[Federal Register Volume 83, Number 241 (Monday, December 17, 2018)]
[Rules and Regulations]
[Pages 64459-64470]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27263]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AQ42


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

AGENCY: Department of Veterans Affairs.

ACTION: Interim final rule.

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SUMMARY: The Department of Veterans Affairs (VA) is amending its rules 
on VA-guaranteed or insured cash-out refinance loans. The Economic 
Growth, Regulatory Relief, and Consumer Protection Act requires VA to 
promulgate regulations governing cash-out refinance loans. This interim 
final rule defines the parameters of when VA will permit cash-out 
refinance loans, to include defining net tangible benefit, recoupment, 
and seasoning requirements.

DATES: Effective Date: This rule is effective February 15, 2019.
    Comment date: Comments are due on or before February 15, 2019.

ADDRESSES: Written comments may be submitted by email through http://www.regulations.gov; by mail or hand-delivery to Director, Regulations 
Management (00REG), Department of Veterans Affairs, 810 Vermont Avenue 
NW, Room 1063B, Washington, DC 20420; or by fax to (202) 273-9026. 
(This is not a toll-free number.) Comments should indicate that they 
are submitted in response to ``RIN 2900-AQ42, Loan Guaranty: Revisions 
to VA-Guaranteed or Insured Cash-out Home Refinance Loans.'' Copies of 
comments received will be available for public inspection in the Office 
of Regulation Policy and Management, Room 1063B, 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 http://www.regulations.gov.

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) 632-8978. (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 VA to promulgate regulations for cash-out refinance 
loans within 180 days after the date of the enactment of the Act, 
specifically for loans 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.
    VA's current regulation concerning cash-out refinance loans is 
found at 38 CFR 36.4306. VA is revising Sec.  36.4306 in this 
rulemaking, and planning additional rulemakings to implement other 
provisions of the Act.

I. VA's Refinance Program and New Section 3709

A. Two Types of Cash-Out Refinance Loans Under Section 3709

    Refinancing loans guaranteed or insured by VA have historically 
fallen into two broad categories: (i) Cash-out refinance loans (cash-
outs) offered under 38 U.S.C. 3710(a)(5) and (a)(9) and (ii) interest 
rate reduction refinancing loans (IRRRLs) authorized under 38 U.S.C. 
3710(a)(8) and (a)(11). VA has not, until the enactment of the Act, 
seen any reason to delineate in VA's cash-out refinance rule, 38 CFR 
36.4306, between cash-out refinance loans where the principal amount of 
the new loan is either: (a) Higher than, or (b) less than or equal to, 
the payoff amount of the loan being refinanced. The Act, however, 
bifurcates cash-out refinance loans relative to payoff amounts of the 
loan being refinanced, effectively requiring VA to treat the cash-out 
refinance loans differently, notwithstanding the fact that they are 
both authorized under the same statutory authority.
    Subsections (a), (b), and (c) of 38 U.S.C. 3709 set forth standards 
for fee recoupment, net tangible benefits, and loan seasoning, 
respectively, related to the refinancing of loans guaranteed or insured 
by VA. Subsections (a) through (c) all contain similar introductory 
text, providing that when a borrower refinances a loan initially made 
for a purpose under VA's enabling statute in 38 U.S.C. 3710, the new 
refinance loan must meet the respective requirements of subsections 
(a), (b), and (c).
    Subsections (a) through (c) do not expressly distinguish among the 
statutory types of refinancing loans that VA can guarantee or insure. 
While subsections (a) through (c) of section 3709 do not refer 
specifically to IRRRLs or cash-out refinance loans, subsection (d), 
which is identified under the statutory heading of ``Cash-out 
refinances'', explicitly states that subsections (a) through (c) do not 
apply to refinancing loans where the amount of the new loan is larger 
than the payoff amount of the loan being refinanced. The explicit 
delineation provided in subsection (d), i.e., the distinction between 
loan refinance amounts relative to loan payoff amounts, requires VA to 
consider cash-out refinances separately. Based on the way Congress 
structured section 3709, VA-guaranteed or insured refinance loans are 
now effectively grouped into three categories: (i) IRRRLs, (ii) cash-
outs in which the amount of the principal for the new loan is equal to 
or less than the payoff amount on the refinanced loan (Type I Cash-
Outs), and (iii) cash-outs in which the amount of the principal for the 
new loan is larger than the payoff amount of the refinanced loan (Type 
II Cash-Outs). (For ease of reference, VA is referring in this preamble 
to the types of refinancing loans as IRRRLs, Type I Cash-Outs, and Type 
II Cash-Outs, respectively. VA is not using these terms in the rule 
text.)

[[Page 64460]]

    It could be understood that, because the text of section 3709(d) 
does not make any specific reference to Type I Cash-Outs, such loans 
fall outside the scope of section 3709 altogether. In other words, it 
could be suggested that subsections (a) through (c) apply solely to 
IRRRLs and subsection (d) applies to cash-out refinance loans, 
generally, both Type I and Type II. Had Congress specified that section 
3709(a)-(c) applied to loans made for the purpose authorized in 38 
U.S.C. 3710(a)(8) or solely to streamline refinance loans, or had 
Congress not been explicit in making subsection (d) apply solely to 
Type II Cash-Outs, VA would have understood the statute this way.
    Nevertheless, the text of subsection 3709(d) omits Type I Cash-
Outs. In addition, the introductory provisions of subsections (a) 
through (c) are substantially similar. They refer generally to 38 
U.S.C. 3710, without distinction, requiring that if a loan is made for 
a purpose authorized under section 3710 and is then to be refinanced 
and guaranteed or insured by VA, the new refinancing loan is subject to 
the requirements of subsections (a) through (c). On the plain text of 
subsections (a) through (d), then, the statute requires VA to apply 
subsections (a) through (c) to all refinances not expressly excepted 
under subsection (d). Thus, VA understands subsections (a) through (c) 
to apply to IRRRLs and Type I Cash-Outs and subsection (d) to apply to 
Type II Cash-Outs.
    VA is revising its cash-out refinance rule at 38 CFR 36.4306 to 
address the new statutory bifurcation. The rule will outline the common 
characteristics required for the guaranty or insurance of Type I and 
Type II Cash-Outs. It will also set apart each type of cash-out 
refinancing to address their unique aspects. VA is further making some 
technical changes for ease of reading. All the changes are explained 
in-depth, later in this preamble. VA is not addressing section 3709's 
impact on IRRRLs, but plans to do so in a separate rulemaking.

B. The Structure of Section 3709(b) and (d) and How It Affects Type I 
and Type II Cash-Outs

    As explained, section 3709 bifurcates cash-out refinance loans into 
two types. Type I Cash-Outs are subject to 38 U.S.C. 3709(a) through 
(c). Type II Cash-Outs are subject to subsection (d). Subsections (a) 
through (c) provide specific criteria before a Type I Cash-Out may be 
guaranteed or insured.
    Subsection (a) imposes requirements related to recoupment of fees 
and expenses when refinancing a VA-guaranteed or insured loan into a 
Type I Cash-Out. In this rule, VA is simply restating the statutory 
criteria Congress prescribed in 38 U.S.C. 3709(a). Likewise, VA is 
simply restating in this rule the statutory criteria found in 
subsection (c), which imposes a seasoning period before a VA-guaranteed 
or insured loan may be refinanced into a Type I Cash-Out. To the extent 
any changes are made, they are solely for ease of reading and should 
not imply a substantive effect. VA is required to follow the statute.
    Subsection (b) requires that a refinance loan provide a net 
tangible benefit to a veteran. To that end, the lender must provide a 
veteran with a net tangible benefit test to ensure that the refinance 
is in the financial interests of the veteran. Congress required the 
test, but did not define its parameters. To clarify statutory 
ambiguity, VA is, therefore, providing the parameters, as described 
later in this preamble.
    VA considered various interpretations in dealing with section 
3709(b). As discussed above, one question was whether the section 
applies only to IRRRLs, excluding Type I Cash-Outs altogether. This 
would be untenable, however, as the plain text of the introductory 
paragraph states unambiguously that it applies broadly to VA-guaranteed 
or insured refinances of VA-guaranteed loans--IRRRLs and cash-outs--
except for those Type II Cash-Outs expressly excepted. The reading also 
would not make sense in application, as it would create a loophole for 
Type I Cash-Outs, making it easy for unscrupulous lenders to exploit 
veterans by inflating interest rates and discount points, without 
regard to net tangible benefits or the recoupment of fees and expenses. 
Such a loophole is inconsistent with the statute, as such lenders could 
render the whole of (a) through (c) meaningless.
    VA also considered whether the net tangible benefit test described 
in (b)(1) was introductory to the criteria set forth in (b)(2) through 
(4). In other words, VA analyzed whether the required interest rate 
reductions, restricted discount points, and capped loan-to-value 
ceilings of paragraphs (2) through (4) comprise, in total, the net 
tangible benefit test mentioned in paragraph (1). This reading also was 
untenable, however, due to the way Congress structured the plain text 
of subsection (b). Subsection (b) contains four paragraphs, not three. 
Had Congress intended for paragraphs (2) through (4) to comprise the 
net tangible benefit test, Congress would have made the net tangible 
benefit test part of the introductory text as an overarching 
requirement, leading into the list of various elements necessary for 
passing the test. Yet the equal paragraph structure of the law clearly 
sets the net tangible benefit test as one criterion of equal weight 
among others necessary to be met for guaranty or insurance.
    VA further considered the placement of the conjunction ``and'' 
between paragraphs (3) and (4). Generally, when Congress enacts a 
statute that lists multiple standards, utilizing serial commas and 
conjoining such discrete standards with the word ``and'' at the end, 
each discrete provision must be applied to the subject of the statute. 
U.S. House of Representatives Office of the Legislative Counsel, House 
Legislative Counsel's Manual on Drafting Style, No. HLC 104-1, sec. 351 
at 58 (1995). The problem with accepting this principle across the 
board is that ``and'' is often ambiguous. It can be used jointly or 
severally. See R. Dickerson, The Fundamentals of Legal Drafting, 76-85 
(1965). When courts deviate from the generally accepted principle, the 
outcome is largely dependent on facts and context. See, e.g., Shaw v. 
Nat'l Union Fire Ins. Co., 605 F.3d 1250 (11th Cir. 2010), which 
catalogs several cases where ``and'' proved difficult to understand.
    One rationale for departing from the generally accepted principle 
is when courts must reconcile the understanding between two mutually 
exclusive concepts. Id. The rationale applies here. The statutory use 
of the term ``and'' cannot apply as it generally would, because two of 
section 309(b)'s criteria are mutually exclusive. Of the four 
paragraphs in subsection (b), there is one that can apply in every case 
and two that cannot apply simultaneously. The fourth is dependent. 
Paragraph (1) provides that refinances of already-guaranteed loans 
cannot be guaranteed by VA unless ``the issuer of the . . . loan 
provides the borrower with a net tangible benefit test . . .'' This 
paragraph is broad enough to apply in the case of all covered loans. 
Paragraph (2) describes a case where the underlying loan and the 
refinancing loan both have a fixed interest rate. Paragraph (3) defines 
a case where the underlying loan has a fixed interest rate and the 
refinancing loan will have an adjustable interest rate. It follows that 
paragraph (2) can never apply in the case of a loan described in 
paragraph (3), and vice versa. They are mutually exclusive, which 
indicates that the ``and'' between paragraph (3) and (4) cannot mean 
that a single refinancing loan must meet all of subsection (b)'s 
requirements.

[[Page 64461]]

    Since the ``and'' between paragraph (3) and (4) could not mean that 
all paragraphs (1) through (4) must be applied and satisfied in every 
single refinance, VA had to determine the meaning. Put another way, VA 
had to analyze whether the discount points requirement would apply only 
when refinancing from a loan with a fixed rate to a loan with an 
adjustable rate (paragraph 3), or if it would also apply when 
refinancing from a fixed rate loan to a fixed rate loan (paragraph 2).
    VA found no legislative history to help clarify the term's meaning. 
For the reasons explained below, VA interprets the ``and'' to link only 
paragraphs (3) and (4).
    A common usage of the term ``and'' is one that indicates an order 
of sequence. Even if not the preferred legal understanding (see 
explanation above), it offers an alternative that resolves the apparent 
ambiguity.
    Accepting this understanding of ``and'', the discount points 
requirement described in paragraph (4) would clearly follow in sequence 
the condition prescribed in paragraph (3). The first step of moving 
from a fixed interest rate mortgage to an adjustable interest rate 
mortgage would parallel the example of the President signing a bill 
into law. The next step in the sequence, i.e., compliance with discount 
points requirements, would be analogous to the rulemaking in the 
example.
    One could argue that the same rationale could apply to paragraphs 
(2) and (4). If a veteran obtains a loan described in paragraph (2), 
the next step in the sequence would be to apply paragraph (4). The 
problem is that paragraph (3) intervenes, and paragraphs (2) and (3) 
are sequential in number only.
    Paragraphs (2) and (3) present different classes of loans entirely, 
carrying with them different risks. Again, they are mutually exclusive 
to one another. This exclusivity seems to interrupt the consequential 
element necessary for continuation of the sequence. If paragraphs (2) 
and (3) were reconcilable, meaning they could either occur 
simultaneously or follow one another, one could look to paragraph (4) 
to complete the sequence. But the differences must be given meaning, 
and VA interprets that meaning as severing the relationship between 
paragraphs (2) and (4), limiting to paragraph (3) the relationship with 
paragraph (4).
    VA recognizes other conclusions might be possible. However, VA's 
interpretation implements the text, on its face, as a coherent and 
consistent framework, without having to consider whether Congress made 
a structural error.
    The coherent and consistent framework mirrors VA's understanding of 
the lending market. A refinance loan should meet a net tangible benefit 
test to ensure that imprudent lenders do not take advantage of veterans 
and the investors who provide liquidity for VA-guaranteed loans. 
Additional requirements are tacked on as the risk profile increases. In 
VA's understanding, Congress addressed the risky aspects of moving from 
one type of interest rate to another, setting an additional threshold 
regarding interest rates, depending on what sort of interest rate 
(fixed versus adjustable) a veteran chooses. Congress addressed the 
least risky type of loan first, meaning a refinance from a fixed 
interest rate to a fixed interest rate. The required interest rate 
shift (50 basis points) is drastically less than that required when 
refinancing from a fixed interest rate to an adjustable interest rate 
(200 basis points). VA understands that, although there can be benefits 
in moving from a fixed interest rate to an adjustable rate, such a move 
is inherently risky. One reason is that the crossover to a different 
category of mortgage makes it more difficult for the average borrower 
to conduct an informed cost-benefit analysis when comparing the two 
types of mortgages. Where moving from a fixed interest rate mortgage to 
another fixed rate is like comparing apples to apples, comparing a 
fixed interest rate mortgage and an adjustable rate mortgage is more 
like comparing apples to pears. They are simply different, and as a 
result, borrowers could have a more difficult time calculating an 
accurate cost-benefit analysis. Also, the adjustable rate means that 
the monthly payment is essentially out of the borrower's hands, 
particularly in a time when interest rates are increasing. Thus, the 
adjustable rate carries with it more risk of payment shock (when the 
rate is adjusted and a higher payment amount is established) and more 
chance that a veteran would later opt to refinance again, increasing 
the risk of serial refinancing and equity stripping. VA understands the 
more significant interest rate reduction for an adjustable interest 
rate mortgage, along with the additional discount point and loan to 
value requirements, as Congress's attempt to counter the potential 
downsides of the riskier type of loans.
    Before moving to the next point, it should be noted, as well, that 
linking paragraph (4) to both paragraphs (2) and (3) is a restrictive 
approach. It would result in VA establishing a larger regulatory 
footprint than if VA were to link paragraph (4) only to paragraph (3). 
VA is reluctant to take the more restrictive interpretation for this 
aspect of the rule. VA does not have data, at least at the moment, to 
demonstrate how linking the additional restrictions of paragraph (4) to 
paragraph (2) would provide veterans additional advantages. VA also 
cannot point to data showing a clear market-based reason to impose the 
larger regulatory footprint. VA does not have other evidence that the 
more restrictive approach reflects the meaning of the ambiguously 
structured statute. Nevertheless, VA specifically invites comments on 
its interpretation of subsection (b), as VA believes it would be 
helpful to receive public feedback on this important issue.
    Finally, VA considered whether a Type I Cash-Out would need to pass 
a net tangible benefit test to comply with the law or whether the net 
tangible benefit test is merely a disclosure for informational 
purposes. The meaning of a word must be ascertained in the context of 
achieving particular objectives. See Chevron, U.S.A., Inc. v. NRDC, 
Inc., 467 U.S. 837, 861 (1984). VA first reviewed the Act to determine 
whether another section could provide additional context. The term 
``net tangible benefit test'' is not used elsewhere in the Act. Neither 
is the term ``test''. The nearest analog VA could find in the Act was 
in section 401, referring to ``supervisory stress tests.'' Under 
section 401, the Board of Governors of the Federal Reserve System is 
required to conduct supervisory stress tests of certain bank holding 
companies ``to evaluate whether such bank holding companies have the 
capital, on a total consolidated basis, necessary to absorb losses as a 
result of adverse economic conditions.''
    VA does not believe the section 401 supervisory stress test is a 
valid comparison to section 309's net tangible benefit test. A 
supervisory stress test based on estimates and forecasts of economies 
seems a completely different character from a test to show whether a 
lender is preying upon an individual borrower. The objectives are 
entirely different. ``Context Counts.'' Envtl. Def. v. Duke Energy 
Corp. 549 U.S. 561 (2007) (explaining that ``There is, then, no 
`effectively irrebuttable' presumption that the same defined term in 
different provisions of the same statute must be `interpreted 
identically.'''
    Guaranteeing a loan when VA and others know it would cause a 
veteran financial harm would be inconsistent with the statutory context 
of section 309. In paragraph (2) of subsection (b), Congress required 
that a fixed rate refinance loan must meet certain

[[Page 64462]]

interest rate requirements, or the Secretary is not authorized to 
guarantee the loan. In paragraphs (3) and (4), Congress required that 
an adjustable rate refinance loan must meet certain interest rate and 
discount point requirements, or the Secretary is not authorized to 
guarantee the loan. If each of these other provisions in subsection (b) 
sets forth a pass/fail standard that must be met, not just disclosed, 
VA finds it difficult to conclude that merely disclosing the fact that 
a loan is harmful would be sufficient to satisfy the net tangible 
benefit test of paragraph (1). It would be inconsistent to do so.
    The consistency in the legislative scheme is not limited to the 
requirements of subsection (b). The same pass/fail sort of standard 
applies to the recoupment requirements of subsection (a). If one of the 
recoupment requirements is not met, the refinance loan cannot be 
guaranteed. The same pass/fail sort of standard also applies to the 
seasoning requirements of subsection (c). If the requirement is not 
met, the loan cannot be guaranteed.
    Again, VA interprets the law within the coherent and consistent 
framework that Congress prescribed. At each step, in every provision in 
section 309, Congress identified an issue, imposed a requirement, and 
prohibited a VA guaranty as the consequence of noncompliance with one 
of the section's requirements. It would be inconsistent with this 
coherent statutory scheme if the consequence of noncompliance with the 
net tangible benefit test of subsection (b)(1) would be wholly 
different. To infer the term ``net tangible benefit disclosure'' within 
this context when Congress selected the term ``net tangible benefit 
test,'' would not only fail to give the proper weight to the word 
selection, but would also require an inference, without evidence, that 
Congress had departed from the coherent framework it had designed. VA 
believes it would run counter to the purpose of a statute entitled the 
``Protecting Veterans from Predatory Lending Act'' for VA to guarantee 
or insure a loan when all parties involved--lender, veteran, VA, 
secondary market investors, and Congress--know a loan fails a net 
tangible benefit test, meaning that the loan is predatory and indeed 
will cause financial harm. See INS v. National Ctr. for Immigrants' 
Rights, 502 U.S. 183, 189-90 (1991) (acknowledging that title of 
statute can aid in resolving ambiguity in text).
    Furthermore, for additional context in interpreting the meaning of 
the term ``test'', VA looked at other Government-backed lending 
programs: HUD, the Federal National Mortgage Association (Fannie Mae), 
the Federal Home Loan Mortgage Corporation (Freddie Mac), and the 
Department of Agriculture's Rural Development program. The consensus 
approach is that, absent a net tangible benefit to a borrower, the loan 
should not be made.
    Accordingly, VA is interpreting section 309's net tangible benefit 
test as one that must be passed. VA believes that, by selecting the 
word ``test'', Congress has imposed a requirement to establish the 
fitness of the loan, as opposed to a requirement only to disclose the 
characteristics of the loan for the veteran's understanding.
    In this rule, VA is defining the parameters of the net tangible 
benefit test for Type I Cash-Outs. VA is also establishing a net 
tangible benefit test for Type II Cash-Outs to comply with section 
3709(d). The net tangible benefit test for both types of cash-outs 
overlaps in some ways, but also differs in a few major respects. The 
full explanation is provided later in this preamble. VA will address 
the net tangible benefit test for IRRRLs in a future rulemaking.

II. Explanation of Specific Changes to 38 CFR 36.4306

A. Section 36.4306(a)

    For ease of reading, VA is revising Sec.  36.4306(a) to discuss the 
criteria that will apply to both types of cash-out refinance loans. In 
Sec.  36.4306(a), VA will provide that a refinancing loan made pursuant 
to 38 U.S.C. 3710(a)(5) qualifies for guaranty in an amount as computed 
under 38 U.S.C. 3703, provided five conditions are met.
1. Reasonable Value
    VA will require that the amount of the new loan must not exceed an 
amount equal to 100 percent of the reasonable value, as determined by 
the Secretary, of the dwelling or farm residence which will secure the 
loan. The Secretary makes determinations of reasonable value pursuant 
to requirements found in 38 U.S.C. 3731. VA's implementing regulations 
are found at 38 CFR 36.4301 and 36.4343, and VA's website provides 
additional resources for fee appraisers. See https://www.benefits.va.gov/homeloans/appraiser.asp. The current Sec.  
36.4306(a) authorizes a loan in an amount that does not exceed 90 
percent of the reasonable value of the dwelling securing the VA-
guaranteed loan. 38 CFR 36.4306(a)(1). In 1989, Congress established a 
90 percent loan-to-value ratio limit for cash-outs. See Public Law 101-
237 sec. 309(b)(3), 103 Stat. 2062. In 2008, Congress enacted Public 
Law 110-389, which increased the loan-to-value ratio limit for cash-
outs to 100 percent. See Public Law 110-389 sec. 504(b); 122 Stat. 
4145. The 100-percent loan-to-value ratio remains intact in the 
statute, and VA has been complying with this amendment. Yet VA has not 
changed its rule to reflect the 2008 change. VA is, therefore, aligning 
its rule with the statutory text to ensure that veterans have full 
access to their home loan benefits as authorized by Congress. This 
regulatory change has no substantive impact as VA has applied the 
statutory 100 percent ratio via its policy and procedural guidance to 
lenders since Congress enacted section 504 of Public Law 110-389, the 
Veterans' Benefits Improvement Act of 2008, 122 Stat. 4145. See also 
Lenders Handbook, VA Pamphlet 26-7, Chapter 3, Topic 3, Page 3-8.
2. Funding Fee
    VA will require that the funding fee as prescribed by 38 U.S.C. 
3729 may be included in the new loan amount, except that any portion of 
the funding fee that would cause the new loan amount to exceed 100 
percent of the reasonable value of the property must be paid in cash at 
the loan closing. The statute at 38 U.S.C. 3729(a)(2) authorizes 
borrowers to finance the funding fee. However, as stated in connection 
with the reasonable value requirement, 38 U.S.C. 3710 requires that 
cash-out refinance loan amounts not exceed 100 percent of the 
reasonable value of the property securing the loan. 38 U.S.C. 
3710(b)(7)-(8). Therefore, VA is clarifying that, while a funding fee 
may be financed, it must not increase the loan to value ratio such that 
the loan would violate 38 U.S.C. 3710. For any overage, a veteran must 
bring the funds to pay at loan closing.
3. Net Tangible Benefit
    For the reasons explained above, VA will require that the new loan 
must provide a net tangible benefit to the borrower. For the purposes 
of Sec.  36.4306, net tangible benefit means that the new loan is in 
the financial interest of the borrower. The lender of the new loan must 
provide the borrower with a net tangible benefit test and that test 
must be satisfied.
    First, the new loan must meet one or more of the following: The new 
loan eliminates monthly mortgage insurance, whether public or private, 
or monthly guaranty insurance; the term of the new loan is shorter than 
the term of the loan being refinanced; the interest rate on the new 
loan is lower than the interest rate on the loan being refinanced; the 
payment on the new loan is lower than the payment on the loan being

[[Page 64463]]

refinanced; the new loan results in an increase in the borrower's 
monthly residual income as explained by Sec.  36.4340(e); the new loan 
refinances an interim loan to construct, alter, or repair the home; the 
new loan amount is equal to or less than 90 percent of the reasonable 
value of the home; or the new loan refinances an adjustable rate loan 
to a fixed rate loan.
    VA has chosen these eight criteria because VA believes a loan that 
meets at least one of these criteria helps demonstrate that the loan is 
in the financial interest of the borrower. For example, a lower 
interest rate, a lower payment, or elimination of monthly mortgage 
insurance will be in the financial interest of the borrower by reducing 
the debt service the borrower must cover each month. In many cases, 
lowering the interest rate or reducing the monthly payment through 
elimination of monthly mortgage insurance will also decrease the 
overall cost to the borrower over the life of the loan. In cases where 
the monthly payment is lowered but the overall cost of the loan will 
increase (e.g., borrower refinances an existing loan with five years' 
worth of payments remaining into a new 15-year loan, takes $20,000 in 
cash out, and realizes a reduction of only 50 basis points), VA 
believes that the refinance loan may still be in the borrower's 
financial interest, as the veteran might need access to cash for 
certain expenses (e.g., home repair for livability, medical bills, or 
educational expenses). Additionally, VA notes that the loan comparison 
disclosure mandated by this rule, and discussed in more detail below, 
will provide the borrower with upfront information about the overall 
cost of a loan, thereby helping the borrower make an informed decision 
about whether to proceed with the refinance loan.
    A shorter-term loan will be in the borrower's financial interest as 
the borrower will be paying off the loan in a shorter amount of time. 
Given that all cash-out refinance loans must be fully underwritten and 
the borrower must demonstrate an ability to repay, VA sees little 
downside to a borrower who chooses to refinance his or her loan to a 
shorter term, as a borrower will most likely end up paying less 
interest over the life of the loan.
    VA also finds that a new loan resulting in an increase in the 
borrower's monthly residual income as explained by Sec.  36.4340(e) 
will be in the financial interest of the borrower by providing 
additional liquidity to the borrower. For example, in cases where 
borrowers use a cash-out refinance to pay down higher interest rate 
consumer debts (e.g., credit cards and automobile loans), borrowers use 
the equity in their home to consolidate debts at a lower interest rate, 
which results in a lower monthly debt-to-income ratio.
    A new loan that refinances an interim loan to construct, alter, or 
repair the home will provide a financial benefit to the borrower by 
refinancing out of a loan that is costly to maintain, if it can be 
maintained at all. Generally, this criterion would apply to borrowers 
who have obtained a conventional interim construction loan (i.e., one 
not guaranteed by VA) and who plan to refinance into a permanent VA-
guaranteed loan. Such refinancings enable veterans to avoid costly 
mortgage insurance. In addition, if the reasonable value of a completed 
construction project exceeds the amount of the original construction 
loan, a veteran could recoup certain out-of-pocket expenses the veteran 
incurred during construction. For example, if a veteran obtained an 
original construction loan in the amount of $200,000 and the reasonable 
value of the completed project was $210,000, the veteran could recoup, 
by refinancing into a new loan, up to $10,000 of any personal funds 
expended during the construction process.
    A new loan that is equal to or less than 90 percent of the home's 
reasonable value will also provide a financial interest to the borrower 
because at least 10 percent of home equity is maintained. Such equity 
can, for example, leave some room for a future loan modification if the 
borrower experiences a temporary reduction in income. Also, maintaining 
and building home equity is in any homeowner's interest as such equity 
represents an investment and reduces the likelihood that, when property 
values fall, a homeowner will be left with a mortgage that exceeds the 
value of the home (i.e., an ``underwater mortgage'').
    VA acknowledges that under 38 U.S.C. 3710 VA is authorized to 
guarantee certain housing loans with balances equal to 100 percent of 
the reasonable value of a property. However, VA views 10 percent equity 
preservation as one criterion out of many that can evidence that a 
refinance loan provides a net tangible benefit to a borrower. 
Accordingly, VA is incorporating the 90 percent loan to value criterion 
into the net tangible benefit test.
    VA finds that refinancing from an adjustable rate loan to a fixed 
rate loan will provide a financial benefit to the borrower by providing 
a stable interest rate over the life the loan. Generally, borrowers 
obtain adjustable rate loans to aid in affording a home for a short 
period (i.e., three to five years). However, when circumstances change 
(e.g., a change in employment, an increase in benchmark interest rates, 
or a decision to stay in a home longer) a fixed rate may be more 
affordable and may provide more certainty in the long term. Enabling 
borrowers to refinance to a fixed rate, even if such rate is higher 
than the introductory adjustable rate, can be in a veteran's financial 
interest.
    Second, the lender must provide a borrower with a comparison of the 
following: The loan payoff amount of the new loan, with a comparison to 
the loan payoff amount of the loan being refinanced; the new type of 
loan, with a comparison to type of the loan being refinanced; the 
interest rate of the new loan, with a comparison to the interest rate 
of the loan being refinanced; the term of the new loan, with a 
comparison to the term remaining on the loan being refinanced; the 
total the borrower will have paid after making all payments of 
principal, interest, and mortgage or guaranty insurance (if 
applicable), as scheduled, for both the new loan and the loan being 
refinanced; and the loan to value ratio of the new loan, with a 
comparison to the loan to value ratio under the loan being refinanced.
    Third, the lender must provide the borrower with an estimate of the 
dollar amount of home equity that, by refinancing into a new loan, is 
being removed from the reasonable value of the home, and explain that 
removal of this home equity may affect the borrower's ability to sell 
the home at a later date.
    VA will require the lender to provide the above information in a 
standardized format on two separate occasions: Not later than 3 
business days from the date of the loan application and again at loan 
closing. The borrower must certify that the borrower received this 
information on both occasions.
    Requiring lenders to provide borrowers with the above information 
on two separate occasions will enable borrowers to better understand 
their cash-out refinance loan transaction and, therefore, make a sound 
financial decision. VA believes this information will help borrowers 
avoid costly mistakes that may strip their home equity or make it 
difficult to sell or refinance their home in the future.
4. Reasonable Discount
    VA will require that the dollar amount of discount, if any, to be 
paid by the borrower must be reasonable in amount as determined by the 
Secretary in accordance with Sec.  36.4313(d)(7)(i). This requirement 
is found in current

[[Page 64464]]

Sec.  36.4306(a) and is revised for clarity only.
5. Otherwise Eligible
    VA will require that the loan must otherwise be eligible for 
guaranty. This requirement is found in current Sec.  36.4306(a).

B. Section 36.4306(b)

    VA is revising Sec.  36.4306(b) to discuss the additional criteria 
the Act provided for Type I Cash-Outs. Again, Type I Cash-Outs are 
cash-out refinance loans where the loan being refinanced is already 
guaranteed or insured by VA and the new loan amount is equal to or less 
than the payoff amount of the loan being refinanced. Section 3709 set 
out specific criteria for recoupment and seasoning for these types of 
loans. VA is adopting those criteria.
    For recoupment, there are three criteria. First, the lender of the 
refinanced loan must provide the Secretary with a certification of the 
recoupment period for fees, closing costs, and any expenses (other than 
taxes, amounts held in escrow, and fees paid under 38 U.S.C. chapter 
37) that would be incurred by the borrower in the refinancing of the 
loan. Second, all the fees and incurred costs must be scheduled to be 
recouped on or before the date that is 36 months after the date of loan 
issuance. Finally, the recoupment must be calculated through lower 
regular monthly payments (other than taxes, amounts held in escrow, and 
fees paid under 38 U.S.C. chapter 37) as a result of the refinancing 
loan.
    For seasoning, the new loan may not be guaranteed or insured until 
the date that is the later of 210 days from the date of the first 
monthly payment made by the borrower and the date on which the sixth 
monthly payment is made on the loan.
    In addition to requiring that the lender of the refinanced loan 
provide the borrower with a net tangible benefit test, section 3709 
also prescribes three net tangible benefit criteria for Type I Cash-
Outs. VA is adopting those criteria. First, in a case in which the loan 
being refinanced has a fixed interest rate and the new loan will also 
have a fixed interest rate, the interest rate on the new loan must not 
be less than 50 basis points less than the loan being refinanced. 
Second, in a case in which the loan being refinanced has a fixed 
interest rate and the new loan will have an adjustable rate, the 
interest rate on the new loan must not be less than 200 basis points 
less than the previous loan. Also, when a borrower is refinancing from 
a fixed interest rate loan to an adjustable rate loan, the lower 
interest rate must not be produced solely from discount points, unless 
such points are paid at closing and such points are not added to the 
principal loan amount. Such points may be added to the principal loan 
amount, however, when they are paid at closing and: (i) The discount 
point amounts are less than or equal to one discount point, and the 
resulting loan balance after any fees and expenses allows the property 
with respect to which the loan was issued to maintain a loan to value 
ratio of 100 percent or less, and (ii) the discount point amounts are 
greater than one discount point, and the resulting loan balance after 
any fees and expenses allows the property with respect to which the 
loan was issued to maintain a loan to value ratio of 90 percent or 
less.

C. Section 36.4306(c)

    VA is redesignating Sec.  36.4306(c) and (d) as Sec.  36.4306(d) 
and (e) and adding a new Sec.  36.4306(c). In new Sec.  36.4306(c), VA 
is adding the criteria for Type II Cash-Outs, meaning those cash-out 
refinance loans where the new loan amount is greater than the payoff 
amount of the loan being refinanced. For recoupment, VA is stating that 
meeting the requirements of paragraph (a) is sufficient. This is 
because it is impossible for VA to determine how to quantify recoupment 
for veterans who obtain this type of refinance. For example, a veteran 
may choose to refinance so that the veteran may use home equity to pay 
for a child's college tuition or help pay for nursing services for a 
loved one. The reasons veterans may choose to tap into their home 
equity are countless. VA is concerned that, if VA attempted to 
establish a recoupment period for this type of loan, VA would put a 
veteran in a worse financial position than a non-veteran, and that is 
not VA's intention.
    For proper seasoning of the VA-guaranteed loan, VA is adopting the 
same criteria found in Sec.  36.4306(b)(2) for Type I Cash-Outs, just 
stated in a different way. The difference is in form only. Where it 
made sense structurally for Sec.  36.4306(b) to include the requirement 
in the introductory text, it did not make sense structurally in Sec.  
36.4306(c). Accordingly, VA is spelling out that the seasoning period 
is the later of 210 days from the date of the first monthly payment 
made by the borrower and the date on which the sixth monthly payment is 
made on the loan; however, this requirement applies only when the loan 
being refinanced is a VA-guaranteed or insured loan.
    VA is applying the same seasoning standards for Type II Cash-Outs 
that Congress explicitly set forth for IRRRLs and Type I Cash-Outs 
because the 210-day/6-monthly payment seasoning requirement is 
consistent with other federal seasoning requirements for cash-outs and 
is a viable standard in protecting veterans from predatory lending and 
safeguarding the financial interest of the United States. For example, 
housing loans insured by the Federal Housing Administration (FHA) with 
fewer than six months' worth of payment history are not eligible for 
cash-out refinances. See U.S. Department of Housing and Urban 
Development (HUD), Mortgage Credit Analysis for Mortgage Insurance on 
One- to Four-Unit Mortgage Loans Handbook (4155.1), Chapter 3, Section 
B.2.b., available at https://www.hud.gov/sites/documents/4155-1_3_SECB.PDF (last visited Nov. 20, 2018).
    VA's analysis does not suggest a compelling reason to establish a 
novel seasoning standard for Type II Cash-Outs. In completing its 
regulatory impact analysis for this interim final rule, VA reviewed 
Type II Cash-Outs closed in fiscal years 2016, 2017, and 2018 (through 
July 2018). The vast majority of these refinance loans (96.8 percent) 
would have passed the 210-day seasoning requirement adopted in this 
rule, which indicates that VA's Type II Cash-Out portfolio is already 
achieving the Type I Cash-Out statutory seasoning requirement, as well 
as those now fairly well-accepted as industry standard for refinances 
generally (as explained above). VA does not believe that extending the 
seasoning period would provide substantially more protection to the 
financial interests of veterans. Rather, VA's analysis demonstrates 
that a net tangible benefit test would be more effective in preventing 
riskier Type II Cash-Outs.

D. Section 36.4306(d)

    VA is revising paragraph (d) to delimit the scope of the provision. 
The purpose of paragraph (d) is to explain the calculation of 
entitlement for non-streamlined refinances. It ensures that a veteran 
is not precluded from refinancing solely because entitlement has 
already been used on the loan being refinanced. Where the current rule 
states, ``nothing shall preclude . . .'' guaranty, however, VA is 
concerned that it might be easily misunderstood as superseding 
provisions related to seasoning, recoupment, etc. Therefore, VA is 
clarifying that paragraph (d) is for the limited purpose of calculating 
entitlement. No substantive change is intended.

[[Page 64465]]

E. Section 36.4306(f)

    Similarly, VA is revising paragraph (f) to clarify its scope of 
application. Paragraph (f) states that ``[n]othing in this section 
shall preclude the refinancing . . .'' of a land purchase related to 
new construction. The purpose of the rule is to ensure stakeholders 
understand that, if a loan was originally made for a land purchase 
only, refinancing for the home construction is acceptable under 38 
U.S.C. 3710. The current rule, however, is overly broad, in that it 
could easily be misunderstood as an attempt to supersede other 
provisions of the section, including those sections that, as a matter 
of statutory law, could not be superseded by rule. Accordingly, VA is 
revising the paragraph to state that nothing in this section shall 
preclude the determination that a loan is being made for a purpose 
authorized under 38 U.S.C. 3710, if the purpose of such loan is the 
refinancing of the balance due for the purchase of land on which new 
construction is to be financed through the proceeds of the loan, or the 
refinancing of the balance due on an existing land sale contract 
relating to a borrower's dwelling or farm residence. This is a 
technical change only, and VA intends no substantive impact.

F. Section 36.4306(g)

    As with paragraph (f), paragraph (g) is overly broad. It could be 
interpreted as the sole provision within Sec.  36.4306 related to 
manufactured homes. VA does not intend for paragraph (g) to be deemed a 
standalone provision, rendering the remainder of Sec.  36.4306 
inapplicable to manufactured homes. Instead, VA intends for paragraph 
(g) to be subject to the other relevant requirements (e.g., seasoning, 
recoupment, etc.) set forth in the section. Therefore, VA is inserting 
a new subparagraph (6), along with making the necessary grammatical 
edits to accommodate this addition, as a catch-all, to ensure that 
stakeholders understand ``[a]ll other requirements of this section are 
met . . .'' before VA will guarantee or insure the refinance of a 
manufactured home loan. VA intends this revision as a clarifying 
amendment only, without substantive impact.

G. Section 36.4306(h)

    Section 3709 mentions VA's statutory authority to insure 
refinancing loans. VA's cash-out refinance rule has not specified how 
insurance works for cash-out refinances. Although lenders almost always 
opt for guaranty, rather than insurance, the insurance of loans remains 
an option. Therefore, VA is adding Sec.  36.4306(h) explaining that any 
refinancing loan that might be guaranteed under this section, when made 
or purchased by any financial institution subject to examination and 
supervision by any agency of the United States or of any State may, in 
lieu of such guaranty, be insured by the Secretary under an agreement 
whereby the Secretary will reimburse any such institution for losses 
incurred on such loan up to 15 percent of the aggregate of loans so 
made or purchased by it. This provision is a restatement of the law at 
38 U.S.C. 3703(a)(2)(A).

III. Defining Home Equity

    In Sec.  36.4306, VA uses the term home equity and is therefore 
adding a definition of this term to Sec.  36.4301. VA will define home 
equity as the difference between the home's reasonable value and the 
outstanding balance of all liens on the property. This definition is 
generally accepted in the financial industry and is modified to refer 
to VA's specific program terminology. See Home Equity, Investopedia, 
https://www.investopedia.com/terms/h/home_equity.asp (last visited Aug. 
30, 2018).

Administrative Procedure Act

    Section 309(a)(2) of the Act provides express authority for the 
Secretary to waive the requirements of 5 U.S.C. 551 through 559, e.g., 
advance notice and public comment requirements, if the Secretary 
determines that urgent or compelling circumstances make compliance with 
such requirements impracticable or contrary to the public interest. See 
Public Law 115-174, section 309(a)(2)(A). VA believes that, for the 
reasons explained below, delaying implementation of this rule until 
after VA could provide advance notice, solicit comment, and address 
public comments would be contrary to the public interest. In short, VA 
has determined that urgent and compelling circumstances exist to 
warrant the implementation of these regulatory amendments through an 
interim final rule.
    It is important to note that the Act establishes a new standard, 
specific to the implementation of section 309 of the Act, for 
dispensing with advance notice and comment. The standard Congress 
created is separate and apart from the more generally applicable ``good 
cause'' exception under the Administrative Procedure Act, 5 U.S.C. 
553(b)(B).
    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 a small group of lenders 
who 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 Type II 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, responsible lenders, and investors.
    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, cash flows derived from investors in mortgage-backed securities 
(MBS) 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 such MBS. 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 (last visited Nov. 20, 
2018). If such stakeholders view MBS investments that include VA-
guaranteed refinance loans as less desirable, prudent lenders could be 
deprived of the cash flows, i.e. liquidity, necessary to make new VA-
guaranteed loans to veterans.
    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 responsible 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

[[Page 64466]]

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 lenders have 
more opportunity to prey upon veterans.
    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.
    Lender uncertainty and the potential loophole may also cause 
investors to devalue VA refinance loans until VA steps in to resolve 
the issues. 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.
    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 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 has complied 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 this rulemaking.

Executive Orders 12866, 13563, and 13771

    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 to be an economically 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 website 
at http://www.va.gov/orpm/, by following the link for ``VA Regulations 
Published From FY 2004 Through Fiscal Year to Date.'' This interim 
final rule is considered an E.O. 13771 regulatory action. Details on 
the estimated costs of this interim final rule can be found in the 
rule's economic analysis.

Congressional Review Act

    This regulatory action is a major rule under the Congressional 
Review Act, 5 U.S.C. 801-08, because it may result in an annual effect 
on the economy of $100 million or more. Therefore, in accordance with 5 
U.S.C. 801(a)(1), VA will submit to the Comptroller General and to 
Congress a copy of this regulatory action and VA's Regulatory Impact 
Analysis. Provided Congress does not adopt a joint resolution of 
disapproval, this rule will become effective the later of the date 
occurring 60 days after the date on which Congress receives the report, 
or the date the rule is published in the Federal Register. 5 U.S.C. 
801(a)(3)(A).

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 (adjusted annually for 
inflation) in any one year. This interim final rule will have no such 
effect on State, local, and tribal governments, or on the private 
sector.

Paperwork Reduction Act

    This interim final rule includes provisions constituting 
collections of information under the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501-3521) that require approval by OMB. Accordingly, under 
44 U.S.C. 3507(d), VA has submitted a copy of this rulemaking action to 
OMB for review with a request for emergency processing.
    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. Section 36.4306 contains a 
collection of information under the Paperwork Reduction Act of 1995. If 
OMB does not approve the collection of information as requested, VA 
will immediately remove the provisions containing a collection of 
information or take such other action as is directed by OMB.
    Comments on the collections of information contained in this 
interim final rule 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 or 
emailed to [email protected], with copies sent by mail or 
hand delivery to the Director, Regulation Policy and Management 
(00REG), Department of Veterans Affairs, 810 Vermont Avenue NW, Room 
1068, Washington, DC 20420; fax to (202) 273-9026; or submitted through 
www.Regulations.gov. Comments should indicate that they are submitted 
in response to ``RIN 2900-AQ42--Loan Guaranty: Revisions to VA-
Guaranteed

[[Page 64467]]

or Insured Cash-out Home Refinance Loans.''
    OMB is required to make a decision concerning the collections of 
information contained in this interim final rule between 30 and 60 days 
after publication of this document in the Federal Register. Therefore, 
a comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. Notice of OMB approval for 
this information collection will be published in a future Federal 
Register document.
    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.
    The collection of information contained in 38 CFR 36.4306 is 
described immediately following this paragraph.
    Title: VA-Guaranteed Home Loan Cash-out Refinance Loan Comparison 
Disclosure.
     Summary of collection of information: The new collection 
of information in 38 CFR 36.4306(a)(3) requires lenders to provide 
borrowers with a net tangible benefit test. To satisfy the net tangible 
benefit test, the new loan must meet certain loan criteria; the lender 
must provide a comparison of the terms of the borrower's current loan 
to the terms of the new loan; and the lender must provide the borrower 
a statement concerning the effects of refinancing on the borrower's 
home equity. This information must be provided to the borrower by the 
lender in a standardized format not later than 3 business days of the 
refinance application and again at closing. The borrower must 
acknowledge receipt of this information on both occasions by signing 
the certification.
    VA notes that it will not require lenders to complete a specific 
form. Instead, lenders will generate their own certification from their 
loan origination software. Additionally, any information and response 
to yes/no questions could be answered automatically by the information 
that the lender is inputting as they underwrite the loan. VA created a 
sample certification as an example, but this is not a required document 
or format. VA is only asking the lender to take the information they 
already collect from and provide to veterans, and display and provide 
that information into an easy to read format for the veteran.
     Description of need for information and proposed use of 
information: The information will be used by VA to ensure that the new 
loan meets the net tangible benefit test.
     Description of likely respondents: Lenders refinancing an 
existing loan product through a cash-out refinance loan.
     Estimated number of respondents: VA anticipates the annual 
estimated number of respondents to be 156,000 per year, which is based 
on a 3-year average of VA cash-out refinance loans. VA also estimates a 
one-time burden to the 16,000 loan officers who will require training 
on the new disclosure requirements.
    The training estimate was derived from the 2017 Nationwide Mortgage 
Licensing System & Registry (NMLS) Industry Report showing 158,199 
mortgage loan originators and the July 2018 Ellie Mae Origination 
Insight Report indicating that VA represents 10 percent of the national 
mortgage market. VA assumes that loan officers will learn about this 
new disclosure through annual NMLS TRID/TILA training.
     Estimated frequency of responses: Two times per loan for 
generating and disclosing the information to the borrower. One time for 
training purposes.
     Estimated average burden per response: 5 minutes (total 
for both instances of generation and disclosure). 5 minutes (for 
training).
     Estimated total annual reporting and recordkeeping burden: 
The total annual burden is 12,906 hours. This represents the ongoing 
annual burden of 12,480 hours to generate and provide the disclosure 
plus the one-time hour burden from training (1,280 hours) that has been 
annualized to 426 hours per year for the first three years. The total 
estimated annualized cost to respondents is $483,458.76 (12,906 burden 
hours x $37.46 per hour).
     VA also estimates a one-time technology cost associated 
with this information collection of $1,266,366 (annualized to $422,122 
per year for the first three years). To derive this estimate, VA 
generated a high/low estimate of the one-time technology costs 
associated with this information collection. The low estimate assumes 
that 80 percent of affected lending entities (i.e., 960 of the 1,200 
active VA lenders who make cash-out refinance loans) will not be 
required to complete any technology upgrades as the software companies 
who supply their loan origination software (LOS) systems will update 
their products in time to enable these lenders to comply with the 
regulatory requirements. The costs therefore represent the costs to the 
remaining 20 percent of lenders (i.e., 240 lenders) that will need to 
complete a technology upgrade to generate the disclosure in their LOS. 
The high estimate assumes that no LOS product updates will be in place 
on time and all 1,200 lenders will be required to assume the costs of 
completing a technology upgrade to generate their disclosure.
    VA calculated the one-time technology costs utilizing the amount of 
time estimated to develop a custom disclosure form (either through 
existing LOS software or via a third-party contract). VA assumed 40 
hours of planning, development, testing, and deployment to add the 
disclosure form to a lender's existing LOS. The wage burden was 
calculated as a composite wage, with weighting based on information 
provided by various industry professionals. Mean values from the BLS 
Occupational Employment and Wages data were used to estimate a 
composite wage as 5% Compliance Officer (occupation code 13-1041) at 
$34.39/hour, 5% Lawyer (occupation code 23-1011) at $68.22/hour, and 
90% Computer Occupations (occupation code 15-1100) at $43.16/hour, for 
a composite wage of $43.97.
    VA estimated a high annualized cost of $703,520 and a low 
annualized cost of $140,704. VA therefore estimates that the average 
cost to be $422,122.

Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), imposes 
certain requirements on Federal agency rules that are subject to the 
notice and comment requirements of the Administrative Procedure Act 
(APA), 5 U.S.C. 553(b). This interim final rule is exempt from the 
notice and comment requirements of the APA because the Act permitted VA 
to waive those requirements if the Secretary determined that urgent or 
compelling circumstances make compliance with such requirements 
impracticable or

[[Page 64468]]

contrary to the public interest. As previously discussed, VA has found 
urgent and compelling circumstances to waive those requirements do 
exist. Therefore, the requirements of the RFA applicable to notice and 
comment rulemaking do not apply to this rule.
    Nevertheless, VA does not anticipate that this interim final rule 
will have a significant impact on small business lenders. The Small 
Business Administration (SBA) states that a mortgage lending business 
(NAICS code 522292) is small if annual receipts are less than 
$38,500,000. See 13 CFR 121.201. Utilizing FY2017 annual lender data 
and financial information, VA estimates approximately 22 percent (or 
324) of its lenders qualify as a small business; of those who 
participate in VA cash-out loans, VA estimates 20 percent (or 238) of 
its lenders qualify as a small business.\1\ Of the 238 small business 
lenders who participate in VA cash-out loans, VA notes that 90 percent 
(216 lenders) completed no more than 20 VA cash-out loans in FY2017, 
suggesting that the impact of the statute and this regulation on their 
lending business will be minimal. In that regard, given that VA 
represents only 10 percent of the national mortgage market, it would be 
difficult for a small business to rely solely on VA loans in its 
portfolio. In fact, a sampling of VA small business lenders' websites 
shows that they all offer the full range of conventional, FHA, and VA 
loan products.
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    \1\ Fiscal year (FY) 2017 data shows that 1,467 lenders 
participated in VA loans in FY2017. See VBA Lender Loan Volume 
Reports, ``FY 2017,'' https://www.benefits.va.gov/HOMELOANS/Lender_Statistics.asp. VA first eliminated those whose total VA loan 
volume for FY2017 was greater than $38.5 million (425 lenders). Of 
those remaining, VA removed any lenders who were part of a 
depository institution (i.e., a bank) as they would not fall within 
SBA's definition of a small business for NAICS code 522292, which 
specifically applies to non-depository credit. See 13 CFR 121.201. 
Of those remaining, VA consulted financial information provided by 
lenders to VA in 2017 for purposes of qualifying for automatic 
closing authority. If no annual financial data was available, VA 
assumed the lender was a small business. Of all VA lenders, data 
showed 324 lenders (22%) met the small business definition. For 
lenders who made VA cash-out loans in FY2017, 238 (19.8%) met the 
small business definition.
---------------------------------------------------------------------------

    Relying on its industry knowledge, VA assumes that average loan 
volume for a one-person lending shop would be approximately 120 loans 
per year (or 10 loans per month). As such, even if such a lender were 
to no longer make any VA cash-out loans, it is likely this would 
represent no more than 20 percent of portfolio for the year. VA 
believes this is even too conservative of an estimate as its own lender 
statistics show that for most of its small business lenders (213 out of 
238 lenders), VA cash-out loans represent less than half of their VA 
portfolio. For those whose VA portfolio is majority cash-out 
refinances, only six lenders completed more than 20 VA cash-outs in 
FY2017.

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.

List of Subjects in 38 CFR Part 36

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

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 September 12, 2018, for publication.

    Dated: December 12, 2018.
Jeffrey M. Martin,
Assistant Director, Office of Regulation Policy & Management, Office of 
the Secretary, Department of Veterans Affairs.

    For the reasons stated in the preamble, the Department of Veterans 
Affairs amends 38 CFR part 36 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 3720.

Subpart B--Guaranty or Insurance of Loans to Veterans With 
Electronic Reporting

0
2. Amend Sec.  36.4301 by adding a definition of home equity in 
alphabetical order to read as follows:


Sec.  36.4301   Definitions.

* * * * *
    Home equity. Home equity is the difference between the home's 
reasonable value and the outstanding balance of all liens on the 
property.
* * * * *

0
3. Amend Sec.  36.4306 by:
0
a. Revising paragraphs (a) and (b).
0
b. Redesignating paragraphs (c) and (d) as new paragraphs (d) and (e).
0
c. Adding new paragraph (c).
0
d. Revising newly redesignated paragraph (d) and paragraphs (f) and 
(g)(4) and (5).
0
e. Adding paragraphs (g)(6) and (h).
0
f. Revising the authority citation at the end of the section.
    The revisions and addition read as follows:


Sec.  36.4306  Refinancing of mortgage or other lien indebtedness.

    (a) A refinancing loan made pursuant to 38 U.S.C. 3710(a)(5) 
qualifies for guaranty in an amount as computed under 38 U.S.C. 3703, 
provided--
    (1) The amount of the new loan must not exceed an amount equal to 
100 percent of the reasonable value, as determined by the Secretary, of 
the dwelling or farm residence which will secure the loan.
    (2) The funding fee as prescribed by 38 U.S.C. 3729 may be included 
in the new loan amount, except that any portion of the funding fee that 
would cause the new loan amount to exceed 100 percent of the reasonable 
value of the property must be paid in cash at the loan closing.
    (3) The new loan must provide a net tangible benefit to the 
borrower. For the purposes of this section, net tangible benefit means 
that the new loan is in the financial interest of the borrower. The 
lender of the new loan must provide the borrower with a net tangible 
benefit test. The net tangible benefit test must be satisfied. The net 
tangible benefit test is defined as follows:
    (i) The new loan must meet one or more of the following:
    (A) The new loan eliminates monthly mortgage insurance, whether 
public or private, or monthly guaranty insurance;
    (B) The term of the new loan is shorter than the term of the loan 
being refinanced;
    (C) The interest rate on the new loan is lower than the interest 
rate on the loan being refinanced;
    (D) The payment on the new loan is lower than the payment on the 
loan being refinanced;
    (E) The new loan results in an increase in the borrower's monthly 
residual income as explained by Sec.  36.4340(e);
    (F) The new loan refinances an interim loan to construct, alter, or 
repair the primary home;
    (G) The new loan amount is equal to or less than 90 percent of the 
reasonable value of the home; or
    (H) The new loan refinances an adjustable rate mortgage to a fixed 
rate loan.
    (ii) The lender must provide a borrower with a comparison of the 
following:

[[Page 64469]]

    (A) The loan payoff amount of the new loan, with a comparison to 
the loan payoff amount of the loan being refinanced;
    (B) The new type of loan, with a comparison to the type of the loan 
being refinanced;
    (C) The interest rate of the new loan, with a comparison to the 
interest rate of the loan being refinanced;
    (D) The term of the new loan, with a comparison to the term 
remaining on the loan being refinanced;
    (E) The total the borrower will have paid after making all payments 
of principal, interest, and mortgage or guaranty insurance (if 
applicable), as scheduled, for both the loan being refinanced and the 
new loan; and
    (F) The loan to value ratio of the loan being refinanced compared 
to the loan to value ratio under the new loan.
    (iii) The lender must provide the borrower with an estimate of the 
dollar amount of home equity that, by refinancing into a new loan, is 
being removed from the reasonable value of the home, and explain that 
removal of this home equity may affect the borrower's ability to sell 
the home at a later date.
    (iv) The lender must provide the information required under 
paragraphs (a)(3)(i) through (iii) of this section in a standardized 
format and on two separate occasions: Not later than 3 business days 
from the date of the loan application and again at loan closing. The 
borrower must certify that the borrower received the information 
required under paragraphs (a)(3)(i) through (iii) on both occasions.
    (4) The dollar amount of discount, if any, to be paid by the 
borrower must be reasonable in amount as determined by the Secretary in 
accordance with Sec.  36.4313(d)(7)(i).
    (5) The loan must otherwise be eligible for guaranty.
    (b) If the loan being refinanced is a VA-guaranteed or insured 
loan, and the new loan amount is equal to or less than the payoff 
amount of the loan being refinanced, the following requirements must 
also be met--
    (1)(i) The lender of the refinanced loan must provide the Secretary 
with a certification of the recoupment period for fees, closing costs, 
and any expenses (other than taxes, amounts held in escrow, and fees 
paid under 38 U.S.C. chapter 37) that would be incurred by the borrower 
in the refinancing of the loan;
    (ii) All of the fees and incurred costs must be scheduled to be 
recouped on or before the date that is 36 months after the date of loan 
issuance; and
    (iii) The recoupment must be calculated through lower regular 
monthly payments (other than taxes, amounts held in escrow, and fees 
paid under 38 U.S.C. chapter 37) as a result of the refinanced loan.
    (2) The new loan may not be guaranteed or insured until the date 
that is the later of 210 days from the date of the first monthly 
payment made by the borrower and the date on which the sixth monthly 
payment is made on the loan.
    (3) In a case in which the loan being refinanced has a fixed 
interest rate and the new loan will also have a fixed interest rate, 
the interest rate on the new loan must not be less than 50 basis points 
less than the loan being refinanced.
    (4) In a case in which the loan being refinanced has a fixed 
interest rate and the new loan will have an adjustable rate, the 
interest rate on the new loan must not be less than 200 basis points 
less than the previous loan. In addition--
    (i) The lower interest rate must not be produced solely from 
discount points, unless such points are paid at closing; and
    (ii) Such points are not added to the principal loan amount, 
unless--
    (A) For discount point amounts that are less than or equal to one 
discount point, the resulting loan balance after any fees and expenses 
allows the property with respect to which the loan was issued to 
maintain a loan to value ratio of 100 percent or less; and
    (B) For discount point amounts that are greater than one discount 
point, the resulting loan balance after any fees and expenses allows 
the property with respect to which the loan was issued to maintain a 
loan to value ratio of 90 percent or less.
    (c) If the new loan amount exceeds the payoff amount of the loan 
being refinanced--
    (1) The borrower is deemed to have recouped the costs of the 
refinancing if the requirements prescribed in paragraph (a) are met.
    (2) The new loan may not be guaranteed or insured until the date 
that is the later of 210 days from the date of the first monthly 
payment made by the borrower and the date on which the sixth monthly 
payment is made on the loan; however, this requirement applies only 
when the loan being refinanced is a VA-guaranteed or insured loan.
    (d) For the limited purpose of calculating entitlement, nothing 
shall preclude guaranty of a loan to an eligible veteran having home 
loan guaranty entitlement to refinance under the provisions of 38 
U.S.C. 3710(a)(5) a VA-guaranteed or insured (or direct) mortgage loan 
made to him or her which is outstanding on the dwelling or farm 
residence owned and occupied or to be reoccupied after the completion 
of major alterations, repairs, or improvements to the property, by the 
veteran as a home, or in the case of an eligible veteran unable to 
occupy the property because of active duty status in the Armed Forces, 
occupied or to be reoccupied by the veteran's spouse as the spouse's 
home.
* * * * *
    (f) Nothing in this section shall preclude the determination that a 
loan is being made for a purpose authorized under 38 U.S.C. 3710, if 
the purpose of such loan is the refinancing of the balance due for the 
purchase of land on which new construction is to be financed through 
the proceeds of the loan, or the refinancing of the balance due on an 
existing land sale contract relating to a borrower's dwelling or farm 
residence.
    (g) * * *
    (4) The amount of the loan may not exceed an amount equal to the 
sum of the balance of the loan being refinanced; the purchase price, 
not to exceed the reasonable value of the lot; the costs of the 
necessary site preparation of the lot as determined by the Secretary; a 
reasonable discount as authorized in Sec.  36.4313(d)(6) with respect 
to that portion of the loan used to refinance the existing purchase 
money lien on the manufactured home, and closing costs as authorized in 
Sec.  36.4313.
    (5) If the loan being refinanced was guaranteed by VA, the portion 
of the loan made for the purpose of refinancing an existing purchase 
money manufactured home loan may be, guaranteed without regard to the 
outstanding guaranty entitlement available for use by the veteran, and 
the veteran's guaranty entitlement shall not be charged as a result of 
any guaranty provided for the refinancing portion of the loan. For the 
purposes enumerated in 38 U.S.C. 3702(b), the refinancing portion of 
the loan shall be considered to have been obtained with the guaranty 
entitlement used to obtain VA-guaranteed loan being refinanced. The 
total guaranty for the new loan shall be the sum of the guaranty 
entitlement used to obtain VA-guaranteed loan being refinanced and any 
additional guaranty entitlement available to the veteran. However, the 
total guaranty may not exceed the guaranty amount as calculated under 
Sec.  36.4302(a); and
    (6) All other requirements of this section are met.
    (h) Any refinancing loan that might be guaranteed under this 
section, when

[[Page 64470]]

made or purchased by any financial institution subject to examination 
and supervision by any agency of the United States or of any State may, 
in lieu of such guaranty, be insured by the Secretary under an 
agreement whereby the Secretary will reimburse any such institution for 
losses incurred on such loan up to 15 percent of the aggregate of loans 
so made or purchased by it.

(Authority: 38 U.S.C. 3703, 3709, 3710)


[FR Doc. 2018-27263 Filed 12-14-18; 8:45 am]
 BILLING CODE 8320-01-P