National Service Life Insurance

DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 8

RIN 2900-AH03

National Service Life Insurance

AGENCY: Department of Veterans Affairs.

ACTION: Proposed regulation.

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SUMMARY: The Department of Veterans Affairs (VA) proposes to amend its

National Service Life Insurance (NSLI) policy loan regulation to

provide that when an interest rate change is required on an NSLI

variable rate loan the effective date of the new interest rate will be

on or after the first day of October on the date the change is

implemented through the insurance Automatic Data Processing (ADP)

system. This action is being taken to allow sufficient time to make all

necessary modifications to the Insurance ADP system without any adverse

impact on NSLI policyholders or VA.

DATES: Comments must be received on or before October 3, 1994.

ADDRESSES: Interested persons are invited to submit written comments,

suggestions, or objections regarding the proposed regulation to the

Secretary of Veterans Affairs (271A), Department of Veterans Affairs,

810 Vermont Avenue, NW., Washington, DC 20420. All written comments

will be available for public inspection in the Veterans Services Unit,

Room 119 of the above address, between the hours of 8 a.m. and 4:30

p.m., Monday through Friday (except holidays).

FOR FURTHER INFORMATION CONTACT:

Mr. Gregory Hosmer, Senior Insurance Specialist/Attorney, Department of

Veterans Affairs Regional Office and Insurance Center, P.O. Box 8079,

Philadelphia, Pennsylvania 19101, (215) 951-5710.

SUPPLEMENTARY INFORMATION: Sice 1987 the loan interest rate on all new

NSLI policy loans has been a variable rate that is tied to an economic

indicator. The indicator is the Ten-Year Constant Maturities Index of

U.S. Treasury Securities for the month of June of each year. Current

regulations require rate changes to be effective October 1. 38 CFR

8.28(c). The June 1, 1994, indicator has resulted in a need to increase

the loan interest rate by two percentage points from 5% to 7%.

From an administrative standpoint, in all likelihood it appears

that VA's computer resource staff will not be able to provide the

necessary programming support to implement this change on October 1

without adversely affecting two major insurance ADP projects. The first

critical project involves the expansion of the insurance master record,

which is scheduled to be implemented in October of this year. Because

of the current limitation of the system, the insurance personnel have

been forced to split policies into two and in some cases three or four

policies in order to process loans in excess of funds over $9,999.99.

This results in the issuance of multiple policies, with separate

billings for loan interest and premiums and separate annual statements.

A similar situation arises when the amount payable on an insurance

death claim exceeds $9,999.99 and the policy must be split. These split

policies adversely affect customer service and require a substantial

amount of clerical intervention in order to process the desired

actions.

The second project which would in all likelihood be delayed is the

``rehosting'' project which will consolidate insurance ADP processing

onto one mainframe system. Today, the insurance system runs on two

parallel systems, and IBM mainframe which does all of the batch

processing and a Honeywell system that handles all of the data entry

transactions. In running parallel systems VA incurs additional

maintenance fees as well as redundant program costs to keep two systems

synchronized.

In addition to our administrative concerns, the failure to program

the ADP system by October 1 to reflect the rate change could have an

adverse impact on certain NSLI policyholders. Implementing the interest

rate change on October 1 without programming the ADP system to bill

policyholders on that date would require us to bill policyholders for

back interest, which could put some policyholders in immediate jeopardy

of having their policies automatically cancelled. This would occur if

the outstanding debt on the policy (the loan principal plus interest)

exceeds the policy cash value. Amending the regulations in the manner

proposed would allow us sufficient time to make all necessary ADP

modifications without any adverse impact on our policyholders.

The Secretary of Veterans Affairs hereby certifies that this

proposed regulation will not have a significant economic impact on a

substantial number of small entities as they are defined in the

Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612. Pursuant to 5

U.S.C. 605(b), this proposed regulation is, therefore, exempt from the

initial and final regulatory flexibility analyses requirements of

section 603 and 604. The reason for this certification is that this

proposed regulation will effect only certain Government life insurance

policyholders. It will, therefore, have no significant direct impact on

small entities in the terms of compliance costs, paperwork requirement

or effects on competition.

The comment period for this proposed rule has been shortened from

sixty days to thirty days. It has been determined that this is

necessary in order to establish a final rule prior to October 1, 1994,

when the next rate change is effective.

The catalog of Federal Domestic Assistance Program number for

this regulation is 64.103.

List of Subjects 38 CFR Part 8

Life Insurance, Loan programs--veterans, Veterans.

Approved August 23, 1994.

Jesse Brown,

Secretary of Veterans Affairs.

For the reasons set out in the preamble, 38 CFR part 8 is proposed

to be amended as set forth below.

PART 8--NATIONAL SERVICE LIFE INSURANCE

1. The authority citation for part 8 continues to read as follows:

Authority: 38 U.S.C. 502, 1901-1924, 1981-1988, unless otherwise

noted.

2. In Sec. 8.28(c) the second sentence is removed and the following

is added in place thereof:

Sec. 8.28 Policy loans.

* * * * *

(c) * * * Such loan rate shall be effective on the date on or after

the first day of October on which the rate change is made in the

insurance automatic data processing system, and shall remain in effect

for not less than one year after the date of establishment. * * *

[FR Doc. 94-21651 Filed 8-31-94; 8:45 am]

BILLING CODE 8320-01-M