Loan Guaranty: Implementation of Public Laws 102-547, 103-66, 103-78, 103-325, 103-353, and 103-446

Federal RegisterJul 26, 1995

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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AG14

Loan Guaranty: Implementation of Public Laws 102-547, 103-66,

103-78, 103-325, 103-353, and 103-446

AGENCY: Veterans Benefits Administration, Department of Veterans

Affairs.

ACTION: Final rule.

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SUMMARY: This document amends the Department of Veterans Affairs (VA)

loan guaranty regulations to implement certain provisions of various

public laws. VA is amending its regulations to provide for loans to

Reservists and members of the National Guard, loans with negotiated

interest rates, adjustable rate mortgages, restoration of entitlement

in certain cases, energy efficient mortgages, and flood zone

determination fees. VA is also amending its regulations in the areas of

manufactured housing certifications, certain interest rate reduction

refinancing loans, and conveyance of properties notwithstanding

overbids. In addition, the regulations are amended to reflect a reduced

funding fee for interest rate reduction refinancing loans and an

increase in the maximum guaranty amount. These changes increase the

types of loans available to veterans and the categories of veterans

eligible for VA home loans.

EFFECTIVE DATE: This final rule is effective on August 25, 1995.

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) 273-7368.

SUPPLEMENTARY INFORMATION: On February 24, 1994, VA published in the

Federal Register (59 FR 8881) proposed regulatory amendments

implementing Public Laws 102-547, 103-66, and 103-78. The proposed

amendments were published to change: [1] 38 CFR 36.4312, to add a

funding fee structure for loans to members of the Selected Reserves;

[2] Secs. 36.4212 and 36.4311, to allow VA guaranteed loans to bear

interest at rates agreed upon by the veteran and the lender; [3]

Secs. 36.4212(b) and 36.4311(b), to provide that discount points cannot

be financed, except for interest rate reduction refinancing loans; [4]

Secs. 36.4212 and 36.4311, to provide for VA guaranteed loans with

adjustable interest rates; [5] Secs. 36.4302 and 36.4336, to provide

for energy efficient mortgages; [6] Secs. 36.4232, 36.4254, and

36.4312, to reduce the funding fee for interest rate reduction

refinancing loans to 0.50 percent of the total loan amount; [7]

Sec. 36.4312, to increase the funding fee on most guaranteed loans and

for the second and subsequent use of the loan guaranty benefit, except

for interest rate reduction refinancing loans; and [8] Secs. 36.4223

and 36.4302, to revise the guaranty percentage for certain interest

rate reduction refinancing loans. Please refer to the February 24,

1994, Federal Register for a complete discussion of the proposed

amendments. This document adopts the regulatory amendments as

originally proposed, except for a technical change discussed below,

revisions of authority citations, amendments reflecting statutory

changes made by Public Laws 103-325, 103-353, and 103-446, and non-

substantive changes.

VA received three comments on the proposed amendments. Two

commenters noted that the veteran is permitted to finance discount

points on interest rate reduction refinancing loans, and suggested that

the veteran be allowed to finance discount points on purchase loans as

well. This suggestion cannot be adopted because the financing of

discount points on purchase loans is prohibited by statute; see 38

U.S.C. 3703(c).

A third commenter supported the amendments which allow VA to

guarantee a loan above the reasonable value of the property for the

purpose of adding energy efficient improvements to the home. This

commenter recommended that language be added to the regulations

requiring ``that financed energy improvements meet efficiency standards

that exceed, by some pre-determined level, those otherwise applicable

in the jurisdiction.''

We do not believe it would be appropriate to require specific

standards for energy efficient improvements. Local variations in

climate, energy sources and energy efficiency requirements would make

it difficult to implement and monitor the use of such standards.

Furthermore, standards for energy efficient improvements could be

perceived by program participants as unnecessarily complicating the

lending process and have an adverse impact on this area of VA's home

loan program.

This commenter also suggested that prior to the closing of a VA

guaranteed loan the purchaser be required to obtain an energy audit

which would provide an estimate of home energy consumption and

information about potential cost-effective improvements to reduce that

consumption. VA is

[[Page 38257]]

opposed to a mandatory energy audit. At this time, it is uncertain

whether reliable energy audits can be obtained by home purchasers in

all parts of the country for an affordable cost. Furthermore, the

requirement could be perceived by program participants as unnecessarily

complicating the lending process and increasing the cost of

homeownership. However, the Certificate of Reasonable Value (VA Form

26-1843) or the lender's Notice of Value is issued for each property to

be purchased with a VA guaranteed loan. These notices do recommend that

the veteran purchaser obtain such an audit.

A technical change is being made to 38 CFR 36.4212(f)(2) and

36.4311(d)(2) by adding a new sentence to each. The proposed

regulations failed to specify what would be the effective date of the

new interest rate on an adjustable rate mortgage. The additional

sentence provides that when the rate is adjusted, the new rate will

become effective the first day of the month following the adjustment

date; the corresponding change in the monthly payment of principal and

interest will occur one month later, because interest is collected in

arrears. These changes reflect standard practice in the industry.

This final rule also contains new provisions to incorporate changes

made by Public Laws 103-325, 103-353 and 103-446.

First, 38 CFR 36.4203(a) and 36.4302 are amended to reflect the

change by Public Law 103-446 to 38 U.S.C. 3702 to permit a veteran's

home or manufactured home loan entitlement to be restored, on a one-

time basis, if the veteran has repaid the prior VA loan in full, but

has not disposed of the property securing that loan. After one such

restoration, any future restoration of that entitlement will require

the veteran to have disposed of all property previously financed with a

VA loan using that entitlement.

The manufactured home warranty requirements of Sec. 36.4231(b) are

amended to reflect the provisions of Public Law 103-446 abolishing the

requirement for VA inspections of the manufacturing process and onsite

inspections of manufactured homes sold to veterans. Also, as required

by Public Law 103-446, the provisions of Sec. 36.4231(b) are amended to

provide that any manufactured home properly displaying a certificate of

conformity with all applicable Federal manufactured home construction

and safety standards is eligible for VA financing.

Public Law 103-353 increased the maximum guaranty amount on loans

greater than $144,000 from $46,000 to $50,750. This final rule

accordingly amends 38 CFR 36.4302(a) and (d) to incorporate the

increased guaranty amount for VA loans over $144,000.

38 CFR 36.4306a(a) is amended to incorporate the changes made by

Public Law 103-446 with regard to energy efficient improvement costs to

be included in interest rate reduction refinancing loans (IRRRLs).

Under the provisions of the new law, IRRRLs may now include additional

funds for energy efficient improvements.

This final rule also adds new provisions at the end of

Secs. 36.4212(a) and 36.4311(a). Public Law 103-446 amended 38 U.S.C.

3710(e) to provide that, for an adjustable rate mortgage being

refinanced under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) by a

fixed rate mortgage, the interest rate on the new loan may be higher

than the current rate on the adjustable rate loan. The new language

merely reflects the statutory change.

This document amends 38 CFR 36.4320(a)(1)(ii)(B) to conform with

new statutory language regarding the conveyance of property. Public Law

103-446 amended 38 U.S.C. 3732(c)(7) to provide that VA may now accept

conveyance of property securing a guaranteed loan from the loan holder

notwithstanding the holder's overbid at the liquidation sale. This was

previously allowed only where State law requirements resulted in an

overbid. This change extends to all overbids, including those caused by

lender or attorney error.

Finally, the National Flood Insurance Reform Act of 1994, title V

of Public Law 103-325, permits lenders to charge borrowers a reasonable

fee for certain costs of determining whether the home or manufactured

home is located in an area having special flood hazards. 38 CFR

36.4232, 36.4254, and 36.4312 are amended accordingly.

The Secretary hereby certifies that this final rule will 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. The final rule essentially restates statutory provisions and

reflects statutory requirements. Therefore, pursuant to 5 U.S.C.

605(b), this final rule is exempt from the initial and final regulatory

flexibility analysis requirements of Secs. 603 and 604.

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.

Approved: July 17, 1995.

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 is revised to read as follows:

Authority: Sections 36.4201 through 36.4287 issued under 38

U.S.C. 501, 3701-3704, 3707, 3710-3714, 3719, 3720, 3729, unless

otherwise noted.

2. Section 36.4203 is amended by revising the remainder of

paragraphs (a)(2) and (a)(3 and adding new paragraph (a)(4) to read as

follows:

Sec. 36.4203 Eligibility of the veteran for the manufactured home loan

benefit under 38 U.S.C. 3712.

(a) * * *

(2)(i) The loan has been repaid in full or the Secretary has been

released from liability as to the loan, or if the Secretary has

suffered a loss on said loan, such loss has been paid in full; or

(ii) A veteran-transferee has agreed to assume the outstanding

balance on the loan and consented to the use of his or her entitlement

to the extent the entitlement of the veteran-transferor had been used

originally, and the veteran-transferee otherwise meets the requirements

of 38 U.S.C. chapter 37.

(3) In a case in which the veteran still owns a property purchased

with a VA-guaranteed loan, the Secretary may, one time only, restore

entitlement if:

(i) The loan has been repaid in full, or, if the Secretary has

suffered a loss on the loan, the loss has been paid in full; or

(ii) The Secretary has been released from liability as to the loan

and, if the Secretary has suffered a loss on the loan, the loss has

been paid in full.

(4) The Secretary may, in any case involving circumstances deemed

appropriate, waive either or both of the requirements set forth in

paragraphs (a)(1) and (a)(2)(i) of this section.

(Authority: 38 U.S.C. 3702, 3712)

3. 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 either bear interest

at a rate that is agreed upon by the veteran and the lender, or bear

interest at a rate not in

[[Page 38258]]

excess of a rate established by the Secretary. The Secretary may, from

time to time, change that election by publishing a notice in the

Federal Register. Provided, however, that the interest rate of a loan

for the purpose of an interest rate reduction under 38 U.S.C.

3712(a)(1)(F) must be less than the interest rate of the VA loan being

refinanced. This paragraph (a) does not apply in the case of an

adjustable rate mortgage being refinanced with a fixed rate loan.

(Authority: 38 U.S.C. 3703, 3712)

(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).

(Authority: 38 U.S.C. 3703, 3712)

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

(Authority: 38 U.S.C. 3710, 3712)

(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 or default; Provided,

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

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

considered a violation of this limitation.

(Authority: 38 U.S.C. 3712)

(e) 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. The adjusted rate will become

effective the first day of the month following the adjustment date; the

first monthly payment at the new rate will be due on the first day of

the following month. 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 (e)(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; and

(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.

(Authority: 38 U.S.C. 3707, 3712)

4. 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; and

(Authority: 38 U.S.C. 3703, 3712)

* * * * *

[[Page 38259]]

5. Section 36.4231 is amended by revising paragraph (b) to read as

follows:

Sec. 36.4231 Warranty requirements.

* * * * *

(b) Any manufactured housing unit properly displaying a

certification of conformity to all applicable Federal manufactured home

construction and safety standards pursuant to 42 U.S.C. 5415 shall be

acceptable as security for a VA guaranteed loan.

(Authority: 38 U.S.C. 3712)

* * * * *

6. In Sec. 36.4232, paragraph (a)(2) is amended by removing the

period at the end thereof and by adding in its place a semi-colon;

paragraphs (a)(5) and (a)(6) are amended by removing ``, and'' and by

adding to each paragraph at the end thereof a semi-colon; and paragraph

(a)(7) is amended by removing the period at the end thereof and adding

in its place ``; and''. Section 36.4232 is also amended by adding a new

paragraph (a)(8) and by revising paragraph (e)(1), to read as follows:

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

(a) * * *

(8) The actual amount charged for flood zone determinations,

including a charge for a life-of-the-loan flood zone determination

service purchased at the time of loan origination, if made by a third

party who guarantees the accuracy of the determination. A fee may not

be charged for a flood zone determination made by a Department of

Veterans Affairs appraiser or for the lender's own determination.

(Authority: 38 U.S.C. 3712; 42 U.S.C. 4001 note, 4012a)

* * * * *

(e)(1) Subject to the limitations set out in paragraph (e)(4) 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 38 U.S.C. 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 shall disregard any amount included in the loan to enable

the borrower to pay such fee.

(Authority: 38 U.S.C. 3729(a))

* * * * *

7. Section 36.4254 is amended by redesignating paragraph (a)(7) as

paragraph (a)(8); and is further amended by adding a new paragraph

(a)(7), by adding an authority citation following paragraph (a)(8), and

by revising paragraph (d)(1), to read as follows:

Sec. 36.4254 Fees and charges.

(a) * * *

(7) The actual amount charged for flood zone determinations,

including a charge for a life-of-the-loan flood zone determination

service purchased at the time of loan origination, if made by a third

party who guarantees the accuracy of the determination. A fee may not

be charged for a flood zone determination made by a Department of

Veterans Affairs appraiser or for the lender's own determination, and

(8) * * *

(Authority: 38 U.S.C. 3712; 42 U.S.C. 4001 note, 4012a)

* * * * *

(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 38 U.S.C. 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.

(Authority: 38 U.S.C. 3729(a))

* * * * *

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

36.4375 is revised to read as follows:

Authority: Sections 36.4300 through 36.4375 issued under 38

U.S.C. 101, 501, 3701-3704, 3710, 3712-3714, 3720, 3279, 3732,

unless otherwise noted.

9. In Sec. 36.4302, paragraphs (c), (d), (e), (f), (g), (h), (i)

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

(j) and (l), respectively; and Sec. 36.4302 is further amended by

revising paragraph (a)(4), by revising paragraph (b), by adding a new

paragraph (c), by revising the newly redesignated paragraph (e), by

revising newly redesignated paragraphs (j)(2), (j)(3), and (j)(4), and

by adding a new paragraph (k), to read as follows:

Sec. 36.4302 Computation of guaranties or insurance credits.

(a) * * *

(4) The lesser of $50,750 or 25 percent of the original principal

loan amount where the loan amount exceeds $144,000 and the loan is for

the purchase or construction of a home or the purchase of a condominium

unit.

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

guaranteed under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11), 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.

(Authority: 38 U.S.C. 3703, 3710)

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

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

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

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

of the increased guaranty amount.

(Authority: 38 U.S.C. 3703, 3710)

* * * * *

(e) Subject to the provisions of Sec. 36.4303(g), 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 $14,750 if the loan

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

a home or purchase of a condominium; and

(ii) Entitlement for manufactured home loans that are to be

guaranteed under 38 U.S.C. 3712 may not exceed $20,000.

(2) If a veteran previously secured a realty (home) loan, the

amount of realty (home) loan entitlement used is 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 $14,750 if the loan

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

a home or purchase of a condominium; and

[[Page 38260]]

(ii) Entitlement for manufactured home loans that are to be

guaranteed under 38 U.S.C. 3712 may not exceed $20,000.

(3) If a veteran previously secured a manufactured home loan under

38 U.S.C. 3712, the amount of entitlement used for that loan is

subtracted from $36,000. The sum remaining is the amount of available

entitlement for home loans and the sum remaining may be increased by up

to $14,750 if the loan amount exceeds $144,000 and the loan is for

purchase or construction of a home or purchase of a condominium. To

determine the amount of entitlement available for manufactured home

loans processed under 38 U.S.C. 3712, the amount of entitlement

previously used for that purpose is subtracted from $20,000. The sum

remaining is the amount of available entitlement for use for

manufactured home loan purposes under 38 U.S.C. 3712.

(Authority: 38 U.S.C. 3703, 3712)

* * * * *

(j) * * *

(2)(i) The loan has been repaid in full or the Secretary has been

released from liability as to the loan, or if the Secretary has

suffered a loss on said loan, such loss has been paid in full; or

(ii) A veteran-transferee has agreed to assume the outstanding

balance on the loan and consented to the use of his or her entitlement

to the extent the entitlement of the veteran-transferor had been used

originally; or

(3) The loan has been repaid in full, and the loan for which the

veteran seeks to use entitlement is secured by the same property which

secured the fully repaid loan; or

(4) In a case in which the veteran still owns the property

purchased with a VA-guaranteed loan, the Secretary may, one time only,

restore entitlement used on that loan if:

(i) the loan has been repaid in full or, if the Secretary has

suffered a loss on the loan, the loss has been paid in full; or

(ii) the Secretary has been released from liability as to the loan,

and, if the Secretary has suffered a loss on the loan, the loss has

been paid in full.

(k) The Secretary may, in any case involving circumstances deemed

appropriate, waive either or both of the requirements set forth in

paragraphs (j)(1) and (j)(2)(i) of this section.

(Authority: 38 U.S.C. 3702(b), 3710)

* * * * *

10. In Sec. 36.4306a, the introductory text of paragraph (a) and

paragraph (a)(3) are revised, to read as follows:

Sec. 36.4306a Interest rate reduction refinancing loan.

(a) Pursuant to 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11), a

veteran may refinance an existing VA guaranteed, insured, or direct

loan to reduce the interest rate payable on the existing loan provided

the following requirements are met:

* * * * *

(3) The amount of the refinancing loan may not exceed:

(i) An amount equal to the sum of the balance of the loan being

refinanced and such closing costs as authorized by Sec. 36.4312(d) and

a discount not to exceed a dollar amount determined in accordance with

Sec. 36.4312(d)(7)(i); or

(ii) In the case of a loan to refinance an existing VA guaranteed

or direct loan and to improve the dwelling securing such loan through

energy efficient improvements, an amount equal to the sum of the amount

referred to with respect to the loan under paragraph (a)(3)(i) of this

section and the amount authorized by Sec. 36.4336(a)(4);

(Authority: 38 U.S.C. 3710(a))

* * * * *

11. 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 either bear interest

at a rate that is agreed upon by the veteran and the lender, or bear

interest at a rate not in excess of a rate established by the

Secretary. The Secretary may, from time to time, change that election

by publishing a notice in the Federal Register. However, the interest

rate of a loan for the purpose of an interest rate reduction under 38

U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) must be less than the

interest rate of the VA loan being refinanced. This paragraph does not

apply in the case of an adjustable rate mortgage being refinanced under

38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) with a fixed rate loan.

(Authority: 38 U.S.C. 3703, 3710)

(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), (a)(9)(B)(i), and (a)(11). For loans

bearing an interest rate agreed upon by the veteran and the lender, the

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

(Authority: 38 U.S.C. 3703, 3710)

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.

(Authority: 38 U.S.C. 3710)

(d) Adjustable rate mortgage loans which comply with the

requirements of this paragraph (d) 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 weeks) 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 no sooner than 12 months nor later than 18 months from the date