Loan Guaranty: Implementation of Public Law 102-547

Federal RegisterFeb 24, 1994

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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AG14

Loan Guaranty: Implementation of Public Law 102-547

AGENCY: Department of Veterans Affairs.

ACTION: Proposed regulatory amendments.

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SUMMARY: The Department of Veterans Affairs (VA) is proposing to amend

its loan guaranty regulations to comply with certain provisions of the

Veterans Home Loan Program Amendments of 1992 and the Onmibus Budget

Reconciliatory Act of 1993. VA proposes to amend its regulations to

provide for the guarantee of loans for reservists and members of the

national guard, loans where the interest rate has been negotiated

between the borrower and the lender, adjustable rate mortgages, and

energy efficient mortgages. VA also proposes to amend its regulations

to reflect a reduced funding fee for interest rate reduction

refinancing loans, and a revised guaranty percentage for these loans as

well as an increased funding fee on most guaranteed loans, and an

increased funding fee for second and subsequent use of the loan

guaranty benefit, except for interest rate reduction refinancing loans.

These changes will increase the types of loans available to veterans

and the categories of veterans eligible for VA home loans.

DATES: Comments must be received on or before April 25, 1994. Comments

will be available for public inspection until May 5, 1994. VA proposes

to make these regulations effective 30 days after publication of the

final regulations.

ADDRESSES: Interested persons are invited to submit written comments,

suggestions or objections regarding this proposal to the Secretary of

Veterans Affairs, 810 Vermont Avenue NW., Washington, DC 20420. All

written comments will be available for public inspection in room 170,

Veterans Service Unit, at the above address between the hours of 8 a.m.

and 4:30 p.m., Monday through Friday (except holidays) until May 5,

1994.

FOR FURTHER INFORMATION CONTACT: Ms. Judith Caden, Assistant Director

for Loan Policy (264), Loan Guaranty Service, Veterans Benefits

Administration, Department of Veterans Affairs, Washington, DC 20420,

(202) 233-3042.

SUPPLEMENTARY INFORMATION: VA is proposing to incorporate into its

regulations several changes to comply with certain provisions of Public

Law 102-547 and Public Law 103-66.

Prior to the enactment of Public Law 102-547 persons whose only

military service consisted of active duty for training and inactive

duty training in the reserve components of the Armed Forces did not

qualify for loan guaranty benefits. Public Law 102-547 extends

eligibility for VA-guaranteed home loans to certain members of the

Selected Reserve as defined in 38 U.S.C. 3701(b)(5). This eligibility

expires 7 years from the date of enactment of the law.

38 U.S.C. 3729 requires that a funding fee be collected from each

veteran obtaining a VA-guaranteed loan except for veterans who receive

compensation or from a surviving spouse of a veteran who died from a

service-connected disability. Public Law 102-547 requires that a higher

funding fee be collected on loans to the newly eligible members of the

Selected Reserve as defined in 38 U.S.C. 3701(b)(5) than on loans to

other veterans. Effective October 1, 1993, Public Law 103-66, the

Omnibus Budget Reconciliation Act of 1993, increased the funding fee by

0.75 percent on all VA loans except interest rate reduction refinancing

loans, vendee loans, direct loans, manufactured home loans under 38

U.S.C. 3712, and loan assumptions. This new law also established an

increased fee for second and subsequent use of the loan guaranty

benefit, except for interest rate reduction refinancing loans. The

increase in funding fees established by Public Law 103-66 will expire

on September 30, 1998. VA is proposing to amend 38 CFR 36.4312 to add

the funding fee structure for members of the Selected Reserves, and to

provide for the higher funding fees required by Public Law 103-66, as

discussed in the following paragraphs.

Public Law 103-66 provides that on loans to veterans whose

entitlement is not based on service in the Selected Reserve as defined

in 38 U.S.C. 3701 (b)(5)(1), the funding fee shall be as follows:

(1) For loans for the purchase or construction of a home on which

the veteran does not make a down payment, the funding fee shall be 2.00

percent of the total loan amount;

(2) For loans where the veteran makes a down payment of 5 percent

or more, but less than 10 percent, the funding fee shall be 1.5 percent

of the loan amount;

(3) For loans where the veteran makes a down payment of 10 percent

or more, the funding fee shall be 1.25 percent of the total loan

amount;

(4) For refinancing loans except interest rate reduction

refinancing loans under 38 U.S.C. 3710(a)(8) and 3710(b)(7), the

funding fee shall be 2.00 percent of the total loan amount; and

(5) For loans where the veteran uses entitlement for a second or

subsequent time and does not make a downpayment, the funding fee shall

be 3.00 percent of the total loan amount.

Public Law 103-66 provides that on loans to veterans whose

entitlement is based on service in the Selected Reserve as defined in

38 U.S.C. 3701(b)(5) the funding fee shall be as follows:

(1) For loans for the purchase or construction of a home on which

the veteran does not make a down payment, the funding fee shall be 2.75

percent of the total loan amount;

(2) For loans where the veteran makes a down payment of 5 percent

or more, but less than 10 percent, the funding fee shall be 2.25

percent of the loan amount;

(3) For loans where the veteran makes a down payment of 10 percent

or more, the funding fee shall be 2.00 percent of the total loan

amount;

(4) For refinancing loans except interest rate reduction

refinancing loans under 38 U.S.C. 3710(a)(8) and 3710(b)(7), the

funding fee shall be 2.75 percent of the total loan amount; and

(5) For loans where the veteran uses entitlement for a second or

subsequent time and does not make a downpayment, the funding fee shall

be 3.00 percent of the total loan amount.

Prior to the enactment of Public Law 102-547 the Secretary was

required to set a maximum interest rate which a veteran could pay when

purchasing a home with a VA guaranteed loan, and the veteran was not

permitted to pay discount points on the loan. Public Law 102-547

authorizes the Secretary to elect either to require that VA-guaranteed

loans bear interest at rates not to exceed the maximum rates

established by the Secretary or to allow such loans to bear interest at

rates agreed upon by the veteran and the lender. The law also

authorizes the Secretary to change the election from time to time, and

provides that when the Secretary has elected to have interest rates

negotiated between the veteran and the lender, the veteran may pay

reasonable discount points on the loan. Effective October 28, 1992, the

Secretary elected to have interest rates negotiated between the veteran

and the lender. VA proposes to amend 38 CFR 36.4212 and 36.4311 to

reflect these changes.

Public Law 102-547 generally prohibits financing discount points

when interest rates are negotiated between the lender and veteran.

However, Public Law 103-78, approved August 13, 1993, permits veterans

to finance discount points on interest rate reduction refinancing

loans. Accordingly, the proposed Secs. 36.4212(b) and 36.4311(b)

prohibit discount points from being financed, except for interest rate

reduction refinancing loans under 38 U.S.C. 3710(a)(8), 3710(b)(7) and

3712(a)(1)(F).

Prior to enactment of Public Law 102-547, VA was authorized to

guarantee fixed rate mortgages only. Public Law 102-547 authorizes a

demonstration project during fiscal years 1993, 1994, and 1995 whereby

VA will guarantee loans with adjustable interest rates. The law

provides that the interest rate adjustments on these loans shall: (1)

Correspond to a specified national interest rate index approved in

regulations by the Secretary, information on which is readily

accessible to mortgagors from generally available published sources;

(2) be made by adjusting the monthly payment on an annual basis; (3) be

limited, with respect to any single annual interest rate adjustment, to

a maximum increase or decrease of 1 percentage point; and (4) be

limited, over the term of the mortgage, to a maximum increase of 5

percentage points above the initial contract interest rate. VA proposes

to amend 38 CFR 36.4311 to provide for an adjustable rate mortgage with

these adjustment provisions. The regulations will also provide that the

first interest rate adjustment may occur 12 to 18 months from the date

of the borrower's first mortgage payment. The VA guaranteed adjustable

rate mortgage with the above features will be similar to the Federal

Housing Administration (FHA) adjustable rate mortgage. This should

facilitate pooling of these mortgages together in Government National

Mortgage Association (GNMA) mortgage-backed securities pools.

Public Law 102-547 requires the Secretary to carry out a program to

demonstrate the feasibility of guaranteeing mortgages for the

acquisition of an existing dwelling and the cost of making energy

efficiency improvements to the dwelling or for energy efficient

improvements to a dwelling owned and occupied by a veteran. The law

authorizes an addition to the purchase loan for the cost of energy

efficient improvements. It provides that for a mortgage guaranteed

under 38 U.S.C. 3710(d) the cost of the energy efficient improvements

may be added to the loan amount provided the cost does not exceed (1)

$3,000; or (2) $6,000, if the increase in the monthly payment for

principal and interest does not exceed the likely reduction in monthly

utility costs resulting from the energy efficiency improvements. VA

proposes to amend 38 CFR 36.4336 to provide that a loan for an energy

efficient mortgage guaranteed under 38 U.S.C. 3710(d) may exceed the

reasonable value of the property by the cost of the energy efficient

improvements as stated above. This demonstration program for financing

the cost of energy efficiency improvements will expire on December 31,

1995.

The law provides that the amount of the guaranty for an energy

efficient mortgage guaranteed under 38 U.S.C. 3710(d) will be in the

same proportion as would have been provided if the energy efficiency

improvements were not added to the loan amount. It also provides that

there be no additional charge to the veteran's entitlement as a result

of the increased loan amount. VA proposes to amend 38 CFR 36.4302 to

conform to these changes.

Public Law 102-547 reduces the funding fee for interest rate

reduction refinancing loans guaranteed under sections 3710(a)(8),

3710(a)(9)(B), and 3712(a)(1)(F) to 0.50 percent of the total loan

amount. VA proposes to amend 38 CFR 36.4232, 36.4254 and 36.4312 to

comply with the law. The law also provides that the guaranty amount for

interest rate reduction refinancing loans shall not exceed the greater

of the original guaranty amount or 25 percent of the loan amount. VA

proposes to amend 38 CFR 36.4223 and 36.4302 to reflect this change.

The provisions of Public Law 102-547 and Public Law 103-66 included

in the appropriate regulations by this amendment have been implemented

administratively.

The Secretary hereby certifies that these proposed regulatory

amendments will not, if promulgated, 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. The proposed amendments

simply update VA regulations to incorporate the changes which have

already been made by Public Law 102-547 and Public Law 103-66.

The Catalog of Federal Domestic Assistance Program numbers are

64.114 and 64.119.

List of Subjects in 38 CFR Part 36

Condominiums, Handicapped, Housing Loan programs--housing and

community development, Manufactured homes, Veterans.

These amendments are proposed under Public Law 102-547 and the

authority granted the Secretary by section 501(a) of title 38, United

States Code.

Approved: September 10, 1993.

Jesse Brown,

Secretary of Veterans Affairs.

For the reasons set out in the preamble 38 CFR part 36, is amended

as set forth below.

PART 36--LOAN GUARANTY

1. The authority citation for part 36 Secs. 36.4201 through 36.4287

continues to read as follows:

Authority: Sections 36.4201 through 36.4287 issued under 38

U.S.C. 501(a), 3712.

2. Section 36.4212 is revised to read as follows:

Sec. 36.4212 Interest rates and late charges.

(a) In guaranteeing or insuring loans under 38 U.S.C. chapter 37

the Secretary may elect to require that such loans bear interest at a

rate that is (1) agreed upon by the veteran and the lender, or (2)

established by the Secretary. The Secretary may, from time to time,

change the election under this paragraph by publishing a notice in the

Federal Register.

(b) For loans bearing an interest rate agreed upon by the veteran

and the lender, the veteran may pay reasonable discount points in

connection with the loan. The discount points may not be included in

the loan amount, except for interest rate reduction refinancing loans

under 38 U.S.C. 3712 (a)(1)(F).

for all loans may be expressed in terms of add-on or discount.

(d) Interest in excess of the rate reported by the lender when

requesting evidence of guaranty or insurance shall not be payable on

any advance, or in the event of any delinquency of default; Provided,

That a late charge not in excess of an amount equal to 4 percent on any

installment paid more than 15 days after due date shall not be

considered a violation of this limitation.

(e) The interest rate of loans for the purpose of an interest rate

reduction (38 U.S.C. 3712(a)(1)(f)) must be less than the interest rate

of the VA loan being refinanced.

(f) Adjustable rate mortgage loans which comply with the

requirements of this paragraph are 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 one year (52 week) Treasury bills adjusted to a

constant maturity. Yields on one year Treasury bills at `constant

maturity' are interpolated by the United States Treasury from the daily

yield curve. This curve, which relates the yield on the security to its

time to maturity, is based on the closing market bid yields on actively

traded one year Treasury bills in the over-the-counter market. The

weekly average one year constant maturity Treasury bill yields are

published by the Federal Reserve Board of the Federal Reserve System.

The Federal Reserve Statistical Release Report H.15 (519) is released

each Monday. These one year constant maturity Treasury bill yields are

also published monthly in the Federal Reserve Bulletin, published by

the Federal Reserve Board of the Federal Reserve System, as well as

quarterly in the Treasury Bulletin, published by the Department of the

Treasury.

(2) Frequency of interest rate changes. Interest rate adjustments

must occur on an annual basis, except that the first adjustment may

occur not sooner than 12 months nor later than 18 months from the date

of the borrower's first mortgage payment. 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 initial index figure

shall be the most recent figure available before the date of mortgage

loan origination. The current index figure shall be the most recent

index figure available 30 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 borrower's monthly payments.

(4) Initial rate and magnitude of changes. The initial contract

interest rate of an adjustable rate mortgage shall be agreed upon by

the lender and the veteran. The rate must be reflective of adjustable

rate lending. Annual adjustments in the interest rate shall be set at a

certain spread or margin over the interest rate index prescribed in

paragraph (f)(1) of this section. Except for the initial rate, this

margin shall remain constant over the life of the loan. Annual

adjustments to the contract interest rate shall correspond to annual

changes in the interest rate index, subject to the following conditions

and limitations:

(i) No single adjustment to the interest rate may result in a

change in either direction of more than one percentage point from the

interest rate in effect for the period immediately preceding that

adjustment. Index changes in excess of one percentage point may not be

carried over for inclusion in an adjustment in a subsequent year.

Adjustments in the effective rate of interest over the entire term of

the mortgage may not result in a change in either direction of more

than five percentage points from the initial contract interest rate.

(ii) At each adjustment date, changes in the index interest rate,

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) Pre-loan disclosure. The lender shall explain fully and in

writing to the borrower, no later than on the date upon which the

lender provides the prospective borrower with a loan application, the

nature of the obligation taken. The borrower shall certify in writing

that he or she fully understands the obligation and a copy of the

signed certification shall be placed in the loan folder and included in

the loan submission to VA. Such lender disclosure must include the

following items:

(i) The fact that the mortgage interest rate may change, and an

explanation of how changes correspond to changes in the interest rate

index;

(ii) Identification of the interest rate index, its source of

publication and availability;

(iii) The frequency (i.e., annually) with which interest rate

levels and monthly payments will be adjusted, and the length of the

interval that will precede the initial adjustment;

(iv) A hypothetical monthly payment schedule that displays the

maximum potential increases in monthly payments to the borrower over

the first five years of the mortgage, subject to the provisions of the

mortgage instrument.

(6) Annual disclosure. At least 25 days before any adjustment to a

borrower's monthly payment may occur, the lender must provide a notice

to the borrower which sets forth the date of the notice, the effective

date of the change, the old interest rate, the new interest rate, the

new monthly payment amount, the current index and the date it was

published, and a description of how the payment adjustment was

calculated. A copy of the annual disclosure shall be made a part of the

lender's permanent record on the loan.

3. Section 36.4223 is amended by revising paragraph (a)(4) to read

as follows:

Sec. 36.4223 Interest rate reduction refinancing loan.

(a) * * *

(4) The dollar amount of the guaranty of the 38 U.S.C.

3712(a)(1)(F) loan may not exceed the greater of the original guaranty

amount of the loan being refinanced, or 25 percent of the loan.

* * * * *

4. Section 36.4232 is amended by revising paragraph (e)(1) to read

as follows:

Sec. 36.4232 Allowable fees and charges; manufactured home unit.

* * * * *

(e)(1) Subject to the limitations set out in paragraphs (e)(4) and

(e)(5) of this section, a fee must be paid to the Secretary. A fee of 1

percent of the total amount must be paid in a manner prescribed by the

Secretary before a manufactured home unit loan will be eligible for

guaranty. Provided, however, that the fee shall be 0.50 percent of the

total loan amount for interest rate reduction refinancing loans

guaranteed under section 3712(a)(1)(F). All or part of the fee may be

paid in cash at loan closing or all or part of the fee may be included

in the loan without regard to the reasonable value of the property or

the computed maximum loan amount, as appropriate. In computing the fee,

the lender will disregard any amount included in the loan to enable the

borrower to pay such fee.

* * * * *

5. Section 36.4254 is amended by revising paragraph (d)(1) to read

as follows:

Sec. 36.4254 Fees and charges.

* * * * *

(d)(1) Notwithstanding the provisions of paragraph (c) of this

section and subject to the limitations set out in paragraphs (d)(4) and

(d)(5) of this section, a fee must be paid to the Secretary. A fee of 1

percent of the total loan amount must be paid to the Secretary before a

combination manufactured home and lot loan (or a loan to purchase a lot

upon which a manufactured home owned by the veteran will be placed)

will be eligible for guaranty. Provided, however, that the fee shall be

0.50 percent of the total loan amount for interest rate reduction

refinancing loans guaranteed under Sec. 3712(a)(1)(F). All or part of

such fee may be paid in cash at loan closing or all or part of the fee

may be included in the loan without regard to the reasonable value of

the property or the computed maximum loan amount, as appropriate. In

computing the fee, the lender will disregard any amount included in the

loan to enable the borrower to pay such fee.

* * * * *

6. The authority citation for part 36, Secs. 36.4300 through

36.4375 continues to read as follows:

Authority: Sections 36.4300 through 36.4375 issued under 38

U.S.C. 501(a).

7. In Sec. 36.4302, paragraph (a) is amended by adding the words

``except as provided in paragraphs (b) and (c)'' after ``38 U.S.C.

3710''; paragraph (b) is revised; paragraphs (c), (d), (e) (f), (g),

(h), (i) and (j) are redesignated paragraphs (d), (e) (f), (g), (h),

(i), (j) and (k) respectively; a newly designated paragraph (c) is

added; newly redesignated (e) introductory text is republished; and the

newly redesignated paragraph (e)(1) is revised to read as follows:

Sec. 36.4302 Computation of guaranties or insurance credits.

* * * * *

(b) With respect to an interest rate reduction refinancing loan

guaranteed under 38 U.S.C. 3710 (a)(8) or (b)(7) the dollar amount of

guaranty may not exceed the greater of the original guaranty amount of

the loan being refinanced, or 25 percent of the refinancing loan

amount.

guaranteed under 38 U.S.C. 3710(d) the amount of the guaranty will be

in the same proportion as would have been provided if the energy

efficiency improvements were not added to the loan amount, and there

will be no additional charge to the veteran's entitlement as a result

of the increased guaranty amount.

* * * * *

(e) Subject to the provisions of paragraph (g) of Sec. 36.4303, the

following formulas shall govern the computation of the amount of the

guaranty or insurance entitlement which remains available to an

eligible veteran after prior use of entitlement:

(1) If a veteran previously secured a nonrealty (business) loan,

the amount of nonrealty entitlement used is doubled and subtracted from

$36,000. The sum remaining is the amount of available entitlement for

use except that (i) entitlement may be increased by up to $10,000 if

the loan amount exceeds $144,000 and the loan is for purchase or

construction of a home, purchase of a condominium, or for an interest

rate reduction refinancing loan, and (ii) entitlement for manufactured

home loans that are to be guaranteed under 38 U.S.C. 3712 may not

exceed $20,000.

* * * * *

8. Section 36.4311 is revised to read as follows:

Sec. 36.4311 Interest rates.

(a) In guaranteeing or insuring loans under 38 U.S.C. chapter 37

the Secretary may elect to require that such loans bear interest at a

rate that is (1) agreed upon by the veteran and the lender, or (2)

established by the Secretary. The Secretary may, from time to time,

change the election under this paragraph by publishing a notice in the

Federal Register. Provided, however, that the interest rate of loans

for the purpose of an interest rate reduction (38 U.S.C. 3710 (a)(8) or

(b)(7)) must be less than the interest rate of the VA loan being

refinanced.

(b) For loans bearing an interest rate agreed upon by the veteran

and the lender, the veteran may pay reasonable discount points in

connection with the loan. The discount points may not be included in

the loan amount, except for interest rate reduction refinancing loans

under 38 U.S.C. 3710(a)(8) and 3710(b)(7). For loans bearing an

interest rate agreed upon by the veteran and the lender the provisions

of Sec. 36.4312, paragraphs (d)(6) and (7) do not apply.

requesting evidence of guaranty or insurance shall not be payable on

any advance, or in the event of any delinquency or default: Provided,

That a late charge not in excess of an amount equal to 4 percent on any

installment paid more than 15 days after due date shall not be

considered a violation of this limitation.

(d) Adjustable rate mortgage loans which comply with the