[Federal Register Volume 81, Number 207 (Wednesday, October 26, 2016)]
[Proposed Rules]
[Pages 74382-74388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25738]
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DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
RIN 2900-AP32
Loan Guaranty Vendee Loan Fees
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 Service (LGY) regulations to establish
reasonable fees that VA may charge in connection with the origination
and servicing of vendee loans made by VA. Fees proposed in this
rulemaking are consistent with those charged in the private mortgage
industry, and such fees would help VA to ensure the sustainability of
this vendee loan program. The loans that would be subject to the fees
are not veterans' benefits. This rule would also ensure that all direct
and vendee loans made by the Secretary are safe harbor qualified
mortgages.
DATES: Comments must be received by VA on or before December 27, 2016.
ADDRESSES: Written comments may be submitted through
www.Regulations.gov; by mail or hand-delivery to Director, Regulation
Policy and Management (00REG), Department of Veterans Affairs, 810
Vermont Avenue NW., Room 1068, Washington, DC 20420; or by fax to (202)
273-9026. Comments should indicate that they are submitted in response
to ``RIN 2900-AP32--Loan Guaranty Vendee Loan Fees.'' Copies of
comments received will be available for public inspection in the Office
of Regulation Policy and Management, Room 1068, between the hours of
8:00 a.m. and 4:30 p.m., Monday through Friday (except holidays).
Please call (202) 461-4902 for an appointment. (This is not a toll-free
number.) In addition, during the comment period, comments may be viewed
online through the Federal Docket Management System (FDMS) at
www.Regulations.gov.
FOR FURTHER INFORMATION CONTACT: Andrew Trevayne, Assistant Director
for Loan and Property Management (261), Veterans Benefits
Administration, Department of Veterans Affairs, 810 Vermont Avenue NW.,
Washington, DC 20420, (202) 632-8795. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: This document proposes to amend VA
regulations to establish reasonable fees in connection with loans made
by VA, commonly referred to as vendee loans. The proposed fees
associated with vendee loans are standard in the mortgage industry. The
vendee loans that would be subject to the fees are not veterans'
benefits and are available to any purchasers, including investors, who
qualify for the loan.
Specifically, this rulemaking would permit VA to establish a fee to
help cover costs associated with loan origination. The proposed rule
would also permit certain reasonable fees to be charged following loan
origination, during loan servicing. Fees permitted would be those
charged for ad hoc services performed at the borrower's request or for
the borrower's benefit, as well as standard fees specified in loan
instruments. Lastly, third-party fees, those not charged by VA, would
be included in this proposed rule solely to clarify for borrowers the
various costs that a borrower may incur when obtaining a vendee loan.
Vendee Loans
When a holder forecloses a VA-guaranteed loan, the holder has the
option, pursuant to 38 U.S.C. 3732 and 3720, of conveying the
foreclosed property to the Secretary of Veterans Affairs (the
Secretary). For properties VA acquires this way, VA sells them as a
salvage operation and deposits the sales proceeds into the Veterans
Housing Benefit Program Fund (VHBPF), as required by 38 U.S.C. 3722, to
help offset the housing operation costs of the Home Loan Guaranty
Program.
In addition to selling properties as part of the salvage operation,
the Secretary has authority under 38 U.S.C. 3720 and 3733 to finance
the sales upon such terms as the Secretary determines reasonable. VA
refers to loans made pursuant to these provisions as vendee loans. The
loans are not classified as veterans' benefits and are available to any
purchaser VA determines creditworthy and whose bid is awarded a sales
contract. Purchasers can be individuals or corporations, and the
properties can be purchased as owner-occupied residences or as
investments. Additionally, the Secretary may make vendee loans to
certain entities pursuant to 38 U.S.C. 2041 for the purpose of
assisting homeless veterans and their families acquire shelter.
Under 38 U.S.C. 3733(a)(4), vendee loans may generally be made for
up to 95 percent of the purchase price of the property. A vendee loan
may exceed 95 percent of the purchase price to the extent the Secretary
determines necessary to competitively market the property. A vendee
loan may also exceed 95 percent of the purchase price in instances
where the Secretary includes, as part of the vendee loan, an amount to
be used for the purpose of rehabilitating such property. Additionally,
38 U.S.C. 3733(a)(6) provides that the Secretary shall make a vendee
loan at an interest rate that is lower than the prevailing mortgage
market interest rate in areas where, and to the extent the Secretary
determines, in light of prevailing conditions in the real estate market
involved, that such lower interest rate is necessary in order to market
the property competitively and is in the interest of the long-term
stability and solvency of the VHBPF. These provisions demonstrate that
this program is to be competitively marketed to borrowers so long as it
is financially sustainable. In fiscal years (FYs) 2011 and 2012, the
most recent period when VA made direct loans, VA sold, on average, 175
real-estate owned (REO) properties per month with vendee financing,
with an average loan amount of $114,925.
Vendee financing is not a veterans' benefit; rather, it is a
competitive lending program with the primary goal of providing
financing to help VA dispose of its REO properties. Vendee loans enable
VA to sell more of its properties and to sell them quicker.
Nevertheless, this program helps veterans by contributing to the long-
term viability of the VHBPF, as the principal and interest resulting
from repayment of vendee loans are deposited into the VHBPF to help
offset the housing operation costs of the Home Loan Guaranty Program.
[[Page 74383]]
Authority for Fees
Section 3720 of title 38 U.S.C. states that the Secretary may
purchase property upon such terms and for such prices as the Secretary
determines to be reasonable, and similarly sell, at public or private
sale, any such property. It also authorizes the Secretary to otherwise
deal with any property acquired or held pursuant to chapter 37 of title
38, U.S.C.
Section 3720 authorizes the Secretary to sell REO properties upon
such terms and for such prices as the Secretary determines reasonable.
See 38 U.S.C. 3720(a). Section 3720 further authorizes the Secretary to
exercise this discretion notwithstanding any other provision of law.
Given the common industry practice of including fees when negotiating
the terms and prices of real estate transactions, and for other reasons
explained below, the Secretary has determined that it is reasonable to
negotiate fees in the terms and prices of any sale of the Secretary's
REO properties. The specific types of allowable fees will be explained
in-depth later in this preamble.
VA considered alternatives to charging fees. One option was to
increase the sales prices of properties to account for the funds that
fees would generate. VA decided, however, that increasing sales prices
might extend the time that VA must hold properties before selling them.
This would also increase costs for taxpayers, rather than the small
population of borrowers enjoying the advantages of vendee loans. VA
also considered adjusting interest rates, but as explained earlier,
Congress has established a preference for lower-than-market interest
rates in order to market properties competitively. See 38 U.S.C.
3733(a)(6). Consequently, VA believes that having the flexibility to
negotiate fees is the most fiscally sound way to protect the integrity
of the VHBPF and ensure that taxpayers who do not participate in the
vendee program do not unfairly bear the burden of its costs.
All origination-related fees and post-origination fees proposed
under this rule will be deposited into the VHBPF. Under 38 U.S.C. 3722,
amounts paid into the VHBPF under section 3729 or any other provision
of law or regulation established by the Secretary imposing fees on
persons or other entities constitute assets of the VHBPF. See 38 U.S.C.
3722(c)(2). These fees would be designated to the proper account as
required under the Federal Credit Reform Act of 1990. See 2 U.S.C. 661,
et seq.
The Proposed Rule
To help ensure that VA's REO portfolio is administered in a cost-
effective manner, VA is proposing to authorize certain reasonable fees
in connection with the origination and post-origination servicing of
vendee loans. The proposed fees would prevent against windfalls to the
small population of vendee borrowers by ensuring that they, rather than
the taxpayers at-large, pay for the unique advantages of vendee
financing. The types of fees proposed are standard in the lending
industry, and as such, would not significantly affect the program's
competitiveness.
In addition to the reasonable fees proposed herein, borrowers
obtaining vendee financing may be required to pay certain third-party
fees. Third-party fees are collected on behalf of, or payable to,
persons other than the Secretary. These include, for instance,
recording fees, force-placed insurance premiums, and inspection fees.
VA does not control these third-party fees, as they are not collected
on behalf of the Secretary. VA is identifying them in this proposed
rule to help participants more fully understand the types of expenses
that typically could affect borrowers.
Section 36.4500 Applicability and Qualified Mortgage Status
VA proposes to add Sec. 36.4500(e) to clarify the applicability of
the sections proposed under this rulemaking. It would state that
proposed Sec. Sec. 36.4528, 36.4529, and 36.4530 would be applicable
to all vendee loans.
VA also proposes to amend paragraph (c)(2), regarding which vendee
loans are qualified mortgages. The purpose and effects of this proposed
change are explained later in this preamble in the section on safe
harbor qualified mortgages.
Section 36.4501 Definitions
VA proposes to update the authority citation for the definition of
vendee loan, as provided in Sec. 36.4501. The authority citation
currently includes 38 U.S.C. 3720 and 3733. VA proposes to add 38
U.S.C. 2041 to this citation. This change would have no substantive
effect on vendee loans but would merely ensure that the authority
citation for the definition of vendee loans fully reflects the
authorities under which the Secretary may make these loans.
VA also proposes to clarify existing policy with regard to vendee
loan terms. The rule would state specifically that the terms of a
vendee loan (e.g., amount of down payment; amortization term; whether
to escrow taxes, insurance premiums, or homeowners' association dues;
fees etc.) are negotiated between the Secretary and the borrower on a
case-by-case basis, subject to the requirements of 38 U.S.C. 2041 or
3733. The terms may vary depending on, among other factors, the
creditworthiness of the buyer/borrower and the purpose of the realty
purchase--investment versus residence. Except for the addition of the
Secretary's discretion to negotiate fees, this is not a substantive
change. VA would also state that the terms related to allowable fees
are subject to proposed Sec. Sec. 36.4528 through 36.4530 of this
part.
In addition, the rule would add a new definition for safe harbor
qualified mortgage. The definition is consistent with that in the
guaranteed loan program. See 38 CFR 36.4300(b)(1). It is necessary to
add the definition to clarify the applicability of safe harbor
provisions to all of VA's direct loan programs, not just the guaranteed
programs.
Section 36.4528 Vendee Loan Origination Fee
VA is proposing a new regulatory provision to be found in 38 CFR
36.4528. Proposed Sec. 36.4528 would authorize an allowable fee that
may be charged in connection with the origination of vendee loans. This
proposed rule would permit VA to charge an origination fee not to
exceed one-and-a-half percent of the loan amount. The proposed
origination fee is distinct, and in addition to, the loan fee required
to be paid by 38 U.S.C. 3729 for vendee loans made pursuant to 38
U.S.C. 3733. All or part of the proposed origination fee may be paid in
cash at loan closing, or all or part of the fee may be included in the
loan. In computing the fee, VA would disregard any amount included in
the loan to enable the borrower to pay such fee. In other words, if a
borrower opts to include the fee into the loan amount, VA would not
increase the amount of origination fee due. Under no circumstance may
the total fee agreed upon between the Secretary and the borrower result
in an amount that would cause the loan to be designated as a high-cost
mortgage, as defined by section 103(bb) of the Truth in Lending Act
(TILA), codified in 15 U.S.C. 1602(bb), and implementing regulations in
12 CFR part 1026.
VA understands that it is common industry practice for lenders to
charge an ``origination fee'' of approximately one percent of the loan
value. Bankrate.com explains that for many loans a one percent
origination fee is
[[Page 74384]]
common.\1\ This fee is customarily charged by lenders to cover certain
expenses involved with evaluating borrowers' creditworthiness and
preparing a mortgage loan. VA currently permits a one percent fee to be
charged in connection with originating loans in its Home Loan Guaranty
Benefit Program (38 CFR 36.4313(d)(2)). Vendee financing is distinct
from VA's benefit program. Nonetheless, VA believes that if private
lenders are permitted to charge a one percent origination fee to
eligible servicemembers and veterans utilizing their home loan benefit,
then it is reasonable to establish up to a one-and-a-half percent fee
in connection with the origination of non-benefit vendee loans, which
may be made to any borrowers, including investors, who qualify.
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\1\ Loan Comparison Calculator, Bankrate.com, http://www.bankrate.com/calculators/home-equity/compare-loans-calculator.aspx#ixzz34FMEFGk5 (last visited May 8, 2015).
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To the extent the maximum one-and-a-half percent fee proposed
herein may on occasion exceed the total amount charged at origination
by certain private lenders, the unique characteristics of vendee
financing would make the extra one-half percent reasonable and help the
vendee program remain competitive. As explained above in the section on
vendee loans, 38 U.S.C. 3733(a)(6) requires the Secretary to make
vendee loans at an interest rate lower than the prevailing mortgage
market interest rate in situations where, based on the local conditions
in an area's real estate market, such lower interest rate is necessary
to market the property competitively. In such situations, VA does not
have the flexibility to charge above market interest rates to offset
costs associated with loan origination, as a private lender might.
Further, VA offers these lower interest rates without charging discount
points collected in exchange for this lower interest rate at the time
of loan origination. In private sector transactions, borrowers can pay
up to three or four discount points, depending on how much they want to
lower their interest rates. One discount point is an upfront payment of
one percent of the loan amount, in addition to the other fees. The
mortgage's interest rate is usually reduced by a quarter of a
percentage point for every discount point paid.
In addition to offering below-market interest rates without
discount points, VA offers vendee financing for up to 95 percent of the
purchase price of the property and, in instances where the Secretary
deems it necessary to market the property competitively, may offer
vendee financing in an amount that exceeds 95 percent of the purchase
price. The average loan amount to sale price ratio for vendee loans
exceeded 85 percent in FY11 and 88 percent in FY12.
Generally, if a borrower's down payment on a home is less than 20
percent of the sale price, a private lender will require mortgage
insurance to protect itself in case the borrower defaults on the
payments. The borrower pays the premiums, and the lender is the
beneficiary.\2\ Private mortgage insurance typically costs about 0.25
to two percent of the loan balance per year, depending on the amount of
the down payment, loan term, and borrower's credit score, and continues
until the borrower reaches 20 percent equity.\3\ In contrast, VA does
not require a borrower to purchase private mortgage insurance on any
vendee loan, regardless of the loan-to-purchase price ratio.
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\2\ Private mortgage insurance--The Basics of PMI, Bankrate.com,
http://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx (last visited May 8, 2015).
\3\ Definition Of `Private Mortgage Insurance-PMI',
Investopedia.com, http://www.investopedia.com/terms/p/privatemortgageinsurance.asp (last visited May 8, 2015).
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Furthermore, the rule would provide that under no circumstances may
the total fees agreed upon between the Secretary and the borrower
result in an amount that would cause the loan to be designated as a
high-cost mortgage loan under TILA and its implementing regulations (15
U.S.C. 1602(bb); 12 CFR part 1026). High-cost mortgages are those where
the annual percentage rate (APR) or points and fees charged exceed
certain threshold amounts. Loans that meet such high-cost coverage
tests are subject to special disclosure requirements and restrictions
on loan terms.
Accordingly, this rulemaking would include authority for VA to
charge an amount not to exceed a one-and-a-half percent origination fee
in connection with the origination of vendee loans. Fees that may be
charged by third parties at the time of loan origination (for example,
courier fees or fees for termite inspection) are not included under 38
CFR 36.4528 and are discussed later in this preamble. In establishing
this reasonable fee to cover costs associated with loan origination, VA
is managing the non-benefit, vendee loan program in a business-like
manner more consistent with private industry standards, and in so
doing, ensuring that purchasers who utilize this financing, rather than
taxpayers at-large, help bear the expenses associated with originating
vendee loans.
Section 36.4529 Vendee Loan Post-Origination Fees
VA is also proposing a new regulatory provision, 38 CFR 36.4529,
which would allow VA to charge reasonable service-related fees
following loan origination. These fees would not constitute the general
servicing fee paid by VA to its contractor to perform functions
normally considered part of prudent loan servicing activities. Rather,
these fees would be charged to the borrower to cover the costs of ad
hoc, special services that are requested and performed on the
borrower's behalf, and are beyond the regular services performed in
connection with loan servicing.
It is common industry practice to charge specific fees in accord
with the rendering of additional services on an account. Accordingly,
VA is establishing, under proposed Sec. 36.4529(a), maximum amounts to
be charged per fee in exchange for the Secretary's performance of
certain services that are above and beyond ordinary and customary loan
servicing activities. VA surveyed some of the larger private entities
that perform loan servicing. The frequency, applicability, and amount
of these fees generally vary by state, loan status, and other loan
characteristics. As such, VA notes that the amounts proposed in this
rulemaking would represent maximums; the specific fees to be charged on
each account may be negotiated between the Secretary and the borrower.
Under the proposed rule, VA could charge a borrower an assumption
processing fee when a purchaser assumes a VA direct loan. This fee
would be assessed when VA approves a request for the transfer of legal
liability of repaying the mortgage. VA intends for the assumption fee
to help offset the costs associated with processing the application,
determining the creditworthiness of the assumptor, and revising the
ownership records when the approved transfer is complete. VA would be
permitted to charge an amount not to exceed $300, plus the actual cost
of any credit report required. If the assumption were denied, VA would
only charge the actual cost of the credit report. The disclosed maximum
assumption fees in the fee schedules surveyed for this rulemaking
ranged from $350 (including the cost of the credit report) to $1300
(however, the $1300 fee also included attorney fees).
The rule would also permit VA to charge the borrower a fee, not to
exceed $350, for processing a subordination request to ensure that a
modified vendee loan retains first lien position over
[[Page 74385]]
another debt on the same property. VA will only modify a loan if it
will retain its priority lien position on that property. State laws
differ as to whether a basic loan modification will affect priority
status of a senior loan holder, and in which situations such a
modification would affect priority status. Accordingly, if VA consents
to the modification of a loan, VA must ensure that its modified
mortgage loan retains first-lien position. The maximum subordination
fee disclosed by the private servicers surveyed for this rulemaking was
$350.
The proposed rule would permit a reasonable partial release fee,
not to exceed $350, to be charged when a borrower seeks to exclude some
of the collateral from the mortgage contract once a certain amount of
the mortgage loan has been paid. A borrower might request a partial
release of real property from the security for a number of reasons; for
example, to release acreage from the original secured lot so that it
can be used for other purposes or to release some portion of the
property to adjust the lot line or resolve a lot line dispute. Of the
private servicers surveyed, two disclosed a maximum fee of $350 and the
third disclosed a maximum fee for this service of $500.
If VA agrees to release an obligor from a mortgage loan in
connection with a division of real property, this rule would permit VA
to charge a release of lien fee not to exceed $15 for executing and
providing documentation of this release. Occasionally, joint owners of
real property may be subject to a judicial decree (such as a divorce
judgment) that divides the property into separately owned parcels
according to each owner's proportionate share in the property.
Generally, neither owner receives any cash consideration in connection
with the partition. In these circumstances, following this division,
the fee may be incurred if the borrower who has possession of the land
that is to be released from the security requests a release from
liability under the mortgage loan. Consistent with VA's proposed
maximum, the maximum fee disclosed in VA's survey of private industry
is $15.
VA could charge a fee not to exceed $30 for processing payoff
statements. Consistent with VA's proposed maximum, the private industry
servicers VA surveyed disclosed a maximum payoff statement fee of $30.
VA could charge a reasonable fee to the borrower to offset the
costs of processing payments a borrower may elect to submit by phone.
To cover the expenses associated with providing this service, which
borrowers may prefer to traditional payment by check, the fee would not
exceed $12 when a representative handles the payment, and would not
exceed $10 when an interactive voice response system (an automated
phone system) handles the payment. The industry fee schedules that VA
surveyed for this rulemaking disclosed maximum payment by phone fees
that ranged from $9 to $20. The schedules also showed that, when a
borrower makes a payment by phone, it usually costs the borrower $3 to
$10 more to speak with a representative than it does for the borrower
to use an interactive voice response system.
In addition to the proposed fees being standard in private
industry, there is precedent for the collection of fees in exchange for
the performance of special ad hoc services in another Federal
Government direct home loan program. Specifically, the Rural Housing
Service (RHS) at the Department of Agriculture (USDA) regulates the
collection of fees in exchange for the performance of certain special
services. RHS provides financing to help very low and low income
individuals, who cannot obtain credit from other sources, obtain
housing in rural areas. VA notes that RHS permits these fees even
though its loan program is targeted to very low and low income
families, whereas sales of REO properties with vendee financing are
intended to help VA dispose of its REO inventory helping fund the
VHBPF.
For example, 7 CFR 3550.161(c) states that RHS may charge a fee for
payoff statements if more than two statements are requested for the
same account in any 30-day period. Under Sec. 3550.161(d), RHS
explains that borrowers who make cash payments, rather than submitting
payment through check, money order, or bank draft, will be assessed a
fee to cover the conversion to money order. RHS stated in its Interim
Final Rule, Reengineering and Reinvention of the Direct Section 502 and
504 Single Family Housing Programs, published on November 22, 2006 (61
FR 59762, 59772), that two commentators strongly opposed RHS's
requirement that a cash payment must be accompanied by an amount
sufficient to cover the cost of a money order, stating that such
proposal was unfair to very low and low income families. It explained,
however, that RHS provides supervised credit. RHS encourages, like all
lenders, customers to send payments by check, money order or bank
draft. Cash payments in local offices are discouraged. Since RHS must
obtain a money order in order to transmit the payment, the customer
should pay that fee. Id.
In addition, RHS regulations at 7 CFR 3550.159 provide that certain
borrower actions require RHS approval. Specifically, Sec. 3550.159(c)
explains that RHS may consent to a transaction affecting the security,
such as a sale or exchange of security property, and grant a partial
release of the security, so long as certain conditions are met. Among
those conditions is the requirement that the proceeds from the sale of
any portion of the security property or other similar transaction
requiring RHS consent must first be used to pay customary and
reasonable costs related to the transaction that must be paid by the
borrower. Additionally, if an appraisal must be conducted, the
regulation states that the appraisal fee will be charged to the
borrower.
As authority for its rule permitting such fees, RHS cites 42 U.S.C.
1480, which provides that the Secretary of Agriculture shall have the
power to sell RHS-acquired properties based on terms and conditions the
Secretary of Agriculture determines reasonable and to make loans to the
purchasers of such properties. The statutory authority cited by RHS to
permit fees to cover the costs of performing additional post-
origination services is analogous to 38 U.S.C. 3720, which provides the
Secretary the power to dispose of VA-owned properties on terms the
Secretary determines reasonable. Thus, the proposed rule would be
consistent with the rule of at least one other Federal Government
direct home loan program that authorizes reasonable fees to cover
unanticipated, additional expenses incurred after loan origination.
The rule would state expressly, at proposed Sec. 36.4529(b), that
the Secretary may negotiate fees on a case-by-case basis. It would also
require the Secretary to review, bi-annually, the maximum fees proposed
under Sec. 36.4529(a) to ensure that the fees continue to reflect the
reasonable costs for the services performed. If VA determines that the
maximum fees listed in Sec. 36.4529(a) no longer reflect the
reasonable amounts necessary to perform the associated services, VA
would propose amendment of the regulation. This would allow VA to
timely address any imbalance in the maximum fee schedule and keep the
vendee loan program both cost-effective and competitively priced for
its participants.
In addition to the ad hoc post-origination fees proposed under
Sec. 36.4529(a), proposed Sec. 36.4529(c) would identify, for
informational purposes, standard fees as established in loan
instruments. Fees established in loan instruments are generally
considered deterrents to default, and a means by which the lender can
[[Page 74386]]
minimize losses if a loan does default. These expenses often relate to
termination of the loan, regardless of whether the loan is ultimately
foreclosed, and are capitalized into the indebtedness.
VA, like many lenders, uses the standard loan documents developed
and adopted by the Federal National Mortgage Association (Fannie Mae).
Fannie Mae's security instruments usually provide that the lender may
charge reasonable fees for services performed in connection with
default and loan termination to protect the lender's interest in the
property and rights under the deed of trust. Various Fannie Mae
security instruments can be viewed at https://www.fanniemae.com/singlefamily/security-instruments.
Fannie Mae's standard security instruments also generally provide
that if the borrower fails to perform the covenants and agreements
contained in the security instrument, the lender may do and pay for
whatever is reasonable or appropriate to protect the lender's interest
in the property and rights under the security instrument. A lender may
not charge any fees prohibited by the instrument or by applicable
federal, state, or local laws or regulations. State laws control
whether any fees charged by the lender, or amounts expended by the
lender to protect its interest in the property and rights under the
loan instrument, are to be added to the borrower's indebtedness.
Pursuant to proposed Sec. 36.4529(d), any fee included in the loan
instrument and permitted under proposed Sec. 36.4529(c) would be based
on the amount customarily charged in the industry for the performance
of the service in the particular area, the status of the loan, and the
characteristics of the affected property. VA is not prescribing
specific maximum amounts for these fees. Rather, as these fees are
governed by the loan instrument and may be capitalized into the
principal balance of the loan, state law sets the maximum amounts for
these fees. Nevertheless, VA seeks to clarify through this rulemaking
that any borrower obtaining vendee financing may incur reasonable fees
as provided for in standard loan instruments.
An example of a fee permitted by the standard loan instrument would
be a property inspection fee that VA could collect. For instance, when
a foreclosure seems necessary, VA must perform a limited inspection to
determine the physical condition or occupancy status of a property
purchased with vendee financing. In situations where VA must perform
work to maintain a vacant property, the loan instrument permits a
reasonable property preservation fee to be charged to the borrower. As
a result, this fee would cover services to protect a vacant property
from further damage or to maintain a property to prevent city code
violations. Such services could range from mowing the yard to
constructing a fence around the property to winterizing the property.
The fees charged would need to reflect the reasonable cost of
performing the particular type of property preservation service.
Additionally, standard loan instruments used by VA permit VA to
collect reasonable appraisal or attorneys' fees. Appraisal fees would
include, for example, the cost of obtaining a liquidation appraisal in
the event of default to determine the value of a property prior to a
liquidation sale or short sale. Appraisal fees could also include the
cost of an appraisal of property to determine its value prior to a
partial release. Attorneys' fees may be incurred in cases where the
property goes into serious delinquency and servicers must hire
attorneys to assure VA's interests are protected. Examples of legal
work incurring attorneys' fees include providing proper and timely
notice to borrowers in the event of foreclosure, determining lien
position if there are multiple liens on the property, and, in judicial
foreclosure states, assuring correct paperwork is submitted to the
court. In addition, attorneys' fees may be incurred in cases where a
loan is referred to foreclosure, but the foreclosure is not completed,
the default is cured, and the loan is reinstated.
Along with the fees for default-related services, there are other
reasonable fees that are specified in the loan instrument that, if
incurred, can be capitalized as part of the borrower's total
indebtedness. These fees offset the additional expense of collection
activities and usually serve as incentives for repaying a loan
obligation in a timely manner or, more aptly, as deterrents to
delinquency that might otherwise interrupt the Government's scheduled
flow of income. These fees include, but are not limited to, late fees
incurred to cover the added expense involved in handling delinquent
payments, and a returned-check (non-sufficient funds) fee incurred when
a mortgage payment is made from an account that does not have
sufficient funds to cover the payment. Other fees that are reasonably
necessary for the protection of the lender's investment are also
permitted under the loan instrument.
VA notes that RHS, in addition to including standard fees in its
loan instrument, also addresses some of these fees in regulation. For
example, RHS servicing regulations state that RHS may assess reasonable
fees including a tax service fee, fees for late payments, and fees
returned for insufficient funds (7 CFR 3550.153). In justifying the
potential to charge late fees to its very low and low income borrowers,
RHS explains that it recognizes its mission to provide supervised
credit, but that it also believes a late fee encourages its clients to
make payments on a timelier basis. See 61 FR 59763. Further, Sec.
3550.156(a) explains that RHS borrowers are expected to meet a variety
of obligations outlined in the loan documents, including maintaining
the security property and paying hazard and flood insurance and other
related costs when due. Paragraph (b) of the rule states that if a
borrower fails to fulfill these obligations, RHS may obtain the needed
service and charge the cost to the borrower's account. Accordingly, VA
is similarly including reasonable fees established in loan instruments
under this proposed rulemaking.
Section 36.4530 Vendee Loan Other Fees
The loan fee required by 38 U.S.C. 3729 and the fees included in
proposed 38 CFR 36.4528 and 36.4529 are not the only types of fees
associated with vendee loans. There are other types of fees necessary
for the origination and servicing of vendee loans that may be permitted
under this rulemaking. As such, VA is proposing to add Sec. 36.4530 to
clarify for borrowers of vendee loans that they may incur fees
associated with their financing, in addition to, and unaffected by,
those fees specified in 38 U.S.C. 3729 and proposed Sec. Sec. 36.4528
and 36.4529.
Other types of fees that that may be charged in connection with
vendee loans are fees charged by third parties. These fees, which are
also permitted in connection with the guaranteed loan benefit program,
are not collected on behalf of the Secretary. These types of fees are
collected to pay for goods or services such as termite inspections,
hazard and force-placed insurance premiums, courier fees, tax
certificates, and recorder's fees. They are standard in closing
transactions, and borrowers of vendee loans would be expected to pay
these fees for the goods and services provided by the third parties. VA
is identifying these fees in this proposed rule to help clarify the
types of expenses that may be incurred in connection with vendee
financing and ensure that borrowers of vendee loans clearly understand
the financial obligations that may be expected of them. The list of
third-party fees in proposed 38 CFR
[[Page 74387]]
36.4530 is not exhaustive. Rather, it is meant to provide examples.
Safe Harbor Qualified Mortgages
VA proposes a change to Sec. 36.4500(c)(2) to clarify that all
direct loans would be safe harbor qualified mortgages. VA's qualified
mortgage rule was first published on May 9, 2014. See 79 FR 26620.
Although VA intended to designate as qualified mortgages all VA direct
loans, VA did not expressly include all authorities under which VA
makes loans. Consequently, it might appear as if VA intentionally
excluded some of VA's direct loans from qualified mortgage status.
To eliminate ambiguity, the proposed change would state expressly
that any VA direct loan made by the Secretary pursuant to chapter 20 or
37 of title 38, U.S.C., is to be considered a safe harbor qualified
mortgage. VA would also revise the authority citation for paragraph
(c)(2) to include citations to 38 U.S.C. 2041, 3711, 3720, 3733, and
3761 in addition to the current citation to 38 U.S.C. 3710 and 15
U.S.C. 1639C(b)(3)(B)(ii). Again, this change is not intended to be
substantive, but rather, would ensure the paragraph's authority
reflects all of the different statutory authorities under which VA may
make direct loans.
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'' requiring review by the Office of
Management and Budget (OMB), unless OMB waives such review, 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 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. VA's impact analysis can be found as a
supporting document at http://www.regulations.gov, usually within 48
hours after the rulemaking document is published. Additionally, a copy
of the rulemaking and its impact analysis are available on VA's Web
site at http://www.va.gov/orpm/, by following the link for VA
Regulations Published from FY2004 to FYTD.
Unfunded Mandates
The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532, requires
agencies to 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 (adjusted annually for inflation) in
any one year. This proposed rule would have no such effect on State,
local, and tribal governments, or on the private sector.
Paperwork Reduction Act
This proposed rule contains no provisions constituting a collection
of information under the Paperwork Reduction Act of 1995 (44 U.S.C.
3501-3521).
Regulatory Flexibility Act
This proposed rule would affect individuals and small businesses
who choose to obtain a vendee loan from VA to finance the purchase of a
VA-owned property rather than alternate financing. A party who wants to
purchase a VA-owned property may choose whatever source of financing he
wishes. Presumably the purchaser would select the least expensive
financing option available, which may or may not be a VA vendee loan.
VA does not believe that this proposed rule would impose any
significant economic impact for the following reasons. Should the
purchaser decide that the VA vendee program was not the most
economically advantageous to the purchaser then he would obtain
alternate financing. Parties would have to choose to be subject to the
impact, if any, imposed by this rule.
Accordingly, the Secretary certifies that the adoption of this
proposed 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). Therefore, under 5
U.S.C. 605(b), this rulemaking 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. Gina S.
Farrisee, Deputy Chief of Staff, Department of Veterans Affairs,
approved this document on October 18, 2016, for publication.
Dated: October 18, 2016.
Jeffrey Martin,
Office Program Manager, Office of Regulation Policy & Management,
Office of the Secretary, Department of Veterans Affairs.
List of Subjects in 38 CFR Part 36
Condominiums, Flood insurance, Housing, Indians, Individuals with
disabilities, Loan programs--housing and community development, Loan
programs--Indians, Loan programs--veterans, Manufactured homes,
Mortgage insurance, Reporting and recordkeeping requirements, Veterans.
For the reasons set out in the preamble, VA proposes to amend 38
CFR part 36, subpart D as set forth below:
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.
Subpart D--Direct Loans
0
2. Amend Sec. 36.4500 by:
0
a. Revising paragraph (c)(2).
0
b. Revising the authority citation for paragraph (c)(2).
0
c. Adding paragraph (e).
The revisions and addition read as follows:
[[Page 74388]]
Sec. 36.4500 Applicability and qualified mortgage status.
* * * * *
(c) * * *
(2) Applicability of safe harbor qualified mortgage. Any VA direct
loan made by the Secretary pursuant to chapter 20 or 37 of title 38,
U.S.C., is a safe harbor qualified mortgage.
(Authority: 15 U.S.C. 1639C(b)(3)(B)(ii), 38 U.S.C. 2041, 3710,
3711, 3720, 3733, and 3761)
* * * * *
(e) Sections 36.4528, 36.4529, and 36.4530, which concern vendee
loans, shall be applicable to all vendee loans.
0
3. Amend Sec. 36.4501 by adding in alphabetical order a definition for
``Safe harbor qualified mortgage'' and revising the definition ``Vendee
Loan'' to read as follows:
Sec. 36.4501 Definitions.
* * * * *
Safe harbor qualified mortgage means a mortgage that meets the
Ability-to-Repay requirements of sections 129B and 129C of the Truth-
in-Lending Act (TILA) regardless of whether the loan might be
considered a high cost mortgage transaction as defined by section 103bb
of TILA (15 U.S.C. 1602bb).
* * * * *
Vendee loan means a loan made by the Secretary for the purpose of
financing the purchase of a property acquired pursuant to chapter 37 of
title 38, United States Code. The terms of a vendee loan (e.g., amount
of down payment; amortization term; whether to escrow taxes, insurance
premiums, or homeowners' association dues; fees, etc.) are negotiated
between the Secretary and the borrower on a case-by-case basis, subject
to the requirements of 38 U.S.C. 2041 or 3733. Terms related to
allowable fees are also subject to Sec. Sec. 36.4528 through 36.4530
of this part.
(Authority: 38 U.S.C. 2041, 3720, 3733)
* * * * *
0
4. Add Sec. Sec. 36.4528, 36.4529, and 36.4530 to read as follows:
Sec. 36.4528 Vendee loan origination fee.
(a) In addition to the loan fee required pursuant to 38 U.S.C.
3729, the Secretary may, in connection with the origination of a vendee
loan, charge a borrower a loan origination fee not to exceed one-and-a-
half percent of the loan amount.
(b) All or part of such fee may be paid in cash at loan closing or
all or part may be included in the loan. The Secretary will not
increase the loan origination fee because the borrower chooses to
include such fee in the loan amount financed.
(c) In no event may the total fee agreed upon between the Secretary
and the borrower result in an amount that will cause the loan to be
designated as a high-cost mortgage as defined in 15 U.S.C. 1602(bb) and
12 CFR part 1026.
(Authority: 38 U.S.C. 2041, 3720, 3733)
Sec. 36.4529 Vendee loan post-origination fees.
(a) The Secretary may charge a borrower the following reasonable
fees, per use, following origination, in connection with the servicing
of any vendee loan:
(1) Processing assumption fee for the transfer of legal liability
of repaying the mortgage when the individual assuming the loan is
approved. Such fee will not exceed $300, plus the actual cost of the
credit report. If the assumption is denied, the fee will not exceed the
actual cost of the credit report.
(2) Processing subordination fee, not to exceed $350, to ensure
that a modified vendee loan retains its first lien position;
(3) Processing partial release fee, not to exceed $350, to exclude
collateral from the mortgage contract once a certain amount of the
mortgage loan has been paid;
(4) Processing release of lien fee, not to exceed $15, for the
release of an obligor from a mortgage loan in connection with a
division of real property;
(5) Processing payoff statement fee, not to exceed $30, for a
payoff statement showing the itemized amount due to satisfy a mortgage
loan as of a specific date;
(6) Processing payment by phone fee, not to exceed $12, when a
payment is made by phone and handled by a servicing representative;
(7) Processing payment by phone fee, not to exceed $10, when a
payment is made by phone and handled through an interactive voice
response system, without contacting a servicing representative.
(b) The specific fees to be charged on each account may be
negotiated between the Secretary and the borrower. The Secretary will
review the maximum fees under paragraph (a) of this section bi-annually
to determine that they remain reasonable.
(c) The Secretary may charge a borrower reasonable fees established
in the loan instrument, including but not limited to the following:
(1) Property inspection fees;
(2) Property preservation fees;
(3) Appraisal fees;
(4) Attorneys' fees;
(5) Returned-check fees;
(6) Late fees; and
(7) Any other fee the Secretary determines reasonably necessary for
the protection of the Secretary's investment.
(d) Any fee included in the loan instrument and permitted under
paragraph (c) of this section would be based on the amount customarily
charged in the industry for the performance of the service in the
particular area, the status of the loan, and the characteristics of the
affected property.
(Authority: 38 U.S.C. 2041, 3720, 3733)
Sec. 36.4530 Vendee loan other fees.
(a) In addition to the fees that may be charged pursuant to 38 CFR
36.4528 and 36.4529 and the statutory loan fee charged pursuant to 38
U.S.C. 3729, the borrower may be required to pay third-party fees for
services performed in connection with a vendee loan.
(b) Examples of the third party fees that may be charged in
connection with a vendee loan include, but are not limited to:
(1) Termite inspections;
(2) Hazard insurance premiums;
(3) Force-placed insurance premiums;
(4) Courier fees;
(5) Tax certificates; and
(6) Recorder's fees.
(Authority: 38 U.S.C. 2041, 3720, 3733)
[FR Doc. 2016-25738 Filed 10-25-16; 8:45 am]
BILLING CODE 8320-01-P