[Federal Register Volume 89, Number 120 (Friday, June 21, 2024)]
[Proposed Rules]
[Pages 51995-52002]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13389]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AS08


Loan Guaranty: Adjustable Rate Mortgages, Hybrid Adjustable Rate 
Mortgages, and Temporary Buydown Agreements

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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SUMMARY: The Department of Veterans Affairs (VA) proposes to amend its 
rules on interest rates for adjustable rate mortgage (ARM) loans and 
hybrid adjustable rate mortgage (h-ARM) loans. The proposed rule would 
ensure VA's existing interest rate regulation reflects current 
statutory requirements regarding these loans, in a way that makes the 
loans a more viable, safe product for Veterans. The proposed rule would 
also solidify requirements for temporary buydown agreements to help 
Veterans temporarily reduce their interest rates and, in effect, lower 
their monthly mortgage payments for a specific period of time.

DATES: Comments must be received on or before August 20, 2024.

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 
www.regulations.gov as soon as possible after they have been received. 
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; however, we will post 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. In accordance with the Providing Accountability 
Through Transparency Act of 2023, a plain language summary (not more 
than 100 words in length) of this proposed rule is available at 
www.regulations.gov, under RIN 2900-AS08(P).

FOR FURTHER INFORMATION CONTACT: Stephanie Li, Assistant Director for 
Regulations, Legislation, Engagement and Training, and Terry Rouch, 
Assistant Director for Loan Policy and Valuation, Loan Guaranty Service 
(26), Veterans Benefits Administration, Department of Veterans Affairs, 
810 Vermont Avenue NW, Washington, DC 20420, (202) 632-8862. (This is 
not a toll-free telephone number.)

SUPPLEMENTARY INFORMATION: 

I. Background and Legal Authority

    VA's home loan guaranty program assists eligible Veterans \1\ to 
purchase, construct, improve, or refinance a home. Since the benefit 
was initially introduced in 1944,\2\ Congress has enacted laws 
expanding the types of loans VA may guarantee. Additionally, sections 
3703(c), 3710, and 3720 further provide the Secretary broad discretion 
in regulating the terms and conditions of loans, establishing 
underwriting standards, and consenting to modified loan terms such as 
interest rates. 38 U.S.C. 3703, 3710, and 3720. Lastly, under 38 U.S.C. 
501, ``[t]he Secretary has authority to prescribe all rules and 
regulations which are necessary or appropriate to carry out the laws 
administered by the Department.'' Based on these authorities, VA 
proposes to amend 38 CFR part 36 as discussed below.
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    \1\ The term ``Veteran'' is more expansive for the home loan 
program than for some other VA benefits. In addition to Veterans 
defined at 38 U.S.C. 101, the term includes active duty service 
members, members of the National Guard and Selected Reserve, 
surviving spouses, and spouses of those individuals who are 
determined missing in action or prisoners of war. See 38 U.S.C. 101, 
3701, and 3702. For more information, please visit VA's website at 
https://www.va.gov/housing-assistance/home-loans/eligibility/.
    \2\ Servicemen's Readjustment Act of 1944, Public Law 78-346, 58 
Stat. 284.
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A. Adjustable Rate Mortgages and Hybrid Adjustable Rate Mortgages

    Two types of loans VA may guarantee are ARM loans pursuant to 38 
U.S.C. 3707 and h-ARM loans pursuant to 38 U.S.C. 3707A. Initially, 
Congress allowed VA to guarantee ARM and h-ARM loans under temporary 
programs, but VA's authority was eventually made permanent.\3\
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    \3\ In 1992, Congress authorized VA to guarantee ARM loans 
beginning in fiscal year (FY) 1993. Veterans Home Loan Program 
Amendments of 1992, Public Law 102-547, sec. 3(a)(1), 106 Stat. 
3633, 3634. This authority, which expired at the end of FY 1995, was 
later extended through FY 2008, then through FY 2012, and then, in 
2012, made permanent. Veterans Benefits Improvement Act of 2004, 
Public Law 108-454, sec. 404, 118 Stat. 3598, 3616; Veterans' 
Benefits Improvement Act of 2008, Public Law 110-389, sec. 505, 122 
Stat. 4145, 4176; Honoring America's Veterans and Caring for Camp 
Lejeune Families Act of 2012, Public Law 112-154, sec. 208, 126 
Stat. 1165, 1179. Legislation authorizing VA to guarantee h-ARM 
loans was first enacted in 2002. Veterans Benefits Act of 2002, 
Public Law 107-330, title III, sec. 303(a), 116 Stat. 2820, 2825. 
The statutory authority, codified at 38 U.S.C. 3707A, expired at the 
end of FY 2005 but was later extended through FY 2008, and then 
through FY 2012. Veterans Benefits Improvement Act of 2004, Public 
Law 108-454, sec. 405, 118 Stat. 3616-3617; Veterans' Benefits 
Improvement Act of 2008, Public Law 110-389, sec. 505, 122 Stat. 
4176. In 2012, Congress made permanent VA's authority to guarantee 
h-ARM loans. Public Law 112-154, sec. 209, 126 Stat. 1179.
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B. Temporary Buydown Agreements

    A temporary buydown agreement is commonly included in a mortgage 
contract and involves using up-front funds deposited into an escrow 
account to temporarily reduce the interest rate, effectively lowering 
the monthly mortgage payment for a specific period lasting anywhere 
from one to three years. These agreements are often used as a marketing 
tool for lenders, sellers, and builders, as they provide the Veteran 
with a lower payment at the beginning of their loan. The up-front funds 
deposited into an escrow account may be funded by the seller, lender, 
builder, or Veteran.
    VA has in recent years permitted the use of temporary buydown 
agreements \4\

[[Page 51996]]

and proposes to amend 38 CFR part 36 as discussed below to codify the 
terms and conditions VA finds acceptable.
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    \4\ When temporary buy-down agreements were still considered 
novel, VA was concerned that a Veteran's payment of the up-front 
escrows could be considered a ``cash-advance fee,'' in violation of 
the regulation at 38 CFR 36.4313. VA published administrative 
guidance explaining the position. See Circular 26-18-4, ``Policy 
Reminder for Lender's Payment or Credit of Veterans Costs in VA Home 
Loans'' (Feb. 23, 2018), https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_18_4.pdf. Upon better understanding of the 
buydown arrangements, however, and upon learning that the position 
could prejudice Veterans' position in the marketplace, VA allowed 
the Circular to expire (Jan. 1, 2020) without renewal.
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II. Discussion of Proposed Changes

    VA is proposing changes to regulations in 38 CFR part 36 that would 
define ARM loans, h-ARM loans, and temporary buydown agreements, as 
well as outline requirements for guarantee. Through this proposed 
rulemaking, VA is looking to provide clarity in the regulations to 
improve Veterans' and lenders' understanding of VA requirements for 
guarantee of these loan products.

A. Definitions and Clarifying or Conforming Amendments

1. Defining ARM Loans and h-ARM Loans
    In 38 CFR 36.4301, VA proposes to define an ``adjustable rate 
mortgage loan'' as ``[a] loan for the purpose of acquiring, 
constructing, or refinancing a single-family dwelling unit with an 
interest rate that may change on an annual basis'' and ``hybrid 
adjustable rate mortgage loan'' as ``[a] loan for the purpose of 
acquiring, constructing, or refinancing a single-family dwelling unit 
with an interest rate that is fixed for a period of time, after which 
the interest rate may change on an annual basis.'' While ``adjustable 
rate mortgage loan'' and ``hybrid adjustable rate mortgage loan'' are 
commonly used terms in the housing finance industry, VA notes that many 
lending programs consider a h-ARM loan to be a subset or type of ARM 
loan.\5\ For purposes of VA-guaranteed loans, each loan type is 
distinct and subject to separate statutory requirements.\6\ Thus, VA 
proposes to add definitions for these terms to avoid confusion among 
Veterans and lenders.
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    \5\ Daniel Liberto, Adjustable-Rate Mortgage (ARM): What It Is 
and Different Types, Investopedia (Apr. 11, 2023), https://www.investopedia.com/terms/a/arm.asp.
    \6\ See 38 U.S.C. 3707 and 3707A.
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2. Conforming Amendments Related to Proposed ARM Loan and h-ARM Loan 
Definitions
    VA's current regulations do not differentiate between ARM and h-ARM 
loans and refer only to ``an adjustable rate mortgage.'' Because VA is 
proposing to provide specific definitions for each term in Sec.  
36.4301, VA is also proposing amendments in 38 CFR 36.4306(a)(3)(i)(H), 
36.4306(b)(4), 36.4307(a)(3), 36.4312(a), and 36.4340(b)(2)(iv). The 
purpose of these proposed changes is to ensure that any regulation 
applicable to both ARM and h-ARM loans identifies them both in the rule 
text. Since the requirements apply to both ARM and h-ARM loans, in 
Sec.  36.4306(a)(3)(i)(H), VA is proposing to add ``loan or a hybrid 
adjustable rate mortgage loan'' after ``adjustable rate mortgage,'' and 
in Sec.  36.4306(b)(4), VA is proposing to add ``or hybrid adjustable 
rate'' after ``adjustable rate.'' For the same reason, in Sec.  
36.4307(a)(3), VA is proposing to add ``loan or a VA-guaranteed hybrid 
adjustable rate mortgage loan'' after ``adjustable rate mortgage,'' and 
in Sec.  36.4312(a), VA is proposing to add ``loan or hybrid adjustable 
rate mortgage loan'' after ``adjustable rate mortgage.'' Lastly, in 
Sec.  36.4340(b)(2)(iv), VA is proposing to add ``or hybrid adjustable 
rate'' after ``adjustable rate.''
3. Paragraph Headings
    To enhance the readability of Sec.  36.4312, VA proposes adding 
paragraph headings. Specifically, for paragraph (a), VA proposes to add 
the paragraph heading ``General.'' For paragraphs (b), (c), and (d), VA 
proposes to add the paragraph headings ``Discount points,'' ``Excess 
interest charges,'' and ``Adjustable rate mortgage loans and hybrid 
adjustable rate mortgage loans,'' respectively.
4. Authority Citations
    Finally, VA proposes to remove the paragraph-specific authority 
citations in paragraphs (a), (b), and (c), and amend the authority 
citation at the end of Sec.  36.4312.

B. Requirements for ARM Loans and h-ARM Loans

    Current 38 CFR 36.4312(d) outlines certain guarantee requirements 
for adjustable rate mortgage loans, effective October 1, 2003. However, 
such requirements do not distinguish between ARM loans and h-ARM loans. 
VA proposes to clarify in the introductory text to paragraph (d) that 
the requirements outlined thereafter apply to both loan types by 
deleting the current text and inserting ``Adjustable rate mortgage 
loans and hybrid adjustable rate mortgage loans that comply with the 
requirements of this paragraph (d) are eligible for guaranty.''
1. Section 36.4312(d)(1) Interest Rate Index
    Both 38 U.S.C. 3707(b)(1) and 3707A(c)(1) require VA to specify 
interest rate adjustment provisions that ``correspond to a specified 
national interest rate index approved by the Secretary, information on 
which is readily accessible to mortgagors from generally available 
published sources.'' VA's current regulation at Sec.  36.4312(d)(1) 
specifies that changes in the interest rate correspond to changes in 
the weekly average yield on 1 year (52 weeks) Treasury bills adjusted 
to a constant maturity.
    While VA is not proposing any changes to the current interest rate 
index used by lenders for ARM loans and h-ARM loans, VA is proposing to 
amend existing paragraph (d)(1) for length and readability. VA believes 
that the industry name of the interest rate index and its publication 
source should be sufficient for lenders and other program participants 
to identify the interest rate index and to refer to appropriate online 
resources on the internet to find out additional particulars if 
necessary.
2. Section 36.4312(d)(2) Frequency of Interest Rate Changes
    Current Sec.  36.4312(d)(2) outlines requirements regarding the 
frequency of interest rate changes, stating that such adjustments must 
occur annually except for the first adjustment, which may occur no 
sooner than 36 months from the date of the first mortgage payment. A 
retrospective review of VA's regulatory changes for this section 
reveals that this section was amended, effective May 2, 2005, to 
implement guarantee requirements for h-ARM loans.\7\ The amendments 
mirrored the then-existing regulatory requirements for ARM loans except 
for the requirement that the first adjustment occur no sooner than 36 
months from the date of the first mortgage payment, as opposed to 
annually for ARM loans. Notably, Congress reauthorized VA's guarantee 
for ARM loans in 2004, including the requirement that interest rate 
changes occur on an annual basis, between the publication of the 
proposed and final rule for h-ARM loan requirements.\8\ The elimination 
of the requirements for ARM loans appeared to be inadvertent, as VA 
continued to guarantee such loans following the regulatory requirements 
in place prior to May 2, 2005.
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    \7\ See 70 FR 22596 (May 2, 2005); 68 FR 58293 (Oct. 9, 2003).
    \8\ See Veterans Benefits Improvement Act of 2004, Public Law 
108-454, sec. 404-405, 118 Stat. 3616-3617.
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    VA proposes to correct this error and spell out the frequency of 
interest rate change requirements for both ARM loans and h-ARM loans in 
paragraph (d)(2). Specifically, VA proposes to divide paragraph (d)(2) 
into four

[[Page 51997]]

paragraphs, incorporating existing language applicable to both ARM 
loans and h-ARM loans and adding the interest rate change requirements 
for ARM loans. Paragraph (d)(2)(i) would state that any interest rate 
adjustments for ARM loans must occur on an annual basis starting from 
the date of the Veteran's first scheduled monthly mortgage payment due 
date.\9\ Paragraph (d)(2)(ii) would state that the first interest rate 
adjustment for h-ARM loans must not occur sooner than 36 months from 
the date of the Veteran's first scheduled monthly mortgage payment due 
date.\10\ Thereafter, for h-ARM loans, any interest rate adjustments 
would occur on an annual basis.\11\ For example, if a Veteran closed on 
an ARM loan on June 15, and the first payment due date on the loan was 
scheduled for August 1, any future adjustment in the interest rate 
would occur on August 1. In the case of a h-ARM loan with a three-year 
fixed interest rate, the first adjustment in the interest rate would 
occur on August 1 three years after the first mortgage payment due 
date; any subsequent adjustments would occur annually on August 1.
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    \9\ See 38 U.S.C. 3707(b)(2).
    \10\ See 38 U.S.C. 3707A(b)(1).
    \11\ See 38 U.S.C. 3707A(c)(2).
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    Paragraph (d)(2)(iii) would contain existing language from Sec.  
36.4312(d)(2) with minor adjustments for consistency with other 
amendments. Specifically, it would state that ``[t]he adjusted rate 
will become effective the first day of the month following the rate 
adjustment date. The first monthly mortgage payment at the new rate 
will be due on the first day of the following month.''
    Finally, paragraph (d)(2)(iv) would contain existing language from 
Sec.  36.4312(d)(2), with minor changes to clarify the lender's 
required actions in setting the new interest rate. VA notes that the 
language in proposed paragraph (d)(2)(iv) was amended in 2015 as part 
of VA's final rule on adjustable rate mortgage notification 
requirements and look-back period.\12\ VA's amendments in 2015 were to 
align VA's look-back requirements with the Truth in Lending Act (TILA), 
as revised by the Consumer Financial Protection Bureau (CFPB) in the 
2013 TILA servicing rule.\13\
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    \12\ See 80 FR 48254 (Aug. 12, 2015).
    \13\ Id.; 78 FR 10902 (Feb. 14, 2013).
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3. Section 36.4312(d)(3) Method of Rate Changes
    VA proposes to amend the text under paragraph (d)(3) to replace 
``adjustments to the borrower's monthly payments'' with ``adjustments 
to the [V]eteran's scheduled monthly payment amount.'' VA believes the 
clarification that an interest rate change shall only be implemented 
through an adjustment in the scheduled monthly payment amount would 
help avoid confusion for stakeholders. As currently written, 
``adjustments to the borrower's monthly payments'' could be interpreted 
as allowing a lender to implement the interest rate change by adjusting 
other attributes of the borrower's monthly payment--for example, by 
changing the number of monthly payments to two.
4. Section 36.4312(d)(4) Initial Rate and Magnitude of Changes
    VA is proposing changes to paragraph (d)(4) for clarity and to 
align Sec.  36.4312 with current requirements for ARM and h-ARM loans. 
To improve the readability of this paragraph, VA proposes to amend the 
introductory text in paragraph (d)(4) to state that ``[t]he lender and 
the [V]eteran must agree upon the initial interest rate. Future 
adjustments in the interest rate must be based upon changes in the 
interest rate index, subject to the following conditions and 
limitations:''.
    VA proposes to remove the term ``annual'' and replace with 
``future.'' VA is proposing this amendment because while ``annual'' 
interest rate adjustments occur in ARM loans, for h-ARM loans, the 
adjustments are ``annual,'' but only after the initial fixed interest 
rate period of at least three years. Therefore, VA determined use of 
the term ``future'' was more appropriate for this introductory text. VA 
also proposes to replace ``adjustments in the interest rate shall 
correspond to annual changes in the interest rate index'' with 
``adjustments in the interest rate must be based upon changes in the 
interest rate index'' because this is a more accurate description of 
future adjustments. Specifically, lenders must derive and calculate 
future adjustments in the interest rate using the applicable interest 
rate index at the time of the adjustment.\14\
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    \14\ See 38 U.S.C. 3707(b)(1) and 3707A(c)(1).
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    In addition to the above changes to the introductory text, VA 
proposes the following amendments to paragraph (d)(4). First, VA 
proposes revisions to paragraph (d)(4)(i) to state that, for adjustable 
rate mortgage loans, no single annual adjustment to the interest rate 
would result in a change in either direction of more than 1 percentage 
point from the interest rate in effect for the period immediately 
preceding that adjustment.\15\ Index rate changes in excess of 1 
percentage point would not be carried over for inclusion in an 
adjustment in a subsequent year.\16\ Adjustments to the interest rate 
over the entire term of the loan would be limited to a maximum increase 
of 5 percentage points from the initial interest rate.\17\
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    \15\ See 38 U.S.C. 3707(b)(3).
    \16\ Id.
    \17\ See 38 U.S.C. 3707(b)(4).
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    VA also proposes to redesignate current paragraph (d)(4)(ii) as 
(d)(4)(iv) and insert new paragraphs (d)(4)(ii) and (d)(4)(iii). In 
proposed new paragraph (d)(4)(ii), VA would outline that for h-ARM 
loans that have an initial interest rate fixed for less than 5 years: 
no single annual adjustment to the interest rate would result in a 
change in either direction of more than 1 percentage point from the 
interest rate in effect for the period immediately preceding that 
adjustment; index rate changes in excess of 1 percentage point would 
not be carried over for inclusion in an adjustment in a subsequent 
year; and adjustments to the interest rate over the entire term of the 
loan would be limited to a maximum increase of 5 percentage points from 
the initial interest rate.\18\
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    \18\ See 38 U.S.C. 3707A(b)(2)-(3), (c).
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    In proposed new paragraph (d)(4)(iii), VA would outline that for h-
ARM loans that have an initial interest rate fixed for 5 or more years: 
no single annual adjustment to the interest rate will result in a 
change in either direction of more than 2 percentage points from the 
interest rate in effect for the period immediately preceding that 
adjustment; index rate changes in excess of 2 percentage points will 
not be carried over for inclusion in an adjustment in a subsequent 
year; and adjustment to the interest rate over the entire term of the 
loan is limited to a maximum increase of 6 percentage points from the 
initial interest rate.\19\ Finally, in redesignated paragraph 
(d)(4)(iv), VA proposes minor clarifying edits for improved 
comprehension.
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    \19\ Id.
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5. Section 36.4312(d)(5) Interest Rate for Underwriting Purposes
    VA proposes to redesignate current paragraphs (d)(5) and (d)(6) to 
paragraphs (d)(6) and (d)(7), respectively, and add a new paragraph 
(d)(5) to outline requirements pertaining to underwriting ARM loans and 
h-ARM loans. While VA prescribes underwriting guidelines for guaranteed 
loans at 38 CFR 36.4340, specific guidance is needed to ensure that 
lenders understand how to evaluate a Veteran's ability to repay a loan 
where the monthly mortgage payment may be subject to future increases 
associated

[[Page 51998]]

with an increase in the interest rate.\20\ In proposing specific 
underwriting guidelines for ARM and h-ARM loans, VA considered factors 
such as lenders' use of constant maturity treasury (CMT) rates in 
establishing initial interest rates for ARM and h-ARM loans; the 
potential that a Veteran's mortgage payment could increase at a rate 
greater than anticipated increases in the Veteran's income, especially 
for ARM loans; and the underwriting standards applicable to adjustable 
rate mortgages within the Federal Housing Administration's (FHA's) 
Section 251 Adjustable Rate Mortgage program.\21\
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    \20\ See 38 U.S.C. 3707(c) and 3707A(d).
    \21\ Id. See also 24 CFR 203.49; Single Family Housing Policy 
Handbook (Handbook 4000.1), II.A.8.f.vii., Oct. 31, 2023, https://www.hud.gov/sites/dfiles/OCHCO/documents/4000.1hsghhdbk1223.pdf.
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    Accordingly, in proposed new paragraph (5), VA would outline that 
ARM loans subject to underwriting must be evaluated at an interest rate 
not lower than 1 percentage point above the initial interest rate.\22\ 
VA proposes this requirement because the interest rate for an ARM loan 
could potentially increase by as much as 1 percentage point after only 
12 months. Therefore, requiring the lender to consider the Veteran's 
ability to repay using the higher interest rate ensures that the 
Veteran would be able to adjust to the increased monthly mortgage 
payment. VA notes that this underwriting requirement is a floor, not a 
ceiling. Thus, lenders may, when underwriting ARM loans, evaluate the 
borrower using an even higher initial interest rate depending on other 
applicable credit and risk factors.
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    \22\ See 38 U.S.C. 3707(c).
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    For h-ARM loans subject to underwriting, VA is proposing in new 
paragraph (d)(5) that they be evaluated at an interest rate not lower 
than the initial interest rate. Given the delayed interest rate 
adjustments, as well as the annual and maximum interest rate 
adjustments for h-ARM loans, VA believes there is less immediate 
concern for a Veteran's ability to repay the guaranteed loan at a 
higher interest rate. Therefore, VA is not proposing to require lenders 
to underwrite h-ARM loans at an interest rate that is above the initial 
interest rate. As with ARM loans, VA is not requiring lenders to 
underwrite h-ARM loans at the initial rate but is instead setting an 
interest rate floor for evaluating the Veteran under 38 CFR 36.4340. If 
desired, lenders may, when underwriting h-ARM loans, evaluate the 
borrower using an initial interest rate that is higher depending on 
other applicable credit and risk factors.
6. Section 36.4312(d)(6) Pre-Loan Disclosure
    In redesignated paragraph (d)(6), VA proposes amendments to align 
the pre-loan disclosure requirements with the CFPB's pre-loan 
disclosure requirements (``Loan Estimate'').\23\ While developing this 
proposed rule, VA realized that all but one of its current pre-loan 
disclosure requirements under current paragraph (d)(5) are covered by 
the disclosure requirements of the loan estimate. Under the CFPB 
regulations at 12 CFR 1026.37, lenders are required to provide a loan 
estimate to borrowers of ARM and h-ARM loans. However, the requirement 
for the lender to obtain a signature from the borrower acknowledging 
the receipt of the loan estimate is optional.\24\ And so, in 
redesignated paragraph (6), VA is proposing to include an additional 
requirement for the lenders to obtain the Veteran's signature 
acknowledging the receipt of the disclosure and to retain the signed 
disclosure in the loan file. VA is proposing the additional requirement 
for the lender to retain the signed disclosure in the loan file to 
ensure that such disclosures are available for VA's compliance and 
audit purposes.\25\ In sum, VA is proposing to revise its current pre-
loan disclosure requirements to state that the lender must provide the 
Veteran with disclosures in accordance with the timing, content, and 
format required by the regulations implementing the Truth in Lending 
Act (15 U.S.C. 1601 et seq.) at 12 CFR 1026.37(b)(6)(ii) and (j). The 
lender must make a copy of this disclosure, signed by the Veteran 
acknowledging the receipt of the disclosure, a part of the lender's 
permanent record on the loan.
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    \23\ 12 CFR 1026.37.
    \24\ 12 CFR 1026.37(n).
    \25\ See 38 CFR 36.4333(c).
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7. Section 36.4312(d)(7) Post-Closing Disclosures
    To further clarify the timing and purpose of its post-loan closing 
disclosure requirements in proposed redesignated paragraph (d)(7), VA 
proposes to change the paragraph's heading from ``Disclosures'' to 
``Post-closing disclosures.'' VA also proposes to replace the term 
``borrower'' with ``veteran'' and revise the last sentence for 
consistency with other paragraphs in this section.

C. Requirements for Temporary Buydown Agreements

    VA is proposing to add a new paragraph (e) under Sec.  36.4312 that 
would outline requirements for temporary buydown agreements. In the 
proposed introductory text in paragraph (e), VA would state that 
temporary buydown agreements that comply with the requirements of this 
paragraph (e) may be established to temporarily reduce loan payments 
for up to the first 36 monthly payments of the loan. VA's proposed 
maximum period of 36 monthly payments is consistent with current 
industry standards for these types of agreements. Typically, temporary 
buydowns are established for one-, two-, or three-year periods.\26\ 
While the buydown agreement can be structured in various ways, the most 
common structures are a 3-2-1 and 2-1 buydown agreement.\27\ In a 3-2-1 
buydown, the loan interest rate is reduced by 3 percent in the first 
year, 2 percent in the second year, and 1 percent in the third 
year.\28\ Starting in year four, the loan interest rate agreed upon in 
the mortgage note would be charged for the remainder of the mortgage 
term.
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    \26\ Julia Kagan, Buydown: Definition, Types, Examples, and Pros 
& Cons, Investopedia (May 26, 2023), available at https://www.investopedia.com/terms/b/buydown.asp.
    \27\ Id.
    \28\ Julia Kagan, 3-2-1 Buydown Mortgage: Meaning, Pros and 
Cons, FAQs, Investopedia (Apr. 26, 2023), available at https://www.investopedia.com/terms/1/3-2-1_buydown.asp.
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1. Section 36.4312(e)(1) General Terms and Conditions
    In proposed paragraph (e)(1)(A), VA would prohibit lenders from 
using temporary buydown agreements as a cash-advance on principal, such 
as through subsidizing payments through an above market interest rate, 
discount points, or a combination of discount points and above market 
interest rate. In proposed paragraph (e)(1)(B), VA would clarify that 
any temporary buydown funds provided by the Veteran must not be 
included in the loan amount. In other words, the Veteran cannot borrow 
the monies used to fund the buydown account.
2. Section 36.4312(e)(2) Documenting the Agreement
    In proposed paragraph (e)(2), VA would require lenders to provide 
Veterans with a clear, written explanation of the temporary buydown 
agreement, including a description of the number of monthly payments 
for which the assistance will run, the total payment assistance amount, 
and the monthly payment schedule reflecting the amount of each monthly 
buydown payment and the Veteran's monthly payment. VA would also 
require a copy

[[Page 51999]]

of the buydown agreement, signed by the Veteran, to be made a part of 
the lender's permanent record on the loan. This proposed requirement 
would ensure the Veteran receives and acknowledges the terms and 
conditions of the temporary buydown agreement. It would also make 
certain such agreements are available for VA compliance and audit 
purposes.\29\ VA is proposing that the lender must make a copy of the 
buydown agreement, signed by the Veteran, a part of the lender's 
permanent record on the loan.
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    \29\ See 38 CFR 36.4333.
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3. Section 36.4312(e)(3) Acceptable Loan Types
    In proposed paragraph (e)(3), VA would state that temporary buydown 
agreements would only be permitted for fixed rate mortgage loans. This 
proposed limitation is consistent with other federal housing agency 
policy for these types of agreements.\30\
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    \30\ See Department of Housing and Urban Development (HUD) 
Handbook 4000.1, Federal Housing Administration (FHA) Single Family 
Housing Policy Handbook, 4000.1(II)(A)(8)(f)(vi), 463 (Jan. 18, 
2023), https://www.hud.gov/sites/dfiles/OCHCO/documents/4000.1hsgh-011823.pdf.
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4. Section 36.4312(e)(4) Interest Rate for Underwriting Purposes
    VA recognizes that the purpose of a temporary buydown agreement is 
to help Veterans with their monthly payments in the initial years of 
the loan. To that extent, it is understood and expected that once the 
term of the temporary buydown is over, the Veteran will be able to make 
the monthly mortgage payments based on the interest rate of the loan. 
Therefore, in proposed paragraph (e)(4), VA would require lenders to 
underwrite loans with temporary buydown agreements using the interest 
rate stated on the mortgage note. VA would also provide that temporary 
buydown agreements may be treated as a compensating factor when 
underwriting a loan pursuant to Sec.  36.4340, if there are indications 
that the Veteran's income used to support the loan application will 
increase to cover the yearly increases in loan payments or that the 
buydown plan may be used to offset a short-term debt.
5. Section 36.4312(e)(5) Escrow Account
    VA believes that it is extremely important that the temporary 
buydown funds used to supplement and effectively reduce the Veteran's 
monthly mortgage payment during the agreement period are securely held 
by the holder in a separate escrow account and used solely for the 
intended purpose of paying part of the borrower's monthly mortgage 
payment. Therefore, VA is proposing, in proposed paragraph (e)(5), the 
requirement that holders secure temporary buydown funds in a separate 
escrow account and that such funds be used only to pay the monthly 
buydown payments in accordance with the temporary buydown agreement.
    In developing this rule, VA contemplated whether such an escrow 
account should be held by the holder or by a third-party escrow agent. 
To avoid potential delays in timely processing of monthly buydown 
payments, VA decided to propose that the holders hold the escrow 
accounts. However, VA is interested in receiving comments on whether 
such an escrow account should be held by a third-party escrow agent, 
and if so, why.
    In addition to the above, in proposed paragraph (e)(5), VA would 
outline how the temporary buydown funds would be treated in the event 
of a loan termination or assumption during the agreement period. 
Specifically, VA proposes that in situations where the loan is 
terminated during the agreement period, for example due to a 
foreclosure or prepayment, the funds must be credited against any 
outstanding indebtedness. If a new borrower assumes the loan during the 
agreement period, VA proposes that any remaining temporary buydown 
funds be used as initially intended. Therefore, proposed paragraph 
(e)(5) would provide that if the loan is assumed during the agreement 
period, the holder must continue to pay out the monthly buydown 
payments on behalf of the new borrower in accordance with the temporary 
buydown agreement.
6. Section 36.4312(e)(6) Frequency and Magnitude of Buydown Payment 
Changes
    Consistent with current industry practice,\31\ proposed paragraph 
(e)(6) would provide that any reduction in the amount of the monthly 
buydown payment must be reflected in the temporary buydown agreement 
and must occur only on an annual basis following the date of the first 
monthly mortgage payment due date. Additionally, proposed paragraph 
(e)(6) would state that no reduction will result in an increase of the 
Veteran's monthly payment that corresponds to an increase of more than 
1 percentage point in the interest rate of the loan.
---------------------------------------------------------------------------

    \31\ Julia Kagan, Buydown: Definition, Types, Examples, and Pros 
& Cons, Investopedia (May 26, 2023), available at https://www.investopedia.com/terms/b/buydown.asp.
---------------------------------------------------------------------------

D. Information Collection Approvals

    VA also proposes to amend the Office of Management and Budget (OMB) 
control numbers listed at the end of 38 CFR 36.4312. Specifically, VA 
proposes to delete the current number listed, which references the 
information collection requirement under CFPB's regulations pertaining 
to ARM and h-ARM loans. Consistent with VA's discussion in the below 
Paperwork Reduction Act section, VA proposes to list the OMB control 
numbers assigned to those VA information collections approved by OMB. 
The first, OMB control number 2900-0515, is an already approved 
collection pertaining to lenders' and holders' recordkeeping 
requirements. The second is a new information collection explained 
below in further detail; as such, no control number has yet been 
assigned by OMB.

Executive Orders 12866, 13563 and 14094

    Executive Order 12866 (Regulatory Planning and Review) directs 
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 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). This

[[Page 52000]]

proposed rule would only impose a rule familiarization cost to lenders, 
estimated at $10.04 per lender, regardless of size. As previously 
noted, VA has relied on its statutory authority to guarantee ARM and h-
ARM loans and loans with temporary buydown agreements. As such, VA does 
not anticipate the amendments would result in changes to lenders' 
processes. Therefore, pursuant to 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

    This proposed rule contains provisions constituting collection of 
information under the provisions of the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501-3521) that do not require revision. Specifically, the 
collection of information pertaining to recordkeeping requirements 
under 38 CFR 36.4312 are currently approved by the Office of Management 
and Budget (OMB) and have been assigned OMB control number 2900-0515.
    This proposed rule also includes provisions constituting a new 
collection 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 and approval.
    OMB assigns control numbers to collection 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. If OMB does not approve the 
collection of information as requested, VA will immediately remove the 
provisions containing the collection of information or take such other 
action as is directed by OMB.
    Comments on the new collection of information contained in this 
rulemaking should be submitted through www.regulations.gov. Comments 
should be sent within 60 days of publication of this rulemaking. The 
collection of information associated with this rulemaking can be viewed 
at: www.reginfo.gov/public/do/PRAMain.
    OMB is required to make a decision concerning the collection of 
information contained in this rulemaking between 30 and 60 days after 
publication of this rulemaking 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. This does not affect the 
deadline for the public to comment on the provisions of this 
rulemaking.
    The Department considers comments by the public on new collection 
of information in--
     Evaluating whether the new 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 new collection 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 collection 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 new collection of information associated with this rulemaking 
contained in 38 CFR 36.4312 is described immediately following this 
paragraph, under its respective title.
    Title: Interest Rates 38 CFR 36.4312.
    OMB Control No: 2900-XXXX (New/TBD).
    CFR Provision: 38 CFR 36.4312.
     Summary of collection of information: The new collection 
of information in proposed provision 38 CFR 36.4312 pertains to VA's 
proposed requirements for lenders to obtain the Veteran's signature on 
pre-loan disclosures for ARM and h-ARM loans. While developing this 
proposed rule, VA realized that all but one of its current pre-loan 
disclosure requirements are covered by the disclosure requirements of 
the loan estimate. Under the CFPB regulations at 12 CFR 1026.37, 
lenders are required to provide a loan estimate to borrowers of ARM and 
h-ARM loans. However, the requirement for the lender to obtain a 
signature from the borrower acknowledging the receipt of the loan 
estimate is optional.\32\ VA is proposing to include an additional 
requirement for the lenders to obtain the Veteran's signature 
acknowledging the receipt of the disclosure and to retain the signed 
disclosure in the loan file. The proposed changes to 38 CFR 36.4312 
would also require lenders to prepare temporary buydown agreements with 
certain required elements, as proposed in VA's rule, and obtain the 
Veteran's signature on such agreements.
---------------------------------------------------------------------------

    \32\ 12 CFR 1026.37(n).
---------------------------------------------------------------------------

     Description of need for information and proposed use of 
information: The rule would require lenders to provide Veterans with a 
clear, written explanation of ARM and h-ARM loan terms and temporary 
buydown agreements. VA is requiring the signature on the pre-disclosure 
statement to help ensure that Veteran borrowers are adequately informed 
of pre-loan disclosures in the loan closing process (as covered under 
the Truth in Lending Act (15 U.S.C. 1601 et seq.) at 12 CFR 
1026.37(b)(ii) and (j)). These agreements will be available for VA's 
compliance and audit purposes.
     Description of likely respondents: Veterans obtaining ARM 
or h-ARM loans or loans with temporary buydown agreements and lenders 
offering such loans.
     Estimated number of respondents:

Temporary Buydown Agreements--500 loans per year
ARM and h-ARM loans--4,888 loans each year

     Estimated frequency of responses: One time per loan.
     Estimated average burden per response:

Temporary Buydown Agreements--10 minutes per lender to prepare 
temporary buydown agreement; 5 minutes per Veteran to understand and 
sign agreement
ARM and h-ARM loans--5 minutes per veteran to understand and sign pre-
disclosure form

     Estimated total annual reporting and recordkeeping burden: 
By multiplying the annual number of respondents and the burden per 
response, VA estimates a total burden of 450 hours per year for 
Veterans and 84 hours per year for lenders.
     Estimated cost to respondents per year: VA estimates the 
total information collection burden cost to be $17,578 per year (84 
hours x $40.62 + 450 hours x $31.48 per hour).
    * To estimate the total information collection burden cost for 
Veterans, VA used the U.S. Bureau of Labor Statistics (BLS) mean hourly 
wage for hourly

[[Page 52001]]

wage for ``all occupations'' of $31.48 per hour.\33\ The mean hourly 
wage of lenders is $40.62 based on BLS wage code--``13-2072 Loan 
Officers.'' \34\
---------------------------------------------------------------------------

    \33\ U.S. BLS, Occupational Employment and Wage Statistics, May 
2023 National Occupational Employment and Wage Estimates United 
States, available at https://www.bls.gov/oes/current/oes_nat.htm#13-0000.
    \34\ U.S. BLS, Occupational Employment and Wage Statistics, 
Occupational Employment and Wages, May 2023, available at https://www.bls.gov/oes/current/oes132072.htm.
---------------------------------------------------------------------------

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

    Denis McDonough, Secretary of Veterans Affairs, approved and signed 
this document on June 13, 2024, 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:

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 definitions of Adjustable rate 
mortgage loan and Hybrid adjustable rate mortgage loan in alphabetical 
order to read as follows:


Sec.  36.4301  Definitions.

* * * * *
    Adjustable rate mortgage loan. A loan for the purpose of acquiring, 
constructing, or refinancing a single-family dwelling unit with an 
interest rate that may change on an annual basis.
* * * * *
    Hybrid adjustable rate mortgage loan. A loan for the purpose of 
acquiring, constructing, or refinancing a single-family dwelling unit 
with an interest rate that is fixed for a period of time, after which 
the interest rate may change on an annual basis.
* * * * *


Sec.  36.4306  [Amended]

0
3. Amend Sec.  36.4306 by:
0
a. In paragraph (a)(3)(i)(H), adding ``loan or a hybrid adjustable rate 
mortgage loan'' after ``adjustable rate mortgage''; and
0
b. In paragraph (b)(4), adding ``or hybrid adjustable rate'' after 
``adjustable rate''.


Sec.  36.4307  [Amended]

0
4. Amend Sec.  36.4307(a)(3) by adding ``loan or a VA-guaranteed hybrid 
adjustable rate mortgage loan'' after ``adjustable rate mortgage''.
0
5. Amend Sec.  36.4312 by:
0
a. Revising the last sentence in paragraph (a);
0
b. Adding paragraph headings to paragraphs (a), (b), and (c);
0
c. Removing the authority citations immediately following paragraphs 
(a), (b), and (c);
0
d. Revising paragraph (d);
0
e. Adding paragraph (e);
0
f. Revising the OMB citation at the end of the section; and
0
g. Revising the authority citation at the end of the section. The 
revisions and additions read as follows:


Sec.  36.4312  Interest rates.

    (a) General.* * * This paragraph does not apply in the case of an 
adjustable rate mortgage loan or hybrid adjustable rate mortgage loan 
being refinanced under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) 
with a fixed rate loan.
    (b) Discount points.* * *
    (c) Excess interest charges.* * *
    (d) Adjustable rate mortgage loans and hybrid adjustable rate 
mortgage loans. Adjustable rate mortgage loans and hybrid adjustable 
rate mortgage loans must comply with the requirements of this paragraph 
(d) to be eligible for guaranty.
    (1) Interest rate index. Changes in the interest rate charged on an 
adjustable rate mortgage must correspond to changes in the weekly 
average yield on 1 year (52 weeks) Treasury bills adjusted to a 
constant maturity. The weekly average 1 year constant maturity Treasury 
bill yields are published by the Federal Reserve Board of the Federal 
Reserve System.
    (2) Frequency of interest rate changes. (i) For adjustable rate 
mortgage loans, any interest rate adjustments must occur on an annual 
basis starting from the date of the veteran's first scheduled monthly 
mortgage payment due date.
    (ii) For hybrid adjustable rate mortgage loans, the first 
adjustment must not occur sooner than 36 months from the date of the 
veteran's first scheduled monthly mortgage payment due date. 
Thereafter, any interest rate adjustments must occur on an annual 
basis.
    (iii) The adjusted rate will become effective the first day of the 
month following the rate adjustment date. The first monthly mortgage 
payment at the new rate will be due on the first day of the following 
month.
    (iv) To set the new interest rate, the lender will determine the 
change between the initial (i.e., base) index figure and the current 
index figure. The lender must use as the initial index figure the most 
recent figure available before the date of the note. For loans where 
the date of the note is before January 10, 2015, the lender must use as 
the current index figure the most recent index figure available 30 days 
before the date of each interest rate adjustment. For loans where the 
date of the note is on or after January 10, 2015, the lender must use 
as the current index figure the most recent index figure available 45 
days before the date of each interest rate adjustment.
    (3) Method of rate changes. Interest rate changes may only be 
implemented through adjustments to the veteran's scheduled monthly 
payment amount.
    (4) Initial rate and magnitude of changes. The lender and the 
veteran must agree upon the initial interest rate. Future adjustments 
in the interest rate must be based upon changes in the interest rate 
index, subject to the following conditions and limitations:
    (i) For adjustable rate mortgage loans, no single annual adjustment 
to the interest rate will result in a change in either direction of 
more than 1 percentage point from the interest rate in effect for the 
period immediately preceding that adjustment. Index rate changes in 
excess of 1 percentage point will not be carried over for inclusion in 
an adjustment in a subsequent year. Adjustments to the interest rate 
over the entire term of the loan is limited to a maximum increase of 5 
percentage points from the initial interest rate.
    (ii) For hybrid adjustable rate mortgage loans that have an initial 
interest rate fixed for less than 5 years, no single annual adjustment 
to the interest rate will result in a change in either direction of 
more than 1 percentage point from the interest rate in effect for the 
period immediately preceding that adjustment. Index rate changes in 
excess of 1 percentage point will not be carried over for inclusion in 
an adjustment in a subsequent year.

[[Page 52002]]

Adjustments to the interest rate over the entire term of the loan is 
limited to a maximum increase of 5 percentage points from the initial 
interest rate.
    (iii) For hybrid adjustable rate mortgage loans that have an 
initial interest rate fixed for 5 or more years, no single annual 
adjustment to the interest rate will result in a change in either 
direction of more than 2 percentage points from the interest rate in 
effect for the period immediately preceding that adjustment. Index rate 
changes in excess of 2 percentage points will not be carried over for 
inclusion in an adjustment in a subsequent year. Adjustments to the 
interest rate over the entire term of the loan is limited to a maximum 
increase of 6 percentage points from the initial interest rate.
    (iv) At each interest rate adjustment date, changes in the interest 
rate index, whether increases or decreases, must be translated into the 
adjusted mortgage interest rate, rounded to the nearest one-eighth of 
one percent, up or down. For example, if the margin is 2 percent and 
the new index figure is 6.06 percent, the adjusted mortgage interest 
rate will be 8 percent. If the margin is 2 percent and the new index 
figure is 6.07 percent, the adjusted mortgage interest rate will be 
8\1/8\ percent.
    (5) Interest rate for underwriting purposes. In cases where a 
lender must evaluate a veteran's loan application pursuant to the 
underwriting standards at Sec.  36.4340, for adjustable rate mortgage 
loans, lenders must use an interest rate not lower than 1 percentage 
point above the initial interest rate. For hybrid adjustable rate 
mortgage loans, lenders must use an interest rate not lower than the 
initial interest rate. When underwriting adjustable rate mortgage loans 
and hybrid adjustable rate mortgage loans, lenders may adjust the 
initial interest rate higher for other applicable credit and risk 
factors.
    (6) Pre-loan disclosure. The lender must provide the veteran with 
disclosures in accordance with the timing, content, and format required 
by the regulations implementing the Truth in Lending Act (15 U.S.C. 
1601 et seq.) at 12 CFR 1026.37(b)(6)(ii) and (j). The lender must make 
a copy of this disclosure, signed by the veteran acknowledging the 
receipt of the disclosure, a part of the lender's permanent record on 
the loan.
    (7) Post-closing disclosures. The lender must provide the veteran 
with disclosures in accordance with the timing, content, and format 
required by the regulations implementing the Truth in Lending Act (15 
U.S.C. 1601 et seq.) at 12 CFR 1026.20(c) and (d). The lender must make 
a copy of these disclosures a part of the lender's permanent record on 
the loan.
    (e) Temporary buydowns. Temporary buydown agreements that comply 
with the requirements of this paragraph (e) may be established to 
temporarily reduce loan payments for up to the first 36 monthly 
payments of the loan.
    (1) General terms and conditions. (A) Lenders are prohibited from 
using temporary buydown agreements as a cash-advance on principal, such 
as through subsidizing payments through an above market interest rate, 
discount points, or a combination of discount points and above market 
interest rate.
    (B) Any temporary buydown funds provided by the veteran must not be 
included in the loan amount.
    (2) Documenting the agreement. Lenders must provide veterans with a 
clear, written explanation of the temporary buydown agreement, 
including a description of the number of monthly payments for which the 
assistance will run, the total payment assistance amount, and the 
monthly payment schedule reflecting the amount of each monthly buydown 
payment and the veteran's monthly payment. The lender must make a copy 
of the buydown agreement, signed by the veteran, a part of the lender's 
permanent record on the loan.
    (3) Acceptable loan types. Temporary buydown agreements are only 
permitted for fixed rate mortgage loans.
    (4) Interest rate for underwriting purposes. Lenders must 
underwrite the loan at the interest rate stated on the mortgage note. 
Temporary buydown agreements may be treated as a compensating factor 
when underwriting a loan pursuant to Sec.  36.4340, if there are 
indications that the veteran's income used to support the loan 
application will increase to cover the yearly increases in loan 
payments or that the buydown plan may be used to offset a short-term 
debt.
    (5) Escrow account. Holders must secure temporary buydown funds in 
a separate escrow account. Such funds must be used only to pay the 
monthly buydown payments in accordance with the temporary buydown 
agreement. If the loan is terminated during the agreement period, for 
example due to a foreclosure or prepayment, the funds must be credited 
against any outstanding indebtedness. If the loan is assumed during the 
agreement period, the holder must continue to pay out the monthly 
buydown payments on behalf of the new borrower in accordance with the 
temporary buydown agreement.
    (6) Frequency and magnitude of buydown payment changes. Any 
reduction in the amount of the monthly buydown payment must be 
reflected in the temporary buydown agreement and will occur only on an 
annual basis following the date of the first monthly mortgage payment 
due date. No reduction will result in an increase of the veteran's 
monthly payment that corresponds to an increase of more than 1 
percentage point in the interest rate of the loan.

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0515 and XXXX-XXXX)

(Authority: 38 U.S.C. 3703(c), 3707, 3707A, 3710(g), and 3720)


Sec.  36.4340  [Amended]

0
6. Amend Sec.  36.4340(b)(2)(iv) by adding ``or hybrid adjustable 
rate'' after ``adjustable rate''.

[FR Doc. 2024-13389 Filed 6-20-24; 8:45 am]
BILLING CODE 8320-01-P