being the highest rated and tier four the 
lowest. Effective July 1, 2005, every servicer of loans guaranteed by 
the Secretary shall be presumed to be in servicer tier two, and shall 
remain in tier two until the date specified in paragraph (c)(2) of this 
section.
    (b) For purposes of this section, the term ``calendar quarter'' 
shall mean the 3-month periods ending on March 31, June 30, September 
30, and December 31.
    (c)(1) No later than 30 days after the last business day of the 
first calendar quarter occurring after the rules for determining tier 
rankings take effect, and then not later than 30 days after the last 
business day of each subsequent calendar quarter, the Secretary shall 
provide each servicer with an evaluation of their performance under 
such criteria.
    (2) No later than 45 days after the last business day of the fourth 
calendar quarter during which the Secretary evaluates the performance 
of servicers, and then annually thereafter, VA shall advise each 
servicer of its tier ranking.
    (3) Any entity which begins servicing guaranteed loans after the 
first calendar quarter occurring after rules for determining tier 
rankings take effect shall be presumed to be in tier two. The Secretary 
will evaluate the performance of such servicer as provided in paragraph 
(c)(1) of this section. The Secretary will advise such servicer of its 
tier ranking at the time other servicers are advised of their tier 
rankings pursuant to paragraph (c)(2) of this section, provided the 
servicer has received evaluations for at least four calendar quarters.
    (d) The quarterly evaluation and tier ranking of a servicer shall 
be deemed to be confidential and privileged and shall not be disclosed 
by the Secretary to any other party.

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

    9. Section 36.4317 is revised to read as follows:


Sec.  36.4317  Servicer Loss-Mitigation Options and Incentives.

    (a) The Secretary will pay a servicer in tiers one, two, or three 
an incentive payment for each of the following successful loss-
mitigation options completed: repayment plans, special forbearance, 
loan modification, compromise sale, and deed-in-lieu of foreclosure. 
Only one incentive payment will be made with respect to any default 
required to be reported to the Secretary pursuant to Sec.  36.4315a(d). 
No incentive payment will be made to a servicer in tier four.
    (b) The amount of the incentive payment is as follows:

[[Page 8486]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Special            Loan                         Deed-in-lieu of
                           Tier ranking                             Repayment plan    forbearance      modification   Compromise sale     foreclosure
--------------------------------------------------------------------------------------------------------------------------------------------------------
One..............................................................             $200             $200             $500           $1,000               $250
Two..............................................................              160              160              400              800                200
Three............................................................              120              120              300              600                150
Four.............................................................                0                0                0                0                  0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (c) For purposes of this section, a loss-mitigation option will be 
deemed successfully completed as follows:
    (1) With respect to a repayment plan, when four consecutive 
payments under such plan have been made or the total amount of the 
delinquency has been paid, whichever is earlier;
    (2) With respect to special forbearance, when the loan reinstates;
    (3) With respect to a loan modification, when the modification is 
executed and the loan reinstates;
    (4) With respect to a compromise sale, when the claim under 
guaranty is filed; or
    (5) With respect to a deed-in-lieu of foreclosure, when the claim 
under guaranty is filed.
    (d) Incentive payments with respect to repayment plans, special 
forbearances and loan modifications shall be made monthly. For all 
other successful loss-mitigation options, incentives shall be paid in 
the final claim payment.

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

    10. Section 36.4318 is amended by:
    A. In paragraph (a), removing ``Sec.  36.4317'' and adding, in it 
place, ``Sec.  36.4315a(d)''; and removing ``within 30 days 
thereafter''.
    B. Adding paragraph (c).
    The addition reads as follow:


Sec.  36.4318  Refunding of loans in default.

* * * * *
    (c) Servicers must deliver to the Secretary all legal documents, 
including but not limited to proper loan assignments, required to 
evidence proper loan transfer within 60 days from receipt of notice 
that VA has decided to refund a loan under this section. Servicers 
exhibiting a continued failure to provide timely loan transfer 
documentation may, at the discretion of the Secretary and upon delivery 
of notice to the servicer, be subject to temporary suspension of all 
property acquisition and claim payments until all deficiencies 
identified in the notice provided to the servicer have been corrected.

(Authority: 38 U.S.C. 3703(c) and 3732(a))

    11. Section 36.4319 is amended by:
    A. Revising paragraph (a) and adding an authority citation.
    B. Removing paragraphs (b), (c), (d), and (f).
    C. Redesignating paragraph (e) as paragraph (b).
    The revision reads as follows:


Sec.  36.4319  Service of process.

    (a) In any legal or equitable proceeding (including probate and 
bankruptcy proceedings) arising from a loan guaranteed, insured, or 
made, or a property acquired by the Secretary pursuant to title 38, 
U.S.C., chapter 37, to which the Secretary is a party, original process 
and any other process prior to appearance, proper to be served on the 
Secretary, shall be delivered to the VA Regional Counsel having 
jurisdiction over the area in which the court is situated. Copies of 
such process will also be served on the Attorney General of the United 
States and the United States Attorney having jurisdiction over that 
area. Within the time required by applicable law, or rule of court, the 
Secretary will cause appropriate special or general appearance to be 
entered in the case by an authorized attorney.

(Authority: 38 U.S.C. 3703(c) and 3720(a))

* * * * *
    12. Section 36.4319a is added to read as follows:


Sec.  36.4319a  Loan Termination.

    (a) For purposes of this part, the Secretary has determined that a 
holder, using reasonable diligence, will need the time set forth in the 
following table to complete a foreclosure:
BILLING CODE 4191-02-P

[[Page 8487]]

[GRAPHIC] [TIFF OMITTED] TP18FE05.008

BILLING CODE 4191-02-C

[[Page 8488]]

    (b)(1) At least 30 days prior to the scheduled or anticipated date 
of the liquidation sale, the holder must request that VA assign an 
appraiser to conduct a liquidation appraisal. This appraisal will be 
requested by means of the Department of Veterans Affairs Internet-based 
Appraisal System (``TAS''). The Internet address (URL) for TAS is: 
http://tas.vba.va.gov.
    (2) If the holder (or its authorized servicing agent) has been 
approved by the Secretary to process liquidation appraisals under Sec.  
36.4344a, the appraiser shall forward the liquidation appraisal report 
directly to the holder for a determination of the fair market value of 
the property pursuant to Sec.  36.4344a of this part.
    (3) If the holder (or its authorized servicing agent) has not been 
approved by the Secretary to process liquidations appraisals under 
Sec.  36.4344a, the Secretary shall review the appraisal and determine 
the fair market value of the property. The Secretary will provide the 
holder with a statement of the fair market value.
    (4)(i) Except as provided in paragraph (b)(4)(ii) of this 
paragraph, a liquidation appraisal or statement of fair market value 
issued pursuant to paragraph (b)(3) of this section will be valid for 6 
months.
    (ii) The Secretary may specify in writing a shorter validity 
period, not less than 90 days, for a liquidation appraisal or statement 
of fair market value if rapidly-changing market conditions in the area 
where the property is located make such shorter validity period in the 
best fiscal interests of the United States.
    (c) Prior to the liquidation sale, the holder shall compute the net 
value of the property securing the guaranteed loan by subtracting the 
estimated costs to the Secretary for the acquisition and disposition of 
the property from the fair market value, as determined under paragraph 
(b) of this section. Those costs will be calculated using the 
percentage derived by the Secretary and published in the Federal 
Register pursuant to Sec.  36.4301.
    (d) If the holder learns of any material damage to the property 
occurring after the appraisal and prior to the liquidation sale, the 
impact of such damage on the fair market value must be determined in 
consultation with the fee appraiser, and the net value adjusted 
accordingly.
    (e)(1) In any case where the veteran's or other obligor's equity in 
the property securing the loan is equal to at least 25 percent of the 
fair market value of the property, the holder shall notify the 
Secretary of the equity calculations at least 5 business days prior to 
the foreclosure date. Such notice will be given as an electronic event 
update or by e-mail if the event update will not occur in time to meet 
the 5 business day requirement.
    (2) For purposes of this paragraph:
    (i) ``Business day'' means Monday through Friday, inclusive, 
excluding the legal public holidays specified in 5 U.S.C. 6103(a).
    (ii) ``Equity'' means the fair market value of a property, as 
determined pursuant to paragraph (b)(2) or (b)(3) of this section, 
minus the sum of:
    (A) The total indebtedness on the loan guaranteed by the Secretary; 
and
    (B) The unpaid balance of all other liens of record on the 
property.
    (iii) ``Foreclosure date'' means the date of the scheduled judicial 
or nonjudicial foreclosure sale (e.g., sheriff's or trustee's sale).
    (f)(1) A holder may approve a compromise sale of the property 
securing the loan without the prior approval of the Secretary provided 
that:
    (i) The holder has determined the loan is insoluble;
    (ii) The net proceeds from the compromise sale must equal or exceed 
the net value of the property securing the loan as computed by the 
holder pursuant to paragraph (c) of this section;
    (iii) The holder has determined that the estimated guaranty payment 
it would receive following the compromise sale would not exceed the 
estimated guaranty payment it would receive following foreclosure;
    (iv) The current owner of the property securing the loan will not 
receive any proceeds from the sale of the property; and
    (v) If the current owner is a liable obligor, the owner executes 
the repayment agreement required by paragraph (h) of this section.
    (2) A holder may request advance approval from the Secretary for a 
compromise sale notwithstanding that all of the conditions specified in 
paragraph (f)(1) of this section cannot be met if the holder believes 
such compromise sale would be in the best interests of the veteran and 
the Secretary.
    (g)(1) A holder may accept a deed voluntarily tendered by the 
current owner of the property securing the loan in lieu of conducting a 
foreclosure without the prior approval of the Secretary provided that:
    (i) The holder has determined the loan is insoluble;
    (ii) The holder has computed the net value of the property securing 
the loan pursuant to paragraph (c) of this section;
    (iii) The holder has considered a compromise sale pursuant to 
paragraph (f) of this section and determined such compromise sale is 
not practical;
    (iv) The holder has determined that the estimated guaranty payment 
it would receive following the deed-in-lieu of foreclosure would not 
exceed the estimated guaranty payment it would receive following 
foreclosure;
    (v) The holder has determined the current owner of the property can 
convey clear and marketable title to the property that would meet the 
standard stated in paragraph (c)(5) of Sec.  36.4320; and
    (vi) If the current owner is a liable obligor, the owner executes 
the repayment agreement required by paragraph (h) of this section.
    (2) A holder may request advance approval from the Secretary for a 
deed-in-lieu of foreclosure notwithstanding that all of the conditions 
specified in paragraph (g)(1) of this section cannot be met if the 
holder believes such deed-in-lieu would be in the best interests of the 
veteran and the Secretary.
    (h)(1) For purposes of this paragraph and paragraphs (f)(1)(v) and 
(g)(1)(vi) of this section, the term ``liable obligor'' means:
    (i) A veteran whose entitlement was used to obtain or assume the 
loan, if the loan was closed or assumed on or before December 31, 1989;
    (ii) An individual who is obligated by contract to assume all of 
the obligations of a veteran who was released from liability on the 
loan pursuant to 38 U.S.C. 3713; or
    (iii) An individual who the Secretary approved to assume the loan 
pursuant to 38 U.S.C. 3714.
    (2)(i) Each liable obligor who disposes of the property by a 
compromise sale or deed-in-lieu of foreclosure must execute an 
agreement to repay to the Secretary 50 percent of the amount that would 
otherwise be due to the Secretary pursuant to Sec.  36.4323.
    (ii) The repayment agreement shall require the first payment to be 
made on the first day of the first month which is more than one year 
from the date of the deed-in-lieu or the closing of the compromise 
sale. The agreement shall require equal monthly payments sufficient to 
repay the entire balance due within 5 years after the first payment is 
due.
    (iii) The obligation shall bear interest at the rate determined by 
the Secretary pursuant to 38 U.S.C. 5315(b)(2) in effect on the date of 
the notice described in paragraph (h)(2)(iv) of this section. Interest 
shall accrue from the date the first payment is due.
    (iv) Upon payment of the guaranty claim to the holder, the 
Secretary shall send by certified mail, return receipt

[[Page 8489]]

requested, a notice to the liable obligor of the amount of the debt due 
under this paragraph, the date the first payment will be due, the 
amount of the required monthly payments, and the applicable interest 
rate.
    (v) The execution of the repayment agreement will not preclude a 
veteran from seeking waiver of the debt pursuant to 38 U.S.C. 5302. The 
notice required by paragraph (h)(2)(iv) of this section shall include a 
statement of the right of the veteran to seek waiver and a description 
of the procedures for submitting an application for waiver.

(Authority: 38 U.S.C. 3703(c), 5302, 5315)

    13. Section 36.4320 is revised to read as follows:


Sec.  36.4320  Election to convey security.

    (a) If the holder acquires the property that secured the guaranteed 
loan at the liquidation sale or through acceptance of a deed-in-lieu of 
foreclosure and if, under 38 U.S.C. 3732(c), the Secretary may accept 
conveyance of the property, the holder must notify the Secretary by 
electronic means no later than 15 days after the date of liquidation 
sale or execution of the deed to the holder by the homeowners that the 
holder elects to convey the property to the Secretary. The Secretary 
will not accept conveyance of the property if the holder fails to 
notify the Secretary of its election within such 15 days.
    (b) The holder, in accounting to the Secretary in connection with 
the conveyance of any property pursuant to this section, may include as 
a part of the indebtedness all actual expenses or costs of the 
proceedings, paid by the holder, within the limits defined in Sec.  
36.4313. In connection with the conveyance or transfer of property to 
the Secretary the holder may include in accounting to the Secretary the 
following expense items if actually paid by the holder, in addition to 
the consideration payable for the property under 38 U.S.C. 3732(c):
    (1) State and documentary stamp taxes as may be required.
    (2) Amount expended for taxes, special assessments, including such 
payments which are specified in paragraph (d)(4) of this section.
    (3) Recording fees.
    (4) Any other expenditure in connection with the property which are 
approved by the Secretary.
    (c) The conveyance or transfer of any property to the Secretary 
pursuant to this section shall be subject to the following provisions:
    (1) The notice of the holder's election to convey the property to 
the Secretary shall state the amount of the holder's successful bid and 
shall state the insurance coverage then in force, specifying for each 
policy, the name of the insurance company, the hazard covered, the 
amount, and the expiration date. With respect to a voluntary conveyance 
to the holder in lieu of foreclosure, the amount of the holder's 
successful bid shall be deemed to be the lesser of the net value of the 
property or the total indebtedness.
    (2) Coincident with the notice of election to convey or transfer 
the property to the Secretary or with the acquisition of the property 
by the holder, following such notice, whichever is later, the holder 
shall request endorsements on all insurance policies naming the 
Secretary as an assured, as his/her interest may appear. Such insurance 
policies shall be forwarded to the Secretary at the time of the 
conveyance or transfer of the property to the Secretary or as soon 
after that time as feasible. If insurers cancel policies, holders must 
properly account for any unearned premiums refunded by the insurer.
    (3) Occupancy of the property by anyone properly in possession by 
virtue of and during a period of redemption, or by anyone else unless 
under a claim of title which makes the title sought to be conveyed by 
the holder of less dignity or quality than that required by this 
section, shall not preclude the holder from conveying or transferring 
the property to the Secretary. Except with the prior approval of the 
Secretary, the holder shall not rent the property to a new tenant, nor 
extend the term of an existing tenancy on other than a month-to-month 
basis.
    (4) The notice shall provide property tax information to include 
all taxing authority property identification numbers. Any taxes, 
special assessments or ground rents due and payable within 30 days 
after date of conveyance or transfer to the Secretary must be paid by 
the holder.
    (5)(i) Each conveyance or transfer of real property to the 
Secretary pursuant to this section shall be acceptable if:
    (A) The holder thereby covenants or warrants against the acts of 
the holder and those claiming under the holder (e.g., by special 
warranty deed); and
    (B) It vests in the Secretary or will entitle the Secretary to such 
title as is or would be acceptable to prudent lending institutions, 
informed buyers, title companies, and attorneys, generally, in the 
community in which the property is situated.
    (ii) Any title will not be unacceptable to the Secretary by reason 
of any of the limitations on the quantum or quality of the property or 
title stated in Sec.  36.4350(b) of this part: Provided, That
    (A) At the time of conveyance or transfer to the Secretary there 
has been no breach of any conditions affording a right to the exercise 
of any reverter.
    (B) With respect to any such limitations which came into existence 
subsequent to the making of the loan, full compliance was had with the 
requirements of Sec.  36.4324. The acceptability of a conveyance or 
transfer pursuant to the requirements of this paragraph will be 
established by delivery to the Secretary of the following evidence of 
title showing that title to the property of the quality specified in 
this paragraph is or will be vested in the Secretary:
    (1) A copy of the deed or document evidencing transfer of interest 
and title at the liquidation sale;
    (2) A copy of the deed conveying the property to the Secretary; and
    (3) A copy of the mortgage, deed of trust, or other security 
instrument for the guaranteed loan which was terminated.
    (6)(i) The holder will be deemed to warrant to the Secretary that 
the Secretary has received the quality of title specified in paragraph 
(c)(5)(i)(B) of this section. Such warranty shall be limited to any 
defect identified by the Secretary to the holder within 36 months after 
the acceptance by the Secretary of a conveyance or transfer by the 
holder.
    (ii) The Secretary may make a claim against a holder with regard to 
the warranty specified in paragraph (c)(5)(i)(A) of this section or any 
other express warranty provided by the holder without any time limit.
    (7) As between the holder and the Secretary, the responsibility for 
any loss due to damage to or destruction of the property or due to 
personal injury sustained in respect to such property shall be governed 
by the provisions of this paragraph and paragraph (c)(11) of this 
section. Ordinary wear and tear excepted, the holder shall bear such 
risk of loss from the date of acquisition by the holder to the date 
such risk of loss is assumed by the Secretary. Such risk of loss is 
assumed by the Secretary from the date of receipt of the holder's 
election to convey or transfer the property to the Secretary. The 
amount of any loss chargeable to the holder may be deducted from the 
amount payable by the Secretary at the time the property is 
transferred. In any case where pursuant to the VA regulations rejection 
of the title is legally proper, the Secretary may surrender custody of 
the property as of the date specified in the Secretary's notice to the 
holder. The Secretary's

[[Page 8490]]

assumption of such risk shall terminate upon such surrender.
    (8) The conveyance should be made to ``Secretary of Veterans 
Affairs, an Officer of the United States.'' The name of the incumbent 
Secretary should not be included unless State law requires naming a 
real person.
    (9) The holder shall not be liable to the Secretary for any portion 
of the paid or unpaid taxes, special assessments, ground rents, 
insurance premiums, or other similar items. The holder shall be liable 
to the Secretary for all penalties and interest associated with taxes 
not timely paid by the holder prior to conveyance.
    (10) The Secretary shall be entitled to all rentals and other 
income collected from the property and to any insurance proceeds or 
refunds subsequent to the date of acquisition by the holder.
    (11) In respect to a property which was the security for a 
condominium loan guaranteed or insured under 38 U.S.C. 3710(a)(6) the 
responsibility for any loss due to damage to or destruction of the 
property or due to personal injury sustained in respect to such 
property shall in no event pass to the Secretary until the Secretary 
expressly assumes such responsibility or until conveyance of the 
property to the Secretary, whichever first occurs. The holder shall 
have the right to convey such property to the Secretary only if the 
property (including elements of the development or project owned in 
common with other unit owners) is undamaged by fire, earthquake, 
windstorm, flooding or boiler explosion. The absence of a right in the 
holder to convey such property which is so damaged shall not preclude a 
conveyance, if the Secretary agrees in a given case to such a 
conveyance upon completion of repairs within a specified period of time 
and such repairs are so completed and the conveyance is otherwise in 
order.
    (d) Except as provided in paragraph (c)(6) of this section, the 
provisions of this section shall not be in derogation of any rights 
which the Secretary may have under Sec.  36.4325. The Under Secretary 
for Benefits, or the Director, Loan Guaranty Service, may authorize any 
deviation from the provisions of this section, within the limitations 
prescribed in 38 U.S.C. Chapter 37, which may be necessary or desirable 
to accomplish the objectives of this section if such deviation is made 
necessary by reason of any laws or practice in any State or Territory 
or the District of Columbia:
    Provided, That no such deviation shall impair the rights of any 
holder not consenting to the deviation with respect to loans made or 
approved prior to the date the holder is notified of such action.

(Authority: 38 U.S.C. 3732, Pub. L. 100-527)

    14. Section 36.4321 is revised to read as follows:


Sec.  36.4321  Guaranty claims; subsequent accounting.

    (a) Subject to the limitation that the total amounts payable shall 
in no event exceed the amount originally guaranteed, the amount payable 
on a claim for the guaranty shall be the percentage of the loan 
originally guaranteed applied to the sum of:
    (1) The unpaid principal as of the date of the liquidation sale;
    (2) Allowable expenses/advances; and
    (3) The lesser of:
    (i) The unpaid interest as of the date of the liquidation sale; or,
    (ii) The unpaid interest for the reasonable period that the 
Secretary has determined, pursuant to Sec.  36.4319a(a), it should have 
taken to complete the foreclosure, plus 180 days.
    (iii) The unpaid interest allowed pursuant to paragraph (a)(2)(ii) 
of this section shall be increased if the Secretary determines the 
holder was unable to complete the foreclosure within the time specified 
in such paragraph due to Bankruptcy proceedings, appeal of the 
foreclosure by the debtor, the holder granting forbearance in excess of 
30 days at the request of the Secretary, or other factors beyond the 
control of the holder.
    (b) Deposits or other credits or setoffs legally applicable to the 
indebtedness shall be applied in reduction of the indebtedness on which 
the claim is based. Any escrowed or earmarked funds not subject to 
superior claims of third persons must likewise be so applied.
    (c)(1) Credits accruing from the proceeds of a liquidation sale 
shall be reported to the Secretary incident to claim submission, and 
the amount payable on the claim shall in no event exceed the remaining 
balance of the indebtedness.
    (2) The amount payable under the guaranty shall be computed 
applying the formulae in 38 U.S.C. 3732(c). With respect to a voluntary 
conveyance to the holder in lieu of foreclosure, the holder shall be 
deemed to have acquired the property at the liquidation sale for the 
lesser of the net value of the property or the total indebtedness.
    (d)(1)(i) Except as provided in paragraph (d)(1)(ii) of this 
section, holders shall file a claim for payment under the guaranty 
electronically no later than 1 year after the completion of the 
liquidation sale. For purposes of this section, the liquidation sale 
will be considered completed when:
    (A) The last act required under State law is taken to either make 
the liquidation sale final, or obtain a judgment, a confirmation, or an 
approval of the sale, but excluding any redemption period permitted 
under State law;
    (B) If a holder accepts a voluntary conveyance of the property in 
lieu of foreclosure, the date of execution of the deed to the holder or 
the holder's designee; or
    (C) In the case of a sale of the property to a third party for an 
amount less than is sufficient to repay the unpaid balance on the loan 
where the holder has agreed in advance to release the lien in exchange 
for the proceeds of such sale, the date of settlement of such sale.
    (ii) With respect to any liquidation sale completed prior to 
[effective date of final rule to be inserted], all claims must be 
submitted no later than 1 year following [effective date of final rule 
to be inserted].
    (2) If additional information becomes known to a holder after the 
filing of a guaranty claim, the holder may file a supplemental claim 
provided that such supplemental claim is filed within the time period 
specified in paragraph (d)(1) of this section.
    (3) No claim under a guaranty shall be payable unless it is 
submitted within the time period specified in paragraph (d)(1) of this 
section.
    (4) A claim shall be submitted to VA electronically on the VA Loan 
Electronic Reporting Interface system. The following information must 
be included in the claim:
    (i) Total payments received on the loan;
    (ii) Amount applied to interest;
    (iii) Prepayments and other amounts applied to principal,
    (iv) Itemized liquidation expenses;
    (v) Itemized advances;
    (vi) Remaining balance in the tax and insurance escrow account; and
    (vii) Any additional unapplied credits.
    (5) Supporting documents will not be submitted with the claim, but 
must be retained by the servicer and are subject to inspection as 
provided in Sec.  36.4330 of this title.
    (e) In the event that VA does not approve payment of any item 
submitted under a guaranty claim, VA shall notify the holder 
electronically what items are being denied and the reasons for such 
denial. The holder may, within 30 days after the date of such denial 
notification, submit an electronic request to VA that one or more items 
that were denied be reconsidered. The holder must present

[[Page 8491]]

any additional information justifying payment of items denied.
    (f) Determinations under paragraphs (a)(3) and (e) of this section 
and paragraph (f)(2) of Sec.  36.4313 may be made by any employee 
designated by Sec.  36.4342(b). Authority is hereby granted to the Loan 
Guaranty Officer to redelegate authority to make such determinations.

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

    15. Section 36.4323 is amended by adding paragraph (i) immediately 
after the authority citation at the end of paragraph (h) to read as 
follows:


Sec.  36.4323  Subrogation and indemnity.

* * * * *
    (i) If a veteran requests a release of liability under paragraph 
(f) of this section, or if a borrower requests a release of liability 
pursuant to Sec.  36.4308(c)(1)(vii), a holder or its authorized 
servicing agent described in the first sentence of Sec.  
36.4303(l)(1)(i) of this part is authorized to and must make all 
decisions regarding the credit-worthiness of the transferee, subject to 
the right of a transferee to appeal any denial to the Secretary within 
30 days of being notified in writing of the denial by the holder or 
servicer. The procedures and fees specified in Sec. Sec.  
36.4303(l)(1)(i) and 36.4312(d)(8) applicable to decisions under 38 
U.S.C. 3714 shall also apply to decisions specified in this paragraph.

(Authority: 38 U.S.C. 3703(c) and 3713)

    16. Section 36.4324 is amended by:
    A. Revising paragraph (a).
    B. Removing paragraphs (c) and (e).
    C. Redesignating paragraphs (d) and (f) as paragraphs (c) and (d), 
respectively.
    D. In newly redesignated paragraph (d), removing ``Sec.  36.4317'' 
and adding, in its place, ``Sec.  36.4315a''.
    The revision reads as follows:


Sec.  36.4324  Release of security.

    (a)(1) Except upon full payment of the indebtedness, or except as 
provided in paragraph (a)(2) of this section or in paragraphs (f) and 
(g) of Sec.  36.4319a, the holder shall not release a lien or other 
right in or to real property held as security for a guaranteed or 
insured loan, or grant a fee or other interest in such property, 
without prior approval of the Secretary.
    (2) The holder may, without the prior approval of the Secretary, 
release the lien on a portion of the property securing the loan 
provided:
    (i) The holder has obtained an appraisal from the Secretary showing 
the value of the security prior to the partial release of the lien and 
the value of the security on which the lien will remain;
    (ii) The portion of the property still subject to the lien is fit 
for dwelling purposes; and
    (iii) The loan-to-value ratio after the partial release of the 
lien:
    (A) Will be not more than 80 percent; or
    (B) If the loan-to-value ratio after the partial release of the 
lien is 80 percent or higher, any proceeds received as consideration 
from the partial release of the lien shall be applied to the unpaid 
loan balance.
* * * * *
    17. Section 36.4325 is amended by:
    A. Revising paragraph (b)(5).
    B. Removing paragraph (b)(6).
    C. Redesignating paragraphs (b)(7) through (b)(11) as paragraphs 
(b)(6) through (b)(10), respectively.
    The revision reads as follows:


Sec.  36.4325  Partial or total loss of guaranty or insurance.

* * * * *
    (b) * * *
    (5) Any notice required by Sec.  36.4315a,
* * * * *
    18. In Sec.  36.4330, paragraph (a) is revised to read as follows:


Sec.  36.4330  Maintenance of records.

    (a)(1) The holder shall maintain a record of the amounts of 
payments received on the obligation and disbursements chargeable 
thereto and the dates thereof, including copies of bills and receipts 
for such disbursements. These records shall be maintained until the 
Secretary ceases to be liable as guarantor or insurer of the loan, or, 
if the Secretary has paid a claim on the guaranty, until 3 years after 
such claim was paid. For the purpose of any accounting with the 
Secretary or computation of a claim, any holder who fails to maintain 
such record and, upon request, make it available to the Secretary for 
review 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, or to have not made the disbursement for which 
reimbursement is claimed, and the burden of going forward with evidence 
and of ultimate proof of the contrary shall be on such holder.
    (2) The holder shall maintain records supporting their decision to 
approve any loss mitigation option specified in Sec.  36.4317(a). Such 
records shall be retained a minimum of 3 years from the date of such 
decision and shall include, but not be limited to, credit reports, 
verifications of income, employment, assets, liabilities, and other 
factors affecting the obligor's credit worthiness, work sheets, and 
other documents supporting the holder's decision.
    (3) For any loan where the claim on the guaranty was paid on or 
after October 1, 2005, or action described in paragraph (a)(2) of this 
section taken after October 1, 2004, holders shall submit any documents 
described in paragraph (a)(1) or (a)(2) of this section to the 
Secretary in electronic form. For purposes of this paragraph, 
electronic form shall mean an image of the original document in .jpg, 
.gif, or .pdf format. Notwithstanding the foregoing, any holder whose 
total loan portfolio has an average outstanding principal balance of 
less than $10,000,000 per year may submit copies of documents in paper 
form.
* * * * *
    19. Section 36.4344a is added to read as follows:


Sec.  36.4344a  Servicer appraisal processing program.

    (a) Delegation of authority to servicers to review liquidation 
appraisals and determine net value. (1) To be eligible for delegation 
of authority to review VA liquidation appraisals and determine the 
reasonable value for liquidation purposes on properties secured by VA 
guaranteed or insured loans, a lender must--
    (i) Have automatic processing authority under 38 U.S.C. 3702(d), 
and
    (ii) Employ one or more Staff Appraisal Reviewers (SAR) acceptable 
to the Secretary.
    (2) To qualify as a servicer's staff appraisal reviewer an 
applicant must be a full-time member of the servicer's permanent staff 
and may not be employed by, or perform services for, any other 
mortgagee. The individual must not engage in any private pursuits in 
which there will be, or appear to be, any conflict of interest between 
those pursuits and his/her duties, responsibilities, and performance as 
a Servicer Appraisal Processing Program (SAPP) staff appraisal 
reviewer. Three years of appraisal related experience is necessary to 
qualify as a servicer's staff appraisal reviewer. That experience must 
demonstrate knowledge of, and the ability to apply industry-accepted 
principles, methods, practices and techniques of appraising, and the 
ability to competently determine the value of property. The individual 
must demonstrate the ability to review the work of others and to 
recognize deviations from accepted appraisal principle, practices, and 
techniques, error in computations, and unjustifiable and unsupportable 
conclusions.

[[Page 8492]]

    (3) Servicers that have a staff appraisal reviewer determined 
acceptable to VA, will be authorized to review liquidation appraisals 
and make reasonable value determinations for liquidation purposes on 
properties that are the security for VA guaranteed or insured loans. 
Additionally, servicers must satisfy initial VA office case review 
requirements prior to being allowed to determine reasonable value 
without VA involvement. The initial office case review requirement must 
be satisfied in the VA regional loan center in whose jurisdiction the 
servicer's staff appraisal reviewer is located before the SAPP 
authority may be utilized by that servicer in any other VA office's 
jurisdiction. To satisfy the initial office case review requirement, 
the first five cases of each servicer staff appraisal reviewer 
involving properties in the regional office location where the staff 
appraisal reviewer is located will be processed by him or her up to the 
point where he or she has made a reasonable value determination and 
fully drafted, but not issued, the servicer's notice of value. At that 
point, and prior to loan termination, each of the five cases will be 
submitted to the VA regional loan center having jurisdiction over the 
property. After a staff review of each case, VA will issue a notice of 
value which the servicer may use to compute the net value of the 
property for liquidation purposes. If these five cases are found to be 
acceptable by VA, the servicer's staff appraisal reviewer will be 
allowed to fully process subsequent appraisals for properties 
regardless of jurisdictional location without prior submission to VA 
and issuance by VA of a notice of value. Where the servicer's reviewer 
cannot readily meet the jurisdictional review requirement, the SAR 
applicant may request that VA expand the geographic area of 
consideration. VA will accommodate such requests if practicable. The 
initial office case review requirement may be expanded by VA if 
acceptable performance has not been demonstrated. After satisfaction of 
the initial office case review requirement, routine reviews of SAPP 
cases will be made by VA staff based upon quality control procedures 
established by the Undersecretary for Benefits. Such review will be 
made on a random sampling or performance related basis.
    (4) Certifications required from the servicer will be specified 
with particularity in the separate instructions issued by the 
Secretary, as noted in Sec.  36.4344a(b).
    (b) Instructions for SAPP Procedures. The Secretary will publish 
separate instructions for processing appraisals under the Servicer 
Appraisal Processing Program. Compliance with these regulations and the 
separate instructions issued by the Secretary is deemed by VA to be the 
minimum exercise of due diligence in processing SAPP cases. Due 
diligence is considered by VA to represent that care, as is to be 
properly expected from, and ordinarily exercised by, a reasonable and 
prudent servicer who would be dependent on the property as security to 
protect its investment.
    (c) Adjustment of value recommendations. The amount of authority to 
upwardly adjust the fee appraiser's estimated market value during the 
servicer staff appraisal reviewer's initial review of the appraisal 
report or to subsequently process an appeal of the servicer's 
established reasonable value will be specified in the separate 
instructions issued by VA as noted in Sec.  36.4344a(b). The amount 
specified must not in any way be considered an administrative 
adjustment figure which may be applied indiscriminately and without 
valid basis or justification.
    (1) Adjustment during initial review. Any adjustment during the 
staff appraisal reviewer's initial review of the appraisal report must 
be fully and clearly justified in writing on the appraisal report form 
or, if necessary, on an addendum. The basis for the adjustment must be 
adequate and reasonable by professional appraisal standards. If real 
estate market or other valid data was utilized in arriving at the 
decision to make the adjustment, such data must be attached to the 
appraisal report. All adjustments, comments, corrections, 
justifications, etc., to the appraisal report must be made in a 
contrasting color, be clearly legible, and signed and dated by the 
staff appraisal reviewer.
    (2) Processing appeals. The authority provided under 38 U.S.C. 
3731(d) which permits a lender to obtain a VA fee panel appraiser's 
report which VA is obligated to consider in an appeal of the 
established reasonable value shall not apply to cases processed under 
the authority provided by this section. All appeals of VA fee 
appraiser's estimated market values or servicer's reasonable value 
determinations above the amount specified in the separate instructions 
issued by VA must be submitted, along with the servicer's 
recommendations, if any, to VA for processing and final determination. 
Unless otherwise authorized in the separate instructions servicers must 
also submit appeals, regardless of the amount, to VA in all cases where 
the staff appraisal reviewer has made an adjustment during their 
initial review of the appraisal report to the fee appraiser's market 
value estimate. The fee appraiser's estimated market value or 
servicer's reasonable value determination may be increased only when 
such increase is clearly warranted and fully supported by real estate 
market or other valid data considered adequate and reasonable by 
professional appraisal standards and the servicer's staff appraisal 
reviewer clearly and fully justifies the reasoning and basis for the 
increase in writing on the appraisal report form or an addendum. The 
staff appraisal reviewer must date and sign the written justification 
and must cite within it the data used in arriving at the decision to 
make the increase. All such data shall be attached to the appraisal 
report form and any addendum.
    (d) Indemnification. When the Secretary has incurred a loss as a 
result of a payment of claim under guaranty and in which the Secretary 
determines an increase made by the servicer under Sec.  36.4344a(c) was 
unwarranted, or arbitrary and capricious, the lender shall indemnify 
the Secretary to the extent the Secretary determines such loss was 
caused or increased, by the increase in value.
    (e) Affiliations. A servicer affiliated with a real estate firm, 
builder, land developer or escrow agent as a subsidiary division, or in 
any other entity in which it has a financial interest or which it owns 
may not use the authority for any cases involving the affiliate unless 
the servicer demonstrates to the Secretary's satisfaction that the 
servicer and its affiliate(s) are essentially separate entities that 
operate independently of each other, free of all cross-influences 
(e.g., a formal corporate agreement exists which specifically sets 
forth this fact).
    (f) Quality control plans. The servicer must have an effective 
self-policing or quality control system to ensure the adequacy and 
quality of their SAPP staff appraisal reviewer's processing and, that 
its activities do not deviate from high standards of integrity. The 
quality control system must include frequent, periodic audits that 
specifically address the appraisal review activity. These audits may be 
performed by an independent party, or by the servicer's independent 
internal audit division which reports directly to the firm's chief 
executive officer. The servicer must agree to furnish findings and 
information under this system to VA on demand. While the quality 
control personnel need not be appraisers, they should have basic 
familiarity with appraisal theory and techniques and the

[[Page 8493]]

ability to prescribe appropriate corrective action(s) in the appraisal 
review process when discrepancies or problems are identified. The basic 
elements of the system will be described in separate instructions 
issued by the Secretary. 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 with the servicer's 
application of SAPP authority.
    (g) Fees. The Secretary will require servicers to pay a $100.00 
application fee for each SAR the servicer nominates for approval. The 
application fee will also apply if the SAR begins work for another 
servicer.
    (h) Withdrawal of servicer authority. The authority for a servicer 
to determine reasonable value may be withdrawn by the Loan Guaranty 
Officer when proper cause exists. A servicer's authority to make 
reasonable value determinations shall be withdrawn when the servicer no 
longer meets the basic requirements for delegating the authority, or 
when it can be shown that the servicer's reasonable value 
determinations have not been made in accordance with VA regulations, 
requirements, guidelines, instructions or applicable laws, or when 
there is adequate evidence to support reasonable belief by VA that a 
particular unacceptable act, practice, or performance by the servicer 
or the servicer's staff has occurred. Such acts, practices, or 
performance include, but are not limited to: Demonstrated technical 
incompetence (i.e., conduct which demonstrates an insufficient 
knowledge of industry accepted appraisal principles, techniques and 
practices; or the lack of technical competence to review appraisal 
reports and make value determinations in accordance with those 
requirements); substantive or repetitive errors (i.e., any error(s) of 
a nature that would materially or significantly affect the 
determination of reasonable value or condition of the property; or a 
number or series of errors that, considered individually, may not 
significantly impact the determination of reasonable value or property 
condition, but which when considered in the aggregate would establish 
that appraisal reviews or SAPP case processing are being performed in a 
careless or negligent manner), or continued instances of disregard for 
VA requirements after they have been called to the servicer's 
attention.
    (1) Withdrawal of authority by the Loan Guaranty Officer may be 
either for an indefinite or a specified period of time. For any 
withdrawal longer than 90 days a reapplication for servicer authority 
to process appraisals under these regulations will be required. Written 
notice will be provided at least 30 days in advance of withdrawal 
unless the Government's interests are exposed to immediate risk from 
the servicer's activities in which case the withdrawal will be effected 
immediately. The notice will clearly and specifically set forth the 
basis and grounds for the action. There is no right to a formal hearing 
to contest the withdrawal of SAPP processing privileges. However, if 
within 15 days after receiving notice the servicer requests an 
opportunity to contest the withdrawal, the servicer may submit, in 
person, in writing, or through a representative, information and 
argument to the Loan Guaranty Officer in opposition to the withdrawal. 
The Loan Guaranty Officer will make a recommendation to the Regional 
Loan Center Director who shall make the determination as to whether the 
action should be sustained, modified or rescinded. The servicer will be 
informed in writing of the decision.
    (2) The servicer has the right to appeal the Regional Loan Center 
Director's decision to the Undersecretary for Benefits. In the event of 
such an appeal, the Undersecretary for Benefits will review all 
relevant material concerning the matter and make a determination that 
shall constitute final agency action. If the servicer's submission of 
opposition raises a genuine dispute over facts material to the 
withdrawal of SAPP authority, the servicer will be afforded an 
opportunity to appear with a representative, submit documentary 
evidence, present witnesses and confront any witness the Veterans 
Benefits Administration presents. The Undersecretary for Benefits will 
appoint a hearing officer or panel to conduct the hearing. When such 
additional proceedings are necessary, the Undersecretary for Benefits 
shall base the determination on the facts as found, together with any 
information and argument submitted by the servicer.
    (3) In actions based upon a conviction or civil judgment, or in 
which there is no genuine dispute over material facts, the 
Undersecretary for Benefits shall make a decision on the basis of all 
the information in the administrative record, including any submission 
made by the servicer.
    (4) Withdrawal of the SAPP authority will require that VA make 
subsequent determinations of reasonable value for the servicer. 
Consequently, VA staff will review each appraisal report and issue a 
Notice of Value which can then be used by the servicer to compute the 
net value of properties for liquidation purposes.
    (5) Withdrawal by VA of the servicer's SAPP authority does not 
prevent VA from also withdrawing automatic processing authority or 
taking debarment or suspension action based upon the same conduct of 
the servicer.

(Authority: 38 U.S.C. 3732)

    20. Section 36.4346 is amended by:
    A. In paragraph (c), removing ``60 days'' and adding, in its place, 
``30 days'.
    B. Removing paragraph (g)(1)(i).
    C. Redesignating paragraphs (g)(1) (ii) through (iv) as paragraphs 
(g)(1) (i) through (iii), respectively.
    D. In newly redesignated paragraph (g)(1)(i), removing ``the 
written delinquency notice'' and adding, in its place, ``the initial 
late payment notice''.
    E. Adding new paragraph (g)(1)(iv).
    F. Adding a sentence at the end of paragraph (i)(2).
    G. Removing paragraph (k); and redesignating paragraphs (l) and (m) 
as paragraphs (k) and (l), respectively.
    The additions read as follows:


Sec.  36.4346  Servicing procedures for holders.

* * * * *
    (g) * * *
    (1) * * *
    (iv)(A) A letter to the borrower if payment has not been received--
    (1) In the case of a default occurring within the first 6 months 
following loan closing or the execution of a modification agreement 
pursuant to Sec.  36.4314, within 45 days after such payment was due; 
or
    (2) In the case of any other default, within 75 days after such 
payment was due.
    (B) The letter required by paragraph (g)(1)(iv)(A) must be mailed 
no later than 5 business days after the payment is delinquent for the 
time period stated in paragraph (g)(1)(iv)(A) and shall--
    (1) Provide the borrower with a toll-free telephone number and, if 
available, an e-mail address for contacting the servicer.
    (2) Explain loss mitigation options available to the borrower.
    (3) Emphasize that the intent of servicing is to retain home 
ownership whenever possible;
    (4) Contain the following language:

The delinquency of your mortgage loan is a serious matter that could 
result in the loss of your home. If you are the veteran whose 
entitlement was used to obtain this loan, you can also lose your 
entitlement to a future VA home loan guaranty. If you are not 
already working with us to resolve the delinquency, please call us 
to discuss your workout options. You may be able to make special 
payment arrangements that will reinstate your loan. You may also 
qualify for a repayment plan or loan modification.

[[Page 8494]]

    VA has guaranteed a portion of your loan and wants to ensure 
that you receive every reasonable opportunity to bring your loan 
current and retain your home. VA can also answer any questions you 
have regarding your entitlement. If you have access to the Internet 
and would like to obtain more information, you may access the VA Web 
site at http://www.va.gov. You may also learn where to speak to a VA 
Loan Administration representative by calling 1-800-827-1000.

* * * * *
    (i) * * *
    (2) * * * With respect to any loan more than 30 days delinquent, if 
the property is abandoned or has been or may be subjected to 
extraordinary waste or hazard, these facts must be reported to the 
Secretary within 5 business days and immediate action should be 
initiated by the servicer to protect the property and terminate the 
loan once the abandonment or waste or hazard has been confirmed.
* * * * *
[FR Doc. 05-3084 Filed 2-17-05; 8:45 am]
BILLING CODE 8320-01-P