[Federal Register Volume 88, Number 138 (Thursday, July 20, 2023)]
[Proposed Rules]
[Pages 46720-46723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-14478]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AR97


Loan Guaranty: Servicer Regulation Changes

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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SUMMARY: The Department of Veterans Affairs (VA) is proposing to rename 
and clarify certain loss-mitigation terms used in VA's regulations. VA 
is proposing these changes to align the names and definitions with 
their general use in the housing finance industry. VA believes that 
these proposed revisions would help avoid confusion and enable 
servicers and veterans to address loan defaults more quickly and 
effectively.

DATES: Comments must be received on or before September 18, 2023.

ADDRESSES: Comments must be submitted through www.regulations.gov. 
Except as provided below, comments received before the close of the 
comment period will be available at www.regulations.gov for public 
viewing, inspection, or copying, including any personally identifiable 
or confidential business information that is included in a comment. We 
post the comments received before the close of the comment period on 
the following website as soon as possible after they have been 
received: http://www.regulations.gov. VA will not post on 
Regulations.gov public comments that make threats to individuals or 
institutions or suggest that the commenter will take actions to harm an 
individual. VA encourages individuals not to submit duplicative 
comments. We will post acceptable comments from multiple unique 
commenters even if the content is identical or nearly identical to 
other comments. Any public comment received after the comment period's 
closing date is considered late and will not be considered in the final 
rulemaking.

FOR FURTHER INFORMATION CONTACT: Andrew Trevayne, Assistant Director 
for Loan and Property Management, and Stephanie Li, Assistant Director 
for Regulations, Legislation, Engagement, and Training, 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: 

I. Background

    VA's Loan Guaranty Service offers home loan programs that assist 
eligible veterans, service members, and certain surviving spouses 
(hereinafter collectively referred to as ``veteran'') to buy, build, 
improve, or refinance a home. When a VA-guaranteed loan goes into 
default, the servicer may attempt to resolve the default using a loss-
mitigation option that enables the veteran to remain in their home 
(e.g., repayment plan, special forbearance, or loan modification) or 
avoid foreclosure through compromise sale or deed in lieu of 
foreclosure.\1\
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    \1\ See 38 CFR 36.4319.
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    While regulations in 38 CFR part 36 are specific to VA-guaranteed 
loans, the loss-mitigation options outlined are typical across the 
housing finance industry. VA has received feedback that the names of 
certain servicing terms used in VA regulations are not aligned with how 
those terms are named in the housing finance industry, occasionally 
leading to confusion amongst stakeholders and veterans.
    Additionally, VA's inconsistency in using the terms ``written'' and 
``documented'' to reference various agreements in servicing regulations 
may be confusing for servicers as to whether new technologies enabling 
certain loss-mitigation agreements to be established and documented in 
non-written formats are acceptable to VA. For example, as part of the 
final rule implementing the VA Loan Electronic Reporting Interface 
(VALERI) and corresponding regulations, VA updated its regulation 
pertaining to acceptance of partial payments by removing the 
requirement for a repayment plan to be ``written'' and adding that it 
must be ``documented.'' \2\ However, other

[[Page 46721]]

references to repayment plan and other loss-mitigation agreements, such 
as loan modifications, still contain references to a ``written'' 
requirement.\3\
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    \2\ See 38 CFR 36.4316(b). As background, VA amended its 
regulation pertaining to partial payments as part of an overhaul of 
existing VA loan guaranty program requirements. On February 18, 2005 
(70 FR 8472, 8475), VA proposed amendments to then-existing 38 CFR 
36.4315. Thereafter, on June 1, 2007 (72 FR 30505), VA published a 
supplemental proposed rule outlining VA's plan to phase-in the new 
38 CFR part 36 regulations. This plan included temporarily 
designating then-existing provisions found at 38 CFR 36.4300 through 
36.4393 (the ``36.4300 series'') as a new subpart B and establishing 
a new subpart F to include new 38 CFR 36.4800 through 36.4393 (the 
``36.4800 series''). See 72 FR 30505. On February 1, 2008 (73 FR 
6294), VA published a final rule establishing the 36.4800 series, 
including 38 CFR 36.4816, which contained the proposed amendments to 
then-existing 38 CFR 36.4315. On June 15, 2010 (75 FR 33704), VA 
redesignated the 36.4800 series to replace the 36.4300 series in its 
entirety. Thus, 38 CFR 36.4315 became 38 CFR 36.4816, which became 
38 CFR 36.4316.
    \3\ See 38 CFR 36.4301 (definitions of ``repayment plan'' and 
``special forbearance''); see also 38 CFR 36.4315, 36.4316(b)(6).
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    With this proposed rulemaking, VA would make revisions throughout 
38 CFR part 36 to better align certain loss-mitigation and servicing 
terms with the industry. VA is also proposing amendments to clarify 
that written signatures are not required in order to execute certain 
loss-mitigation agreements.

II. Legal Authority

    Congress has authorized VA to oversee and regulate the servicing of 
VA guaranteed loans. See 38 U.S.C. 501 and chapter 37. This includes 
implementing or clarifying program requirements for the mortgage 
servicing industry such as determining the acceptable documentation for 
a VA guaranteed loan and clarifying servicing loan procedures. During 
the last several years, the mortgage servicing industry has undergone 
various technological advancements which caused necessary procedural 
adjustments. Therefore, VA is proposing these amendments pursuant to 
its statutory authority found in section 501 and chapter 37 of title 
38, United States Code.

III. Summary of Proposed Changes

A. Amend ``Compromise Sale'' to ``Short Sale''

    VA is proposing to amend the term ``compromise sale'' to ``short 
sale'' to be consistent with the name the housing finance industry uses 
to refer to this type of transaction.\4\ Specifically, in Sec.  
36.4301, VA would remove the definition for ``Compromise sale'' and add 
a definition for ``Short sale'' to read as follows: ``A sale to a third 
party for an amount less than is sufficient to repay the unpaid balance 
on the loan where the holder has agreed in advance to release the lien 
in exchange for the proceeds of such sale.'' Also, in the definition 
for liquidation sale in Sec.  36.4301, VA would revise the third 
sentence to refer to ``short sale'' instead of ``compromise sale.'' 
Similarly, VA would remove the references to compromise sale and add in 
its place short sale each place it appears in Sec. Sec.  
36.4317(c)(21); 36.4319(a), (b), and (c)(4); and 36.4322(e)(1), 
(1)(ii), (2), and (f)(1)(iii).
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    \4\ National Association of Realtors, Short Sales & 
Foreclosures, https://www.nar.realtor/short-sales-foreclosures (last 
visited Jan. 4, 2023) (``A short sale is a transaction in which the 
lender, or lenders, agree to accept less than the mortgage amount 
owed by the current homeowner. In some cases, the difference is 
forgiven by the lender, and in others the homeowner must make 
arrangements with the lender to settle the remainder of the 
debt.'').
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B. Amend ``Refund'' to ``VA Purchase''

    Loan Guaranty Service regulations currently use the term ``refund'' 
to denote two separate types of transactions that are entirely 
different in context and purpose. First, in 38 CFR 36.4320, VA uses the 
term ``refund'' to refer to a transaction when VA pays a holder the 
current unpaid principal balance of a VA-guaranteed loan in exchange 
for transfer and assignment of the guaranteed loan to VA. Another way 
of understanding this transaction is that VA purchases the loan from 
the holder and becomes the new loan holder. VA also uses the term 
``refund'' as it is more commonly understood when referring to 
instances in which VA requires the holder to return certain monetary 
amounts to a veteran.\5\
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    \5\ See, e.g., 38 CFR 36.4303(l)(1)(i)(B), 36.4353(b)(2)(v).
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    To avoid confusion, VA is proposing to remove the term ``refund'' 
and add in its place ``VA purchase'' whenever that term is used to 
refer to a transaction described in Sec.  36.4320. Specifically, VA 
would amend the heading for Sec.  36.4320 by removing ``Refunding'' and 
adding ``VA purchase'' in its place. In Sec.  36.4320(c), VA would 
remove ``refund'' and add in its place ``purchase.'' Additionally, VA 
proposes to amend Sec.  36.4317(c)(30) and (31) to clarify how those 
terms are used for servicer reporting requirements. In choosing the 
term ``VA purchase,'' VA notes that the relevant statutory authority 
for this transaction (38 U.S.C. 3732(a)) does not refer to the 
transaction as a refund. Instead, section 3732(a)(2)(A) describes a 
transaction where VA, at its own option, ``pay[s] the holder of the 
obligation the unpaid balance of the obligation plus accrued interest 
and receive[s] an assignment of the loan and security,'' which is much 
more consistent with the common definition of purchase.\6\
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    \6\ Black's Law Dictionary (11th ed. 2019) (noting the 
definition of purchase as ``[t]he acquisition of an interest in real 
or personal property by sale, discount, negotiation, mortgage, 
pledge, lien, issue, reissue, gift, or any other voluntary 
transaction'').
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C. Removing References to ``Written'' and ``Executed'' Agreements

    VA is also proposing to remove the references to ``written'' and 
``executed'' in regard to repayment plans and special forbearance 
agreements and replace with a requirement that an agreement be 
documented. A written, executed agreement can seem more specific and 
limiting in its form and manner of establishment; that is, it may be 
understood as a requirement for the servicer and veteran to sign the 
agreement in writing. Servicers who have interpreted VA's current 
regulations in such manner have indicated that this leads to additional 
time and costs to prepare and execute VA loss-mitigation agreements.
    VA's main concern is that there is an audit trail of the acceptance 
of the agreement between the servicer and the veteran, not that the 
agreement remain restricted to outmoded methods of memorializing 
agreements. VA simply requires that evidence of the agreement between 
the parties be presented to VA in written form, such as documentation 
through email or mobile application (with e-signatures, such as 
DocuSign), or during a recorded phone call (agreed verbally, then 
documented in a letter/notice, and later acted upon).
    Therefore, VA is proposing to clarify VA's expectations regarding 
the establishment of these agreements. The proposed changes would more 
clearly provide servicers and veterans flexibility in utilizing 
industry-prevalent technologies to establish loss-mitigation 
agreements.
    More specifically, VA proposes to remove references to ``a written 
executed agreement'' and ``written agreement'' in the definitions of 
``repayment plan'' and ``special forbearance,'' respectively, in Sec.  
36.4301 and add in those places ``a documented agreement.'' 
Additionally, in the definition of ``repayment plan,'' VA proposes to 
make minor grammatical edits so that the text is consistent with the 
framework for the definition of ``special forbearance.'' In Sec.  
36.4315(a), Loan modifications, VA proposes to remove the reference to 
a ``written agreement'' and add in its place ``a documented 
agreement.''
    In Sec.  36.4316(b)(2) through (4), VA proposes to remove the 
references to ``documented'' as this term would be incorporated into 
the definition of ``repayment plan'' under this proposed rule. VA also 
proposes to remove the term ``written'' in Sec.  36.4316(b)(6) in 
reference to a repayment plan.
    In Sec.  36.4317(c)(18), VA proposes to remove the term 
``agreement'' when

[[Page 46722]]

referencing a ``special forbearance'' as this term, by the proposed 
definition, would be an agreement. For similar reason, in Sec.  
36.4319(a), VA proposes to remove the term ``special forbearance 
agreements'' and add in its place ``special forbearances.''

D. Technical Amendment To Update Information Collection Reference

    Finally, VA proposes to use this rule as an opportunity to correct 
an outdated reference to an approved information collection in Sec.  
36.4320. Currently, Sec.  36.4320 states the Office of Management and 
Budget (OMB) has approved the information collection requirements in 
this section under control number 2900-0362. However, in 2010, VA 
submitted to OMB a request to incorporate the information collected in 
Sec.  36.4320 (specifically, VA Form 26-1874, Claim Under Loan 
Guaranty, and VA Form 26-1874a, Claim Form Addendum--Adjustable Rate 
Mortgages), into another information collection under OMB control 
number 2900-0021.\7\ VA's request was approved in March 2011, and the 
information collection remains active. VA, therefore, proposes to 
update the OMB control number to 2900-0021.
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    \7\ See 75 FR 17832 (Apr. 7, 2010); 75 FR 33898 (June 15, 2010).
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Executive Orders 12866, 13563 and 14094

    Executive Order 12866 (Regulatory Planning and Review) 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 14094 (Executive Order on 
Modernizing Regulatory Review) supplements and reaffirms the 
principles, structures, and definitions governing contemporary 
regulatory review established in Executive Order 12866 of September 30, 
1993 (Regulatory Planning and Review), and Executive Order 13563 of 
January 18, 2011 (Improving Regulation and Regulatory Review). The 
Office of Information and Regulatory Affairs has determined that this 
rulemaking is not a significant regulatory action under Executive Order 
12866, as amended by Executive Order 14094. The Regulatory Impact 
Analysis associated with this rulemaking can be found as a supporting 
document at www.regulations.gov.

Regulatory Flexibility Act

    The Secretary hereby certifies that this proposed rule would not 
have a significant economic impact on a substantial number of small 
entities as they are defined in the Regulatory Flexibility Act (5 
U.S.C. 601-612). However, this rulemaking would have a direct impact on 
a number of industries that service VA loans. VA defines a servicer as 
a mortgage company that collects funds for a debt incurred by a 
borrower to purchase a home. When a loan becomes delinquent after a 
borrower misses one or more mortgage payments, servicers are 
responsible for servicing delinquent loans and working with the 
borrower to reach an agreement that will bring the loan current or 
avoid foreclosure whenever feasible.
    A recent analysis indicated there are currently 450 servicers in 
varying industries that will be impacted by this rulemaking. This 
proposed rule would impose a one-time rule familiarization cost to 
servicers in 2024, estimated at $55.91 per servicer regardless of size. 
The $55.91 cost is derived by dividing the cost of rule 
familiarization, which is estimated to be $25,157, by the 450 servicers 
VA currently works with. To estimate the one-time rule familiarization 
cost, VA multiplies the number of servicers by the time needed for in-
house or retained legal counsel to review and ensure compliance with 
the rule and their compensation rate. VA assumes that it would take 30 
minutes for a lawyer to review the rulemaking. The compensation rate of 
the lawyers is estimated by multiplying their hourly wage rate ($78.74) 
by the fringe benefits factor, 1.42. Multiplying the number of 
servicers (450) by the time to review the rule (30 minutes) and their 
total compensation rate ($111.81 per hour) results in a one-time total 
cost of $25,157 in FY2024. This one-time cost in FY2024 is offset by 
the long-term cost savings of this rulemaking from reduced agreement 
preparation and sharing efforts.
    VA considers a rulemaking to have a ``significant economic impact'' 
when the impact associated with the rulemaking for a small entity 
equals or exceeds 1 percent of annual revenue. Thus, this rulemaking is 
not expected to have a significant economic impact on the participating 
small servicers. After the first year of implementation, there will be 
a monetary benefit realized by servicers due to the reduction in burden 
this rulemaking will accomplish. Therefore, under 5 U.S.C. 605(b), the 
initial and final regulatory flexibility analysis requirements of 5 
U.S.C. 603 and 604 do not apply.

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 proposed rule would have no such 
effect on State, local, and tribal governments, or on the private 
sector.

Paperwork Reduction Act

    Although this proposed rule contains collections of information 
under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3521), there are no provisions associated with this rulemaking 
constituting any new collection of information or any revisions to the 
existing collection of information. The collections of information for 
38 CFR 36.4317, 36.4319, and 36.4320 are currently approved by OMB and 
have been assigned OMB control number 2900-0021.

List of Subjects in 38 CFR Part 36

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

Signing Authority

    Denis McDonough, Secretary of Veterans Affairs, approved and signed 
this document on June 23, 2023, 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.

Jeffrey M. Martin,
Assistant Director, Office of Regulation Policy & Management, Office of 
General Counsel, Department of Veterans Affairs.

    For the reasons stated in the preamble, the Department of Veterans 
Affairs proposes to amend 38 CFR part 36 as set forth below:

[[Page 46723]]

PART 36--LOAN GUARANTY

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

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

    Authority: 38 U.S.C. 501 and 3720.

0
2. Amend Sec.  36.4301 by:
0
a. Removing the definition of ``Compromise sale'';
0
b. Revising the third sentence of ``Liquidation sale'';
0
c. Revising the definition of ``Repayment plan'';
0
d. Adding, in alphabetical order, the definition for ``Short sale''; 
and
0
e. Revising the definition of ``Special forbearance''.
    The revisions and addition read as follows:


Sec.  36.4301  Definitions.

* * * * *
    Liquidation sale. * * * This term also includes a short sale.
* * * * *
    Repayment plan. This is a documented agreement by and between the 
borrower and the holder to reinstate a loan that is 61 or more calendar 
days delinquent, by requiring the borrower to pay each month over a 
fixed period (minimum of three months duration) the normal monthly 
payments plus an agreed upon portion of the delinquency each month.
* * * * *
    Short sale. A sale to a third party for an amount less than is 
sufficient to repay the unpaid balance on the loan where the holder has 
agreed in advance to release the lien in exchange for the proceeds of 
such sale.
    Special forbearance. This is a documented agreement executed by and 
between the holder and the borrower where the holder agrees to suspend 
all payments or accept reduced payments for one or more months, on a 
loan 61 or more calendar days delinquent, and the borrower agrees to 
pay the total delinquency at the end of the specified period or enter 
into a repayment plan.
* * * * *


Sec.  36.4315  [Amended]

0
3. Amend Sec.  36.4315(a) by removing ``written'' and adding in its 
place ``a documented''.


Sec.  36.4316  [Amended]

0
4. Amend Sec.  36.4316 by:
0
a. Removing ``documented'' in paragraphs (b)(2), (3), and (4); and
0
b. Removing ``written'' in paragraph (b)(6).
0
5. Amend Sec.  36.4317 by:
0
a. Removing ``agreement'' in paragraph (c)(18);
0
b. Removing ``Compromise sale'' and ``compromise sale'' and adding 
``Short sale'' and ``short sale'', respectively, in paragraph (c)(21); 
and
0
c. Revising paragraphs (c)(30) and (31).
    The revisions read as follows:


Sec.  36.4317  Servicer reporting requirements.

* * * * *
    (c) * * *
    (30) Basic claim information--when the servicer files a claim under 
guaranty. The servicer shall report this event within 365 calendar days 
of loan termination for non-VA purchase claims, and within 60 calendar 
days of the approval date for VA purchase claims.
    (31) VA purchase settlement--when VA purchases a loan and the 
servicer reports the tax and insurance information. The servicer shall 
report this event within 60 calendar days of the VA purchase approval 
date.
* * * * *


Sec.  36.4319  [Amended]

0
6. Amend Sec.  36.4319 by:
0
a. Removing ``special forbearance agreements'' and ``compromise sales'' 
and adding their place ``special forbearances'' and ``short sales'', 
respectively, in paragraph (a);
0
b. Removing ``Compromise Sale'' and adding in its place ``Short Sale'' 
in the table in paragraph (b); and
0
c. Removing ``compromise sale'' and adding in its place ``short sale'' 
in paragraph (c)(4).


Sec.  36.4320  [Amended]

0
7. Amend Sec.  36.4320 by:
0
a. Removing ``Refunding'' and adding in its place ``VA purchase'' in 
the heading;
0
b. Removing ``refund'' and adding in its place ``purchase'' in 
paragraph (c); and
0
c. Removing ``2900-0362'' and adding in its place ``2900-0021'' in the 
parenthesis at the end of the section.


Sec.  36.4322  [Amended]

0
8. Amend Sec. Sec.  36.4322(e)(1), (1)(ii), (2), and (f)(1)(iii) by 
removing ``compromise sale'' each place it appears and adding ``short 
sale'' in its place.

[FR Doc. 2023-14478 Filed 7-19-23; 8:45 am]
BILLING CODE 8320-01-P