Loan Guaranty: Limitation on Discount Points Financed in Connection With Interest Rate Reduction Refinancing Loans

DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AH90

Loan Guaranty: Limitation on Discount Points Financed in

Connection With Interest Rate Reduction Refinancing Loans

AGENCY: Veterans Benefits Administration, Department of Veterans

Affairs.

ACTION: Final rule.

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SUMMARY: This document adopts as a final rule, without change, an

interim final rule that amends VA's loan guaranty regulations

concerning points allowed to be included in Interest Rate Reduction

Refinancing Loans. This rule limits to two the amount of discount

points that may be included in the loan. This rule is necessary to help

ensure that veterans are not overcharged with excessive points and to

protect the Government against the danger of overinflated loans.

EFFECTIVE DATE: January 24, 1997.

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

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

Administration, Department of Veterans Affairs, 810 Vermont Avenue,

Washington, DC 20420, (202) 273-7368.

SUPPLEMENTARY INFORMATION: On February 28, 1996, VA published in the

Federal Register (61 FR 7414) an interim final rule with request for

comments. The rule amended VA's loan guaranty regulations by limiting

to two the amount of points that may be included in VA-guaranteed

Interest Rate Reduction Refinancing Loans (IRRRLs). We requested that

comments on the interim final rule be submitted on or before April 29,

1996. We received 5 comments: from lenders, lender employees, and

associations representing both veterans and lenders.

The first commenter, a lender trade organization, observed that

while VA had appropriately responded to an abusive practice, the

establishment of a point ceiling still introduced an artificial

limitation in the marketplace. This commenter asserted that lenders

must be able to react quickly to swings in mortgage interest rates. The

commenter further asserted that one mechanism used to accomplish this

is the use of points, especially in a scenario where interest rates are

changing rapidly. The commenter suggested that VA establish a mechanism

to increase the two-point ceiling in times of significant changes in

the mortgage marketplace.

The second commenter, also a lender trade organization, noted that

the rule would prohibit certain transactions that are beneficial to

veterans, i.e., the practice of permitting a veteran to ``buy down''

the interest rate. The commenter further asserted that often the number

of points charged in these cases is more than two and that allowing the

veteran to take advantage of this option affords the veteran the

fullest flexibility in the trade-off between interest rate and points.

The commenter suggested that instead of limiting the number of points

that can be financed, VA adopt an approach that limits the loan-to-

value ratio (LTV) of the loan, noting that lenders routinely determine

and consider LTVs as part of the underwriting process. The commenter

suggested VA combine an LTV limit with a prohibition on increasing the

monthly payment, and thereby limit the Government's risk in a less

restrictive fashion.

The third commenter also thought that the rule was too restrictive,

and suggested that VA allow lenders who set points in a responsible and

competitive manner be allowed to continue to finance more than two

points. The commenter asserted that VA should stop doing business with

lenders found to be charging excessive discount points. This commenter

also argued that lenders and borrowers need the availability of several

pricing options, and that otherwise, when rates begin rising, lenders

could be forced to charge a rate that was unacceptably high to the

veteran and higher than it needed to be.

The fourth commenter, a lender employee, argued that a case could

be made for a limit of one point financed in the loan. The fifth

comment was from an organization representing veterans. The commenter

asserted that many veterans needing to refinance their mortgages lack

the cash that would be needed to pay excess points, and, therefore, by

limiting their ability to finance points, we are effectively forcing

them to take a higher rate than they would otherwise be able to obtain

if they were permitted to finance a greater amount of points.

The suggestion that VA base its decision on how many points may be

[[Page 3611]]

added into the loan on the Loan to Value Ratio (LTV) does address the

question of risk. However, in order to determine LTV an appraisal must

be performed. One of the cornerstones of the IRRRL program is that an

appraisal is not needed. If appraisals were required on IRRRLs the cost

to veterans would increase, on average, by more than $300 per

transaction (added into the loan) and the time needed to close the loan

would be increased by up to three weeks. In light of the fact that we

believe IRRRLs were intended to ``streamline'' refinances, we do not

believe that the requirement of an appraisal is desirable or

appropriate.

When the legislation which authorized the IRRRL program was

considered by the Congress in 1980, interest rates had recently been as

high as 14 percent. Prior to April 1979, interest rates on VA home

loans had never reached 10 percent. The purpose of the IRRRL was, and

is, to allow veterans to make better use of their home loan benefit by

taking advantage of reduced market interest rates. The program was not

designed to allow veterans to artificially buy down the interest rate

by including increased points in the loan. Instead it was to assist

veterans who obtained VA loans during periods of high interest rates to

lower those rates, and consequently their monthly mortgage payments,

when market rates returned to more reasonable levels. It has also been

suggested that VA allow lenders who set points in a ``responsible and

competitive manner'' to continue financing more than two points and

stop doing business with lenders found to be charging excessive

discount points. We do not believe it is feasible to attempt to

administer such an imprecise standard, both for individual loans and

for determining which lenders would be permitted to continue

participating in the VA program.

Obviously, the fullest flexibility would allow for veterans to

include any amount of points in the loan. However, the provisions of 38

U.S.C. 3710(e)(1)(C)(i) which allow VA to limit the points included in

a loan indicate that other factors may be more important. We believe

that a limit of two points in the loan amount provides the appropriate

balance needed to provide flexibility with respect to amounts of

points, to protect veterans against overcharging with excessive points,

and to protect the Government against overinflated loans.

We understand and have considered the concerns of the commenters.

However, we are not persuaded that any of the alternate approaches

would be a satisfactory solution to the problem. None of the proposed

alternatives offers a simpler alternative which affords the same degree

of protection to veterans and the Government. The suggested alternative

approaches would introduce new complications in the form of adjustable

point ceilings, LTV ceilings, and new prohibitions on the size of the

monthly payment. We prefer to retain the streamlined approach for these

loans that made them so popular in the first place.

We would also like to clarify a point of possible confusion. A

number of lenders contacted VA by telephone in response to this action

to inquire whether the two-point limit included the origination fee as

one of the two allowable points. The answer is no. Under 38 CFR

36.4312, a lender making a VA guaranteed loan is authorized to collect

an ``origination fee'' of up to one percent of the loan amount as

compensation for the miscellaneous cost of originating a loan. This fee

is separate and apart from the charging of discount points, and can be

included in the loan amount on an IRRRL as an allowable charge.

VA appreciates the interest of the commenters and thanks them for

their thoughtful remarks.

Because no notice of proposed rulemaking was required in connection

with the adoption of this interim final rule, no regulatory flexibility

analysis is required under the Regulatory Flexibility Act (5 U.S.C.

601-612).

Based on the rationale set forth in the interim rule document

amending 38 CFR part 36 which was published at 61 FR 7414 on February

28, 1996, we are adopting the provisions of the interim rule as a final

rule without change.

Approved: October 9, 1996.

Jesse Brown,

Secretary of Veterans Affairs.

[FR Doc. 97-1656 Filed 1-23-97; 8:45 am]

BILLING CODE 8320-01-P