[Federal Register Volume 76, Number 244 (Tuesday, December 20, 2011)]
[Rules and Regulations]
[Pages 78827-78829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32528]



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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AN78


Loan Guaranty Revised Loan Modification Procedures

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

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SUMMARY: This document amends a Department of Veterans Affairs (VA) 
Loan Guaranty regulation related to modification of guaranteed housing 
loans in default. Specifically, changes are made to requirements 
related to maximum interest rates on modified loans and to items that 
may be capitalized in a modified loan amount. In addition, we are 
revising the regulation to clarify that the holder of a loan may seek 
VA approval for a loan modification that does not otherwise meet 
prescribed conditions. The amendments are intended to liberalize the 
requirements for modification of VA-guaranteed loans and provide 
holders more options for working with veterans to avoid foreclosure.

DATES: This final rule is effective January 19, 2012.

FOR FURTHER INFORMATION CONTACT: Mike Frueh, Assistant Director for 
Loan Management (261), Veterans Benefits Administration, Department of 
Veterans Affairs, 810 Vermont Avenue NW., Washington, DC 20420, at 
(571) 272-0017. (This is not a toll-free telephone number.)

SUPPLEMENTARY INFORMATION:

Statutory Background

    Under 38 U.S.C. chapter 37, VA guarantees loans made by private 
lenders to veterans for the purchase, construction, and refinancing of 
homes owned and occupied by veterans.

Regulatory Background

    On February 1, 2008, VA published in the Federal Register (73 FR 
6294) a final rule that extensively revised 38 CFR part 36 to modernize 
procedures for servicing VA-guaranteed home loans. A new subpart F was 
added to include Sec.  36.4815, which provided detailed parameters for 
private loan servicers to modify delinquent loans without seeking prior 
approval from VA, thereby enabling servicers to quickly assist veteran 
borrowers in avoiding foreclosure. On June 15, 2010, VA published in 
the Federal Register (75 FR 33704) a final rule that redesignated 
subpart F (the 36.4800 series) to replace obsolete subpart B (the 
36.4300 series) in its entirety. On February 7, 2011, VA published in 
the Federal Register (76 FR 6555) an interim final rule that (1) 
restructured Sec.  36.4315 to clarify that holders may seek VA approval 
for a loan modification if the proposed modification does not otherwise 
meet the conditions prescribed in Sec.  36.4315(a), (2) revised the 
methodology for determining the maximum interest rate on a modified 
loan, and (3) allowed foreclosure costs actually incurred to be 
capitalized into the modified loan balance.

Discussion of Public Comments

    The public comment period on the interim final rule closed on April 
8, 2011. VA received comments from six entities about the rule. One 
comment was from a mortgage industry trade association, three were from 
mortgage servicers, and two were from nonprofit law firms writing on 
behalf of veteran borrowers. The final rule has been revised to 
incorporate changes that VA agrees are necessary in light of, or as the 
logical outgrowth of the comments provided. The following paragraphs 
discuss the comments VA received on the interim final rule. The 
comments are presented in order by the paragraph to which the comments 
apply, and similar comments are grouped together.

Section 36.4315(a)(8) Interest Rate Restrictions

    Comment: VA should change the establishment of the maximum interest 
rate from the date the modification is executed to the date the 
modification is approved.
    VA Response: VA concurs. As indicated in the interim final rule, VA 
based its revision to the establishment of the maximum interest rate 
allowable on a loan modification to a large extent on a Department of 
Housing and Urban Development (HUD) Mortgagee Letter (2009-35), which 
stated that the maximum rate would be computed as of the date of 
execution of the Modification Agreement. However, several comments 
mentioned that a subsequent Loan Modification Frequently Asked 
Questions (FAQ) document posted by HUD on its Web site (at http://www.hud.gov/offices/hsg/sfh/nsc/faqlm.cfm) stated that the maximum 
interest rate on a loan modification should actually be calculated as 
of the date the Mortgagee approves the modification. This is a more 
beneficial position for a veteran borrower, as it allows the maximum 
rate to be calculated when the servicer is underwriting the 
modification, without the possibility of an interest rate increase 
occurring before execution of the modification that might result in an 
increase in the interest rate. In addition, it is more feasible from a 
processing standpoint for the servicer, because it allows the rate to 
be fixed without concern that documents may be sent to the borrower to 
be signed, but the Modification Agreement may be in violation of the 
regulation if rates decrease before the modification is executed. 
Therefore, Sec.  36.4315(a)(8)(i) is changed by replacing the word 
``executed'' with the word ``approved''.
    Comment: VA should require that the interest rate on a modified 
loan be lower than the existing rate, or that any interest rate 
increase on a modified loan be submitted to VA for approval.
    VA Response: VA does not concur. As discussed in the preamble to 
the interim final rule, a modification typically allows capitalization 
of past due amounts over a very long repayment term, sometimes as long 
as 10 years past the original maturity date of the loan (or even longer 
if the original term was less than 30 years), which is easier to 
maintain than a short term repayment arrangement, but will likely 
increase the monthly payments by a small amount. This benefits the 
veteran by eliminating the delinquency and granting a ``fresh start'' 
on payment of the loan. The servicer is required to determine that the 
borrower is a reasonable credit risk based on income, expenses and 
other obligations, so even though the interest rate may be increasing 
on a modification, future payments will still be affordable. Requiring 
VA to review every case with a small interest rate increase would place 
an undue burden on limited staff, while providing no tangible benefit 
to veterans. Allowing modification at a market interest rate, which may 
be lower or higher than the existing interest rate, serves as an 
incentive for the servicer to complete the modification at a rate that 
will allow it to re-pool the modified loan without taking a loss to do 
so. However, if the proposed interest rate for the modification is more 
than one percent above the existing rate, then VA believes it is 
appropriate to review the case to determine if the increased rate, in 
addition to the capitalization of the delinquency, could raise serious 
questions about the veteran's ability to repay the modified loan. That 
would give VA the opportunity to consider refunding the loan at a lower 
rate in order to make the modification even more affordable for the 
veteran borrower. If the servicer decides that a veteran is not a 
reasonable credit risk for a loan modification, then VA has the 
opportunity through its oversight to consider refunding the loan at a 
rate that

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will make the loan affordable, if that is possible. This is the 
position that VA believes best balances the goals of the VA home loan 
program to provide a benefit to our nation's veterans, while also 
exercising appropriate judgment in the use of taxpayer funds to acquire 
loans that will yield much lower than market rates.
    Comment: VA should mandate lower payments on a modified loan. For 
circumstances in which: (1) The interest rate will be the same or 
higher, (2) even a reduced interest rate will not result in a lower 
payment, or (3) the interest rate cannot be reduced (such as on a loan 
held by a state housing-finance authority), VA should require reduction 
in the principal balance so that the payment will be reduced.
    VA Response: VA does not concur. As stated above, the purpose of a 
loan modification is to give a borrower a fresh start by resetting the 
terms of the loan to make payments affordable. Reducing a loan payment 
does not necessarily guarantee that future payments will be affordable 
for a borrower, as that requires an analysis of income and other 
expenses. If a borrower can afford future payments that are slightly 
higher than existing payments, but cannot afford to pay the accrued 
delinquency, then there is no need to require that payments on a 
modified loan be lower than the existing payments, only that the 
delinquency be eliminated via the modification. As far as requiring 
that a servicer waive a portion of the principal balance in order to 
reduce payments, VA does not have any specific authority to do so. VA 
does have the option to assist a veteran borrower in need of lower 
payments by refunding a loan and reducing the interest rate well below 
the market rate to make payments affordable. However, that authority to 
refund must be balanced against the fact that taxpayer funds will be 
used to acquire a loan that will be modified to yield much less than 
market interest rates.

Section 36.4315(a)(10) Fees Allowed in Modified Amount

    Comment: VA should ensure that veterans are not overcharged for 
foreclosure expenses, perhaps by setting a limit of $1,000 on legal 
fees that may be capitalized when a loan is modified.
    VA Response: VA partially agrees. This subparagraph presently 
limits the amount that may be included in the modified indebtedness to 
``actual legal fees and foreclosure costs related to the cancelled 
foreclosure.'' Existing Sec.  36.4314 limits the amount of legal fees 
for foreclosure that may be included in the computation of a guaranty 
claim, based on the reasonable and customary amounts the Secretary has 
determined appropriate in each state. In order to ensure that veterans 
are not charged in excess of the maximum amount allowable for a 
completed foreclosure, Sec.  36.4315(a)(10) is amended to limit the 
amount of legal fees and costs that may be included in the modified 
indebtedness to the maximum amounts prescribed in Sec.  36.4314 by 
inserting after ``canceled foreclosure'' the phrase ``(subject to the 
maximum amounts prescribed in Sec.  36.4314).''
    VA does not believe it is appropriate to set a maximum $1,000 for 
the limit on cancelled foreclosure costs and fees that may be included 
in the modified loan balance, as costs vary from state to state, and 
the amount of work completed on a foreclosure will also very from case 
to case. The language limiting costs to ``actual'' fees and costs 
clearly indicates that the maximum allowable charge should not be made 
unless those fees and costs have actually been incurred.

Loss Mitigation Requirements

    Comment: VA should promulgate new regulations requiring that loan 
holders engage in mandatory loss mitigation efforts prior to initiation 
of foreclosure.
    VA Response: VA does not concur. VA believes its existing 
regulations both require and encourage loss mitigation efforts by loan 
holders and their mortgage servicers prior to the initiation of 
foreclosure. In Sec.  36.4350, VA requires establishment of a system 
for servicing delinquent loans and prescribes collection actions 
designed to determine reasons for loan defaults and to explore loss 
mitigation options. In Sec.  36.4319, VA provides an incentive 
structure to encourage successful loss mitigation efforts by loan 
servicers. This final rule (Sec.  36.4315) allows servicers wide 
latitude in modifying delinquent loans without the prior approval of VA 
in order to resolve defaults. VA also authorizes servicers to pursue 
short sale and deeds in lieu of foreclosure (Sec.  36.4322) when home 
retention is not possible and the servicing requirements in VA's 
regulations are satisfied. Furthermore, in order to ensure that a 
servicer has sufficient time to explore all possible loss mitigation 
options, in calculating the guaranty claim payable on a terminated 
loan, VA allows inclusion of interest for 210 days from the due date of 
the last paid installment, plus the reasonable period that VA has 
established for completion of termination in the jurisdiction where the 
loan is located. We believe all these existing requirements, plus the 
oversight efforts of dedicated VA Loan Technicians, has resulted in 
ensuring that veterans receive excellent opportunities to retain their 
homes when feasible, or to avoid foreclosure when retention is not 
possible. As a demonstration of this point, for the past 2 years the 
Mortgage Bankers Association quarterly National Delinquency Survey has 
reported that VA-guaranteed loans have the lowest foreclosure starts 
and foreclosure inventory of any loan type.

Paperwork Reduction Act of 1995

    This document contains no provisions constituting a collection of 
information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3521).

Unfunded Mandates

    The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C. 
1532, that agencies prepare an assessment of anticipated costs and 
benefits before issuing any rule that may result in the expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more in any given year. This rule 
will have no such effect on State, local, and tribal governments, or on 
the private sector.

Executive Orders 12866 and 13563

    Executive Orders 12866 and 13563 direct agencies to assess the 
costs and benefits of available regulatory alternatives and, when 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, and other advantages; distributive impacts; 
and equity). Executive Order 13563 (Improving Regulation and Regulatory 
Review) emphasizes the importance of quantifying both costs and 
benefits, reducing costs, harmonizing rules, and promoting flexibility. 
Executive Order 12866 (Regulatory Planning and Review) defines a 
``significant regulatory action,'' which requires review by the Office 
of Management and Budget (OMB), as ``any regulatory action that is 
likely to result in a rule that may: (1) Have an annual effect on the 
economy of $100 million or more or adversely affect in a material way 
the economy, a sector of the economy, productivity, competition, jobs, 
the environment, public health or safety, or State, local, or tribal 
governments or communities; (2) Create a serious inconsistency or 
otherwise interfere with an action taken or planned by another agency; 
(3) Materially alter the budgetary impact of entitlements, grants, user 
fees, or loan programs or the rights and obligations of recipients

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thereof; or (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
this Executive Order.''
    The economic, interagency, budgetary, legal, and policy 
implications of this regulatory action have been examined and it has 
been determined not to be a significant regulatory action under 
Executive Order 12866.

Regulatory Flexibility Act

    The Secretary hereby certifies that this final rule would not have 
a significant economic impact on a substantial number of small entities 
as they are defined in the Regulatory Flexibility Act, 5 U.S.C. 601-
612. The 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 final rule, which only 
impacts veterans, other individual obligors with guaranteed loans, and 
companies that service VA loans, will have very minor economic impact 
on a very small number of small entities servicing such loans. 
Therefore, pursuant to 5 U.S.C. 605(b), this rule is exempt from the 
initial and final regulatory flexibility analysis requirements of 
sections 603 and 604.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number and title for the 
program affected by this document is 64.114, Veterans Housing--
Guaranteed and Insured Loans.

Signing Authority

    The Secretary of Veterans Affairs, or designee, approved this 
document and authorized the undersigned to sign and submit the document 
to the Office of the Federal Register for publication electronically as 
an official document of the Department of Veterans Affairs. John R. 
Gingrich, Chief of Staff, Department of Veterans Affairs, approved this 
document on October 24, 2011, for publication.

List of Subjects in 38 CFR Part 36

    Condominiums, Handicapped, Housing, Indians, Individuals with 
disabilities, Loan programs--housing and community development, Loan 
programs--Indians, Loan programs--veterans, Manufactured homes, 
Mortgage insurance, Reporting and recordkeeping requirements, Veterans.

    Dated: December 15, 2011.
Robert C. McFetridge,
Director of Regulation Policy and Management, Office of the General 
Counsel, Department of Veterans Affairs.

    For the reasons stated in the preamble, VA amends 38 CFR part 36 as 
follows:

PART 36--LOAN GUARANTY

0
1. The authority citation for part 36 continues to read as follows:

    Authority: 38 U.S.C. 501 and as otherwise noted.

0
2. Amend Sec.  36.4315 by:
0
a. In paragraph (a)(8)(i) removing ``executed'' and adding, in its 
place, ``approved''.
0
b. In paragraph (a)(10) removing ``canceled foreclosure;'' and adding, 
in its place, ``canceled foreclosure; (subject to the maximum amounts 
prescribed in Sec.  36.4314)''.

[FR Doc. 2011-32528 Filed 12-19-11; 8:45 am]
BILLING CODE 8320-01-P