[Federal Register Volume 83, Number 231 (Friday, November 30, 2018)]
[Proposed Rules]
[Pages 61573-61574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26021]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36


Loan Guaranty: Revisions to VA-Guaranteed or Insured Cash-Out 
Home Loans

AGENCY: Department of Veterans Affairs.

ACTION: Advanced notice of rulemaking.

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SUMMARY: The Department of Veterans Affairs (VA) is issuing this 
document in compliance with the Economic Growth, Regulatory Relief, and 
Consumer Protection Act (the Act). The Act requires VA to amend its 
regulation on VA-guaranteed or insured cash-out refinance loans and to 
publish the amended regulation within a shortened time frame. If VA 
determines that urgent or compelling circumstances make compliance with 
the advance public notice and comment requirements of the 
Administrative Procedure Act impracticable or contrary to public 
interest and publishes notice of that determination in the Federal 
Register, the Act permits VA to amend the regulation through an interim 
final rule or final rule. VA has determined that urgent and compelling 
circumstances do exist and is, therefore, issuing this Federal Register 
document announcing VA's intent to promulgate an interim final rule 
implementing the Act.

DATES: November 30, 2018.

ADDRESSES: Loan Policy & Valuation, Loan Guaranty Service (26), 
Veterans Benefits Administration, Department of Veterans Affairs, 810 
Vermont Avenue NW, Washington, DC 20420.

FOR FURTHER INFORMATION CONTACT: Greg Nelms, Assistant Director for 
Loan Policy & Valuation, Loan Guaranty Service (26), Veterans Benefits 
Administration, Department of Veterans Affairs, 810 Vermont Avenue NW, 
Washington, DC 20420, (202) 632-8862. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: On May 24, 2018, the President signed into 
law the Economic Growth, Regulatory Relief, and Consumer Protection Act 
(the Act), Public Law 115-174, 132 Stat. 1296. Section 309 of the Act, 
codified at 38 U.S.C. 3709, provides new statutory criteria for 
determining when, in general, VA may guarantee a refinance loan. The 
Act also requires, among other things, VA to promulgate regulations, 
within 180 days after the date of the enactment of the Act, for cash-
out refinance loans, specifically those where the principal of the new 
loan to be VA-guaranteed or insured is larger than the payoff amount of 
the loan being refinanced. Public Law 115-174, 132 Stat. 1296.
    Section 309(a)(2) of the Act permits VA to waive the requirements 
of the Administrative Procedure Act (APA), 5 U.S.C. 551 through 559, if 
the Secretary determines that urgent or compelling circumstances make 
compliance with such requirements impracticable or contrary to public 
interest. Public Law 115-174, 132 Stat. 1348-1349.
    VA believes there are several urgent and compelling circumstances 
that make advance notice and comment on this rule contrary to the 
public interest. First, VA is concerned about lenders who seem to 
continue to exploit legislative and regulatory gaps related to 
seasoning, recoupment, and net tangible benefit standards, despite 
anti-predatory lending actions that VA and Congress have already taken. 
VA's regulatory impact analysis for this rule indicates that perhaps 
more than 50 percent of cash-out refinances remain vulnerable to 
predatory terms and conditions until this rule goes into effect. VA 
believes that VA must immediately seal these gaps to fulfill its 
obligation to veterans, prudent lenders, and those who invest in 
securities that include VA-guaranteed loans.
    VA is also gravely concerned about constraints in the availability 
of program liquidity if VA does not act quickly to address early pre-
payment speeds for VA-guaranteed cash-out refinance loans. In large 
part, cashflows derived from investors in mortgage-backed securities 
(MBS) furnished by the Government National Mortgage Association (Ginnie 
Mae) provide liquidity for lenders that originate VA-guaranteed 
refinance loans. When pricing MBS, investors rely on pre-payment models 
to estimate the level of pre-payments and any resultant potential 
losses of revenue expected to occur in a set period, given possible 
changes in interest rates. These pre-payment models tend to drive, at 
least in significant part, the valuation of Ginnie Mae MBS. Ginnie Mae, 
buyers of VA-guaranteed loans, and other industry stakeholders have 
expressed serious concerns that early pre-payments of VA-guaranteed 
loans are devaluing these investments. See ``Slowing Down VA Refi Churn 
Proving More Difficult Than Expected'', National Mortgage News 
(November 12, 2018), https://www.nationalmortgagenews.com/news/slowing-down-va-refi-churn-proving-more-difficult-than-expected. If such 
stakeholders view MBS investments that include VA-guaranteed refinance 
loans as less desirable, even prudent lenders could be deprived of the 
cashflows, i.e. liquidity, necessary to make new VA-guaranteed loans to 
veterans.
    In a hearing before the House Veterans' Affairs Committee's 
Subcommittee on Economic Opportunity, the Government National Mortgage 
Association (Ginnie Mae) issued warnings to Congress regarding the 
ripple effects that risky refinancing practices had on the valuing of 
VA-guaranteed loans, as well as Ginnie Mae pools at-large. See Hearing 
on Home Loan Churning Practices and How Veteran Homebuyers are Being 
Affected Before the Subcomm. on Econ. Opportunity of the House Comm. on 
Veterans' Affairs, 115 Cong. (2018). Thus, VA believes that, unless VA 
promulgates rules quickly, a loss of investor optimism in the VA 
product could further restrict veterans from being able to utilize 
their earned VA benefits.
    Exacerbating the issue is the lending industry's varied 
interpretation of the Act, which has led to lender uncertainty in how 
to implement a responsible cash-out refinance program. VA believes this 
uncertainty has caused prudent lenders to employ a high degree of 
caution, (e.g. refraining from providing veterans with crucial 
refinance loans that are not predatory or risky). Absent swift 
implementation of clear regulatory standards, cautious lenders are less 
likely to make cash-out refinance loans, which means that veterans do 
not enjoy the widest range of competitive, responsible credit options 
that can, when used properly, result in placing the veteran in a better 
financial position than the veteran's current circumstances afford. 
Unfortunately, such caution has the potential to compound the risk of 
predatory lending, as irresponsible

[[Page 61574]]

lenders have more opportunity to prey upon veterans by stepping into 
areas where prudent lenders may have stopped competing.
    At the same time, VA is concerned that certain lenders are 
exploiting cash-out refinancing as a loophole to the responsible 
refinancing Congress envisioned when enacting section 309 of the Act. 
VA recognizes there are certain advantages to a veteran who wants to 
obtain a cash-out refinance, and VA has no intention of unduly 
curtailing veterans' access to the equity they have earned in their 
homes. Nevertheless, some lenders are pressuring veterans to increase 
artificially their home loan amounts when refinancing, without regard 
to the long-term costs to the veteran and without adequately advising 
the veteran of the veteran's loss of home equity. In doing so, veterans 
are placed at a higher financial risk, and the lender avoids compliance 
with the more stringent requirements Congress mandated for less risky 
refinance loans. Essentially, the lender revives the period of subprime 
lending under a new name.
    VA does not plan to dispense with the notice and comment 
requirements altogether. Section 309(a)(2)(A)(ii) and (iii) of the Act 
requires VA, 10 days before publication of the final rule, to submit a 
notice of the waiver to the House and Senate Committees on Veterans' 
Affairs and publish the notice in the Federal Register. Public Law 115-
174, 132 Stat. 1296. VA is complying with these requirements. Section 
309(a)(2)(B) further requires VA to seek public notice and comment on 
this regulation if the regulation will be in effect for a period 
exceeding one year. Public Law 115-174, 132 Stat. 1296. VA anticipates 
the regulation will be in effect past the one-year mark. Therefore, VA 
is seeking public comment on the interim final rule once it is 
published in the Federal Register.

Signing Authority

    The Secretary of Veterans Affairs 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. Robert L. 
Wilkie, Secretary, Department of Veterans Affairs, approved this 
document on November 19, 2018, for publication.

    Dated: November 19, 2018.
Jeffrey M. Martin,
Assistant Director, Office of Regulation Policy & Management, Office of 
the Secretary, Department of Veterans Affairs.
[FR Doc. 2018-26021 Filed 11-29-18; 8:45 am]
BILLING CODE 8320-01-P