[Federal Register Volume 87, Number 75 (Tuesday, April 19, 2022)]
[Proposed Rules]
[Pages 23152-23154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-08276]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AR42


Loan Guaranty: Servicer Tier Ranking Procedures

AGENCY: Department of Veterans Affairs.

ACTION: Advance notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Department of Veterans Affairs (VA) Loan Guaranty Service 
(LGY) intends to revise and finalize its temporary regulations 
governing the assignment of a performance-based tier ranking to each of 
the servicers that participate in VA's guaranteed home loan program. VA 
is issuing this advance notice of proposed rulemaking (ANPR) to solicit 
comments, questions, and information to assist VA in developing a 
future proposed regulation. Although VA identifies, below, specific 
topics and questions for discussion, it encourages commenters to 
discuss any other topic that will help VA develop regulations to assign 
performance-based tier rankings to servicers that participate in VA's 
guaranteed home loan program.

DATES: Comments must be received on or before June 21, 2022.

ADDRESSES: Comments may be submitted through www.Regulations.gov. 
Comments received will be available at www.Regulations.gov for public 
viewing, inspection, or copies.

FOR FURTHER INFORMATION CONTACT: Andrew Trevayne, Assistant Director 
for Loan Administration, 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 
telephone number.)

SUPPLEMENTARY INFORMATION: 

[[Page 23153]]

I. Background

    On February 1, 2008, VA published a final rule, Loan Guaranty: Loan 
Servicing and Claims Procedures Modifications (VALERI final rule). 73 
FR 6293-6368. The VALERI final rule was the result of a lengthy 
business reengineering process that led to the modernization of VA's 
loan servicing policies and began a phased implementation of a servicer 
reporting application called the VA Loan Electronic Interface (VALERI). 
In the VALERI final rule, VA established temporary procedures for 
servicer tier ranking, currently codified at 38 CFR 36.4318. 73 FR 
6293, 6327; 75 FR 33704-33705.
    Section 36.4318(a) states that VA will assign to each servicer a 
tier ranking based upon the servicer's performance in servicing 
guaranteed loans. Section 36.4318(a) provides for four tiers, known as 
tier one, tier two, tier three, and tier four. In the VALERI final 
rule, VA explained that VA would presume each servicer to rank in tier 
two until VA develops and implements, via a regulation, a final Tier 
Ranking System (TRS). 73 FR 6293, 6301. After implementing a TRS, VA 
would quarterly evaluate each servicer's performance, and annually rank 
each servicer in tier one, two, three, or four-tier one being the 
highest rated and tier four the lowest. 38 CFR 36.4318. The VALERI 
final rule also established servicer loss mitigation options and 
incentives, currently found at 38 CFR 36.4319 (initially codified at 
Sec.  36.4819). 73 FR 6293, 6327; 75 FR 33704-33705. Section 36.4319 
provides a schedule of incentive payments that VA will pay a servicer 
in tiers one, two, or three following successful completion of each 
applicable loss mitigation action or alternative to foreclosure. 38 CFR 
36.4319. For the same type of loss mitigation action or alternative to 
foreclosure, VA will pay servicers in tier one, the highest incentive 
payment, which will decrease for tier two, and further decrease for 
tier three. Id. A servicer in tier four will not receive any incentive 
payment. Id.
    As noted in the VALERI final rule (and its accompanying proposed 
rule), VA intended to fully operationalize VALERI, and collect 
specific, servicer-reported loan servicing and claims data to develop 
its TRS. 73 FR 6293, 6301. However, due to competing priorities and 
VALERI reporting limitations, VA has delayed the development and 
implementation of a TRS. In the meantime, VA continues to presume each 
servicer to rank in tier two and pays them incentive payments 
accordingly. See 38 CFR 36.4318, 36.4319. Considering a recent re-
design of the VALERI application, which includes enhanced reporting 
functionality, VA is ready to develop and implement its TRS. By 
implementing a TRS, VA intends to further encourage its servicers to 
provide the best level of default resolution and foreclosure avoidance 
efforts to its borrowers.

II. Questions for Comment

    Once VA's TRS is effective, VA would use the TRS to calculate a 
quarterly performance score (quarterly score) for each servicer based 
on servicing data from the prior quarter. 38 CFR 36.4318(c)(1). VA 
would notify each servicer of its quarterly score. Id. After four 
quarters, VA would aggregate the quarterly scores to derive the annual 
performance score (annual score) for each servicer. 38 CFR 
36.4318(c)(2). Based on the servicer's annual score, VA would assign 
each servicer a performance tier rank (tier rank) one, two, three, or 
four. 38 CFR 36.4318(a). Finally, this tier rank would determine the 
amount of incentive payment that each servicer would receive for each 
applicable loss mitigation or alternative to foreclosure action that 
the servicer would complete in the following year. 38 CFR 36.4319. The 
purpose of this performance-based scoring and tier ranking, and tier-
rank-based incentive payments, is to recognize and reward servicers 
based on their level of efforts to help borrowers resolve default and 
avoid foreclosure. Further, it would help identify servicers who may 
need additional training or assistance in improving their loss 
mitigation and foreclosure avoidance efforts. Timely default resolution 
helps borrowers retain their homes, and foreclosure avoidance helps 
them mitigate the negative impact on their chances of future 
homeownership.
    VA's objective is to develop a TRS that accurately and effectively 
assesses the performance of each servicer's loss mitigation and 
foreclosure avoidance efforts. Consequently, the tier-based incentive 
payments would encourage servicers to timely perform loss mitigation 
actions that are in the best interest of participants in VA's 
guaranteed home loan program. With this objective, VA invites comments 
on the specific questions set forth in this ANPR, and on any other 
issues that commenters think should be addressed as part of the 
rulemaking that would establish VA's TRS.
    Question 1: Are there concerns VA should be made aware of that 
could hinder the implementation of the TRS?
    VA would like to know whether ongoing financial effects of the 
COVID-19 National Emergency should affect the timing of a TRS 
implementation. Are there other possible considerations, burdens, or 
obstacles VA should be made aware of in the implementation of the TRS?
    Question 2: Should VA consider a servicer's volume of VA loans in 
developing the TRS?
    For servicers who service a small number of VA loans, the 
performance of one or few seriously delinquent loan(s) would most 
likely have a volatile effect, good or bad, on the servicer's 
quarterly/annual score and/or the tier ranking. Should VA consider 
establishing separate requirements for scoring and ranking servicers 
who service a small number of VA loans? If yes, what volume of loans 
would be an appropriate definition of ``small'' and why? What 
information is relevant to understand whether VA should establish 
separate requirements for this type of servicer? Alternatively, is 
there another way VA could/should differentiate smaller servicers 
(i.e., number of annual foreclosure claims)?
    Question 3: Should VA expand the scope of the TRS to include 
consideration of factors beyond a servicer's performance in the areas 
of default resolution and foreclosure avoidance?
    As described above, VA would use the TRS to evaluate and score a 
servicer's performance during default resolution and foreclosure 
avoidance. Further, the tier ranking assigned would be used to 
determine the amount of incentive paid to the servicer for completing a 
loss mitigation activity or alternative to foreclosure. With that in 
mind, should VA limit its entire process of scoring, ranking, and 
calculating incentive payments to monthly servicer-reported data 
related to default resolution and foreclosure avoidance, or should VA 
consider additional factors in its TRS that are not necessarily shown 
in default resolution and foreclosure avoidance rates? Such factors 
might include, for example, timely, accurate, and complete reporting of 
monthly servicer-reported data. Please elaborate on which factors 
should/should not be included and describe how VA would confirm the 
successful completion of such factors.
    Question 4: During the testing phase of the TRS, would servicers 
like to know their quarterly performance scores? If yes, for how many 
quarters prior to the TRS becoming effective?
    Once the TRS is effective, VA would evaluate an existing servicer's 
performance for at least four full

[[Page 23154]]

quarters to assign the servicer an annual tier ranking. Until then, 
based on current Sec.  36.4318, VA will continue to presume each 
servicer to rank in tier two. VA is not planning to implement a TRS 
pilot. However, leading up to the TRS becoming effective, VA intends to 
test certain aspects of the TRS internally with live servicer-reported 
data. To the extent that VA is able, would there be any benefits to 
servicers if VA were to provide this information to servicers on a 
quarterly basis?
    Question 5: What would be the anticipated burden for a servicer to 
participate in an error resolution process? Should VA provide servicers 
with such option in developing the TRS?
    To derive the quarterly performance scores for each servicer, the 
TRS would apply a range of calculations onto a considerable volume of 
data. VA is considering a number of different criteria upon which to 
base the quarterly score on servicer performance, including: 
Delinquency rate, roll rate, default resolution rate percentage, 
quality of service, foreclosure timeline management, data quality and 
regulatory infractions, and recidivism rate. Subsequently, for each 
servicer, the TRS would aggregate the quarterly scores to calculate the 
annual score, and finally, the TRS would use the annual score to assign 
a tier ranking. It is conceivable that, due to inaccurate or incomplete 
data, the quarterly score, the annual score, and/or the annual tier 
ranking could be incorrect.
    VA might, within a certain number of days, allow a servicer to 
contest a quarterly or annual score or annual tier ranking by 
submitting supporting evidence to VA. VA is interested in understanding 
the potential burden to servicers to prepare such supporting evidence 
and submit it to VA.
    Question 6: Should VA consider providing a new VA servicer with a 
provisional tier ranking after 12 months of servicing has elapsed?
    For a new servicer, including a new servicer who acquires a 
portfolio of existing VA loans, VA is considering whether to presume 
the new servicer to rank in tier two until at least 12 months and four 
full quarters of servicing has elapsed. Once the new servicer completes 
at least 12 months and four full quarters of servicing, VA could 
continue to presume the new servicer to rank in tier two until VA next 
completes its annual scoring and tier ranking of all servicers. In some 
cases, this could result in VA presuming a new servicer to rank in tier 
two for up to 23 months. Alternatively, after the new servicer 
completes at least 12 months and four full quarters of servicing, VA 
could assign the new servicer a provisional tier rank based on the 
quarterly scores of four prior full quarters. The provisional tier rank 
would be in place until VA next completes its annual scoring and tier 
ranking of all servicers. VA invites comments as to which approach the 
public finds more reasonable and why.
    Question 7: Are there other servicer tier ranking systems that VA 
should review and consider, in part or full, for developing its TRS? 
Please describe.
    Question 8: Based on other servicer tier ranking system(s) that 
servicers may have implemented, approximately how long does it take a 
servicer to review and understand a new servicer tier ranking system?
    Question 9: Based on other servicer tier ranking system(s) that 
servicers may have implemented, as an estimate, what costs and burdens 
do servicers expect to incur for implementing a new servicer tier 
ranking system? Please describe the type(s) of cost(s) and provide 
dollar figures, if available.
    Question 10: Based on other servicer tier ranking system(s) that 
servicers may have implemented, what impact, if any, would a lower tier 
ranking (and smaller incentive payments) have on servicer participation 
in the VA home loan program? Would smaller incentive payments, due to a 
lower tier ranking, result in any costs for borrowers, either existing 
or new?

Signing Authority

    Denis McDonough, Secretary of Veterans Affairs, approved this 
document on April 12, 2022, 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.

Luvenia Potts,
Regulations Development Coordinator, Office of Regulation Policy & 
Management, Office of General Counsel, Department of Veterans Affairs.
[FR Doc. 2022-08276 Filed 4-18-22; 8:45 am]
BILLING CODE 8320-01-P