Loan Guaranty: VA Guaranteed Loans on the Automatic Basis, Withdrawal of Automatic Processing Authority, Record Retention Requirements, and Elimination of Late Reporting Waivers

DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AH23

Loan Guaranty: VA Guaranteed Loans on the Automatic Basis,

Withdrawal of Automatic Processing Authority, Record Retention

Requirements, and Elimination of Late Reporting Waivers

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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SUMMARY: VA is proposing to amend its loan guaranty regulations in the

areas of automatic-processing authority, loan reporting, and record-

retention requirements. It is proposed that if a lender does not report

the loan within 60 days following full disbursement, the lender no

longer would have to provide a request for a waiver; but, as a

condition of receiving an evidence of guaranty the lender must continue

to provide the required explanation of why the lender was late in

reporting the loan. This will have no impact on whether or not VA

guarantees the loan but would help VA determine whether action should

be taken against a lender.

VA also is proposing to amend its lender record-retention

requirements. Currently, lenders are required to retain loan

origination records for at least one year from the date of loan

closing. VA is proposing to extend this to two years from the date of

loan closing. This would improve VA's ability to monitor lender

performance and conduct underwriting reviews.

Further, VA is proposing to amend its loan guaranty regulations

regarding criteria used to approve non-supervised lenders to process VA

guaranteed loans on the automatic basis. These changes would reduce the

experience requirements for lenders and their underwriters, thereby

making it easier for them to qualify for automatic-processing

authority. High underwriting standards would be maintained by requiring

that all VA-approved underwriters receive training in VA credit

underwriting procedures. This document also requests Paperwork

Reduction Act comments concerning the collections of information

contained in this document.

DATES: Comments must be received on or before September 15, 1997.

ADDRESSES: Mail or hand deliver written comments to: Director, Office

of Regulations Management (02D), Department of Veterans Affairs, 810

Vermont Avenue, NW, Room 1154, Washington, DC 20420. Comments should

indicate that they are submitted in response to ``RIN 2900-AH23.'' All

written comments will be available for public inspection at the above

address in the Office of Regulations Management, Room 1158, between the

hours of 8 a.m. and 4:30 p.m., Monday through Friday (except holidays).

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: 38 CFR 36.4335 provides that, whenever a

loan is not reported to VA for issuance of evidence of guaranty within

60 days of full disbursement, evidence of guaranty will be issued only

if the timeliness requirement for reporting is formally waived by VA

field station personnel. This waiver is essentially a formality and is

routinely granted where the lender is able to certify that the loan is

current and can provide VA with a valid explanation for the late

reporting. The issuance of these waivers is a time-consuming process

that appears to be no longer warranted. In order to improve efficiency,

VA is proposing to insert a new paragraph (f) in 38 CFR 36.4303 to

state that, upon receipt of a statement of the reasons for late

reporting, evidence of guaranty will be issued. It is proposed that the

statement of the reasons for late reporting continue to be submitted to

VA so that these reasons could be considered in deciding if the

lenders' personnel might need additional training or whether automatic

lending authority should be withdrawn. Since the waiver procedure would

be eliminated, 38 CFR 36.4335 (a) and (b), which provide for delegation

of waiver authority to field stations, would also be eliminated as

unnecessary.

38 CFR 36.4330 requires that lenders maintain loan origination

records on VA-guaranteed home loans for a period of at least one year

from the date of loan closing. This one-year retention requirement has

not been long enough to enable VA monitoring unit audit teams to review

loan records for as many lenders as necessary to properly administer

the VA loan guaranty program. Moreover, industry standards, including

Federal Housing Administration (FHA) regulations and the Equal Credit

Opportunity Act (ECOA), require that lenders keep loan origination

records for at least 24 months. This proposal would amend VA's record-

retention requirement to require that lenders maintain loan origination

records for at least 2 years from the date of loan closing. This not

only would conform with industry standards but it also appears that it

would improve VA's ability to monitor loan performance and to identify

lenders who may be having particular trouble underwriting loans.

VA has completed a study of the criteria and process used to

approve lenders to process VA loans on the automatic basis. In the

course of conducting this review, VA reviewed procedures used by the

FHA, the Government National Mortgage Association (GNMA), the Federal

National Mortgage Association (FNMA), and the Federal Home Loan

Mortgage Corporation (FHLMC). Based on this review it is proposed to

amend the loan guaranty regulations. As explained

[[Page 37825]]

below, we are proposing changes in the following requirements for

lender participation in the automatic lender program: Lender

experience, working capital, lines of credit, and VA-approved

underwriter eligibility and training. Also, as explained below, we

propose to add a requirement for annual recertification of lenders and

provide for withdrawal of automatic authority from lenders who fail to

meet the recertification criteria. These changes would (1) streamline

VA's approval process; (2) update the standards employed in granting

automatic authority to reflect changes in the mortgage banking

industry; and (3) simplify lender submissions by adopting requirements

used by other Government agencies.

VA defines an ``agent'' as any party performing loan-related

functions on behalf of, or in the name of, a sponsoring lender. The

extent of the relationship between lender and agent is at their

discretion. VA does not restrict who may act as agent. Any individual,

including a real estate agent or broker, may be authorized by a lender

to act as its agent, provided the lender accepts full responsibility

for the acts, errors, or omissions of the agent in processing and/or

closing loans.

The Department is proposing changes in requirements for lender and

agent experience. Currently, VA requires that in order for a lender to

close VA loans on the automatic basis the lender must either (1) be a

supervised lender or a wholly owned subsidiary or affiliate of a

supervised lender, i.e., subject to examination and supervision by a

Federal or State agency, or (2) meet certain minimum requirements.

These requirements are: (a) Maintenance of a minimum of $50,000 of

working capital; (b) the firm's active engagement in originating VA

mortgages for at least 3 recent years, or 3 recent years of experience

of each principal officer of the firm who is actively involved in

managing origination functions with VA mortgages in managerial

functions in either the present company or other companies; (c) the

approval, by VA, of a full-time qualified underwriter who will

personally review and make underwriting decisions on VA loans to be

closed on the automatic basis; (d) one or more lines of credit totaling

at least $1 million: (e) if the lender customarily sells loans it

originates, a minimum of two permanent investors; (f) all prospective

VA loans must be reviewed and approved or rejected by a VA-approved

underwriter at the lender's home or main office or a VA-approved

regional underwriting office prior to closing; (g) a designated

liaison, plus an alternate, to deal with VA, other than the

underwriter, if possible; and (h) a written quality control plan

ensuring compliance with VA requirements.

Instead of these current requirements, VA is proposing several

changes to 38 CFR Sec. 36.4348. First, regarding experience

requirements, lenders would be required to have 2 recent years of VA

experience and have closed a minimum of 10 loans within the past 24

months. In the alternative, if the firm has been making VA loans for

less than 2 years, they must have closed at least 25 loans without

repeated deficiencies in underwriting or a high rate of rejection by

VA. As another alternative, each of the operating officers responsible

for loan origination activities must have two recent years of VA loan

experience in that capacity. Also, firms may meet the experience

requirement if they have functioned for at least 2 recent years as an

agent for lender(s) making VA loans, and they provide letters of

recommendation from the sponsoring lender(s). VA offers these

alternative experience requirements to make it easier for more mortgage

lenders to participate in the VA loan guaranty program. This proposed

regulatory change eases these requirements by reducing the number of

years' of experience from 3 to 2. However, to ensure that a potential

program participant has sufficient recent experience, VA proposes to

require that lenders have closed a minimum of 10 loans within the past

24 months.

VA is also proposing to amend this section's requirements

concerning working capital and lines of credit. VA currently requires

that a lender have a minimum of $50,000 working capital. This proposal

would ease VA requirements by accepting, as an alternative, a

demonstrated net worth of $250,000, as defined by the Department of

Housing and Urban Development (HUD) and reported to VA in the lender's

annual financial statements, prepared by a certified public accountant

(CPA). The alternative net worth requirement is the standard currently

in use by HUD. Since most VA program participants are also HUD lenders,

with this regulatory amendment, it will be less burdensome for these

lenders to comply with VA requirements and would still provide adequate

protection for VA loans. In addition, VA's proposed change concerning

lines of credit clarifies that by an ``unrestricted'' line of credit VA

means that the funds must be available based upon the loan meeting VA

requirements and not restricted to those VA loans that the investor

wants to fund.

Finally, VA is proposing changes to its requirements for approved

underwriter eligibility and training. Currently, VA requires that an

underwriter must have a minimum of 3 years' experience in mortgage

lending in reviewing credit and making underwriting decisions, with at

least 2 recent years in connection with loans submitted to VA for

guaranty. This experience must have been with an institutional investor

originating for its own portfolio or purchasing VA loans, or with an

originator selling this type of loan to investors. VA is proposing to

amend 38 CFR 36.4348 to provide that these experience requirements will

be satisfied if the nominee has 3 years of combined experience in

processing, pre-underwriting, and underwriting, at least 1 recent year

of which must be related to underwriting. Alternatively, the nominee

must be designated as an Accredited Residential Underwriter (ARU) by

the Mortgage Bankers Association (MBA) within the last 3 years. This

change is proposed because VA has determined that recognition as an ARU

by the MBA demonstrates proficiency in mortgage underwriting. This

change will make it easier for more qualified lenders to become program

participants than before. In addition, an applicant must be employed on

a full-time basis by the lender and he or she must attend training

sponsored by the VA Regional Office within 90 days of approval as a VA

underwriter. This is in order to make sure that the underwriter

receives up-to-date training in VA program requirements and to enable

him or her to become familiar with the local VA Regional Office.

VA also proposes to stop requiring that the underwriter be located

in the lender's home office or in an approved regional underwriting

office, provided the lender certifies that the underwriter is not

supervised by a branch manager or other person with production

responsibilities. The reason for this is that VA recognizes that

changes in the lending industry may dictate more flexible corporate

structures. Since the lender is responsible to VA for the quality of

the underwriting performed by its employees, VA can be flexible about

the location of the lender's underwriters.

It also is proposed to amend Sec. 36.4349 to clarify the current

practice regarding withdrawal of automatic-processing authority for

non-supervised lenders during their probationary period. In this

regard, it is proposed that automatic authority may be withdrawn for

any of the reasons applicable to non-probationary automatic lenders

regardless of whether deficiencies

[[Page 37826]]

previously have been brought to the attention of the probationary

lender.

Minor changes are proposed to Sec. 36.4349 to conform the language

to proposed changes in Sec. 36.4348 regarding the alternate financial

criteria of adjusted net worth and the provision that automatic-

processing authority may be withdrawn at any time for failure to meet

basic qualifying and/or annual recertification requirements. Also,

other nonsubstantitive changes would be made for purposes of

clarification.

Paperwork Reduction Act of 1995

Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520),

proposed 38 CFR 36.4303(a), (c), (d), (e), (f), (g), (i), and (l);

36.4330(a) and (b); and 36.4348(b), (c), and (d), which are set forth

in full in the text portion of this document, contain collections of

information. These provisions, which include republished provisions,

prescribe the information to be submitted by lenders in order to

qualify for participation in the VA Loan Guaranty Program as

``automatic'' lenders, i.e., lenders who VA has approved as qualified

to close loans to veterans without submitting the paperwork to VA for

prior approval (38 CFR 36.4348-36.4349). These sections contain

material that explains what information is necessary and the quality of

the information needed for lenders to qualify as ``automatic'' lenders

(Sec. 36.4348(b), (c), and (d)). These sections also include a

requirement for explanations of delays in reporting loans

(Sec. 36.4303); and maintenance of records requirements

(Sec. 36.4330(a) and (b)). Also, as required under section 3507(d) of

the Act, VA has submitted a copy of this proposed rulemaking action to

the Office of Management and Budget (OMB) for its review of the

collection of information.

OMB assigns control numbers to collections 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.

Comments on the collections of information should be submitted to

the Office of Management and Budget, Attention: Desk Officer for the

Department of Veterans Affairs, Office of Information and Regulatory

Affairs, Washington, DC 20503, with copies to the Director, Office of

Regulations Management (02D), Department of Veterans Affairs, 810

Vermont Avenue, NW, Washington, DC 20420. Comments should indicate that

they are submitted in response to ``RIN 2900-AH23.''

Title: VA-Guaranteed Loans on the Automatic Basis, Withdrawal of

Automatic-processing Authority, Record-retention Requirements, and

Elimination of Late Reporting Waivers.

Summary of collection of information: Pursuant to 38 U.S.C.

3702(d), mortgage lenders can be authorized to participate in the VA

Loan Guaranty Program as ``automatic'' lenders, i.e., lenders qualified

to close loans to veterans without submitting the paperwork to VA for

prior approval. The proposed regulatory amendments would require that

prospective ``automatic'' lenders provide VA with a certification (38

CFR 36.4348(b)(2)) and other limited information (Sec. 36.4348((b),

(c), and (d)) in order to be approved as qualified to close loans to

veterans without submitting the loan to VA for prior approval.

Description of the need for information and proposed use of

information: If a lender is going to obligate VA to guarantee loans

without VA's prior approval, VA must be able to determine that such a

lender is sufficiently qualified to do so. At the same time, VA needs

to stay current with industry standards with regard to underwriter

qualifications, methods of obtaining information, and other Government

agency lending practices.

Description of likely respondents: Mortgage lenders who make VA-

guaranteed home loans.

Estimated number of respondents: Approximately 4,630 per year.

Estimated frequency of responses: Most of this information is

collected on a ``one-time'' basis or on an annual basis.

Estimated average burden per collection: The information collected

for submission to VA is, in large part, already being prepared for

participation in other government lending programs. Most lenders who

participate in the VA Loan Guaranty Program also participate in other

Government lending programs. The remaining information collections will

have an estimated annual burden of about 1 hour per respondent.

Estimated total annual reporting and recordkeeping burden: The

information collected for submission to VA is prepared, for the most

part, as a customary business practice. These information collections

are elements of a package of information prepared by lenders who

participate in any Government lending program. The remaining

information collections are usually already being provided to VA

lenders who are or who wish to be automatic VA lenders. These

regulatory changes merely make minor adjustments in the manner of

collection to conform VA requirements to industry norms. The result,

for the most part, is that lenders will be able to provide to VA

information they have already prepared for use in other Government

lending programs.

The volume of cases is estimated to be about 4,630. Not all this

information will be required in all cases, depending on the

circumstances of each lender. Information collection per case is

approximately 1 hour. Most of this information is already being

collected by lenders who have Direct Endorsement authority from HUD.

The Department considers comments by the public on proposed

collections of information in--

Evaluating whether the proposed 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 proposed collections 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 collections 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.

OMB is required to make a decision concerning the proposed

collection of information contained in this proposed rule between 30

and 60 days after publication of this document 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 proposed regulations.

Regulatory Flexibility Act

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. Industry norms for other

lending programs already require lenders to comply with most of the

proposed standards set forth in this regulatory package. Further,

activities concerning loans subject to the VA Loan Guaranty Program do

not constitute a significant portion of activities of small businesses.

[[Page 37827]]

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 3, 1997.

Hershel W. Gober,

Acting Secretary of Veterans Affairs.

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

to be amended as set forth below:

PART 36--LOAN GUARANTY

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

36.4375 continues to read as follows:

Authority: Sections 36.4300 through 36.4374 issued under 38

U.S.C. Secs. 101, 501, 3701-3704, 3710, 3712-3714, 3720, 3729, 3732,

unless otherwise noted.

2. Section 36.4303 is revised to read follows:

Sec. 36.4303 Reporting requirements.

(a) With respect to loans automatically guaranteed under 38 U.S.C.

3703(a)(1), evidence of the guaranty will be issuable to a lender of a

class described under 38 U.S.C. 3702(d) if the loan is reported to the

Secretary within 60 days following full disbursement and upon the

certification of the lender that:

(1) No default exists thereunder which has continued for more than

30 days;

(2) Except for acquisition and improvement loans as defined in

Sec. 36.4301, any construction, repairs. alterations, or improvements

effected subsequent to the appraisal of reasonable value, and paid for

out of the proceeds of the loan, which have not been inspected and

approved upon completion by a compliance inspector designated by the

Secretary, have been completed properly in full accordance with the

plans and specifications upon which the original appraisal was based;

and any deviations or changes of identity in said property have been

approved as required in Sec. 36.4304 concerning guaranty or insurance

of loans to veterans;

(3) The loan conforms otherwise with the applicable provisions of

38 U.S.C. Chapter 37 and of the regulations concerning guaranty or

insurance of loans to veterans.

(Authority: 38 U.S.C. 3703(c)(1))

(b) Loans made pursuant to 38 U.S.C. 3703(a), although not entitled

to automatic insurance thereunder, may, when made by a lender of a

class described in 38 U.S.C. 3702(d)(1), be reported for issuance of an

insurance credit.

(Authority: 38 U.S.C. 3702(d), 3703(a)(2))

(c) Each loan proposed to be made to an eligible veteran by a

lender not within a class described in 38 U.S.C. 3702(d) shall be

submitted to the Secretary for approval prior to closing. Lenders

described in 38 U.S.C. 3702(d) shall have the optional right to submit

any loan for such prior approval. The Secretary, upon determining any

loan so submitted to be eligible for a guaranty, or for insurance, will

issue a certificate of commitment with respect thereto.

(d) A certificate of commitment shall entitle the holder to the

issuance of the evidence of guaranty or insurance upon the ultimate

actual payment of the full proceeds of the loan for the purposes

described in the original report and upon the submission within 60 days

thereafter of a supplemental report showing that fact and:

(1) The identity of any property purchased therewith,

(2) That all property purchased or acquired with the proceeds of

the loan has been encumbered as required by the regulations concerning

guaranty or insurance of loans to veterans,

(3) Except for acquisition and improvement loans as defined in

Sec. 36.4301(c), any construction, repairs, alterations, or

improvements paid for out of the proceeds of the loan, which have not

been inspected and approved subsequent to completion by a compliance

inspector designated by the Secretary, have been completed properly in

full accordance with the plans and specifications upon which the

original appraisal was based; and that any deviations or changes of

identity in said property have been approved as required by

Sec. 36.4304, and

(4) That the loan conforms otherwise with the applicable provisions

of 38 U.S.C. Chapter 37 and the regulations concerning guaranty or

insurance of loans to veterans.

(Authority: 38 U.S.C. 3703(c)(1))

(e) Upon the failure of the lender to report in accordance with the

provisions of paragraph (d) of this section, the certificate of

commitment shall have no further effect, or the amount of guaranty or

insurance shall be reduced pro rata, as may be appropriate under the

facts of the case: Provided, nevertheless, that if the loan otherwise

meets the requirements of this section, said certificate of commitment

may be given effect by the Secretary, notwithstanding the report is

received after the date otherwise required.

(f) For loans not reported within 60 days, evidence of guaranty

will be issued only if the loan report is accompanied by a statement

signed by a corporate officer of the lending institution which explains

why the loan was reported late. The statement must identify the case or

cases in issue and must set forth the specific reason or reasons why

the loan was not submitted on time. Upon receipt of such a statement

evidence of guaranty will be issued. A pattern of late reporting and

the reasons therefore will be considered by VA in taking action under

Sec. 36.4349.

(g) Evidence of a guaranty will be issued by the Secretary by

appropriate endorsement on the note or other instrument evidencing the

obligation, or by a separate certificate at the option of the lender.

Notice of credit to an insurance account will be given to the lender.

Unused certificates of eligibility issued prior to March 1, 1946, are

void. No certificate of commitment shall be issued and no loan shall be

guaranteed or insured unless the lender, the veteran, and the loan are

shown to be eligible. Evidence of guaranty or insurance will not be

issued on any loan for the purchase or construction of residential

property unless the veteran, or the veteran's spouse in the case of a

veteran who cannot occupy the property because of active duty status

with the Armed Forces, certifies in such form as the Secretary shall

prescribe, that the veteran, or spouse of the active duty veteran,

intends to occupy the property as his or her home. Guaranty or

insurance evidence will not be issued on any loan for the alteration,

improvement, or repair of any residential property or on a refinancing

loan unless the veteran, or spouse of an active duty service member,

certifies that he or she presently occupies the property as his or her

home. An exception to this is if the home improvement or refinancing

loan is for extensive changes to the property which will prevent the

veteran or the spouse of the active duty veteran from occupying the

property while the work is being completed. In such a case the veteran

or spouse of the active duty veteran must certify that he or she

intends to occupy or reoccupy the property as his or her home upon

completion of the substantial improvements or repairs. All of the

mentioned certifications must take place at the time of loan

application and closing except in the case of loans automatically

guaranteed, in which case veterans or in the case of an active duty

veteran, the veteran's spouse shall make

[[Page 37828]]

the required certification only at the time the loan is closed.

(Authority: 38 U.S.C. 3704(c))

(h) Subject to compliance with the regulations concerning guaranty

or insurance of loans to veterans, the certificate of guaranty or the

evidence of insurance credit will be issuable within the available

entitlement of the veteran on the basis of the loan stated in the final

loan report or certification of loan disbursement, except for

refinancing loans for interest rate reductions. The available

entitlement of a veteran will be determined by the Secretary as of the

date of receipt of an application for guaranty or insurance of a loan

or of a loan report. Such date of receipt shall be the date the

application or loan report is date-stamped into VA. Eligibility derived

from the most recent period of service.

(1) Shall cancel any unused entitlement derived from any earlier

period of service, and

(2) Shall be reduced by the amount by which entitlement from

service during any earlier period has been used to obtain a direct,

guaranteed, or insured loan.

(i) On property which the veteran owns at the time of application,

or

(ii) As to which the Secretary has incurred actual liability or

loss, unless in the event of loss or the incurrence and payment of such

liability by the Secretary, the resulting indebtedness of the veteran

to the United States has been paid in full. Provided, That if the

Secretary issues or has issued a certificate of commitment covering the

loan described in the application for guaranty or insurance or in the

loan report, the amount and percentage of guaranty or the amount of the

insurance credit contemplated by the certificate of commitment shall

not be subject to reduction if the loan has been or is closed on a date

which is not later than the expiration date of the certificate of

commitment, notwithstanding that the Secretary in the meantime and

prior to the issuance of the evidence of guaranty or insurance shall

have incurred actual liability or loss on a direct, guaranteed, or

insured loan previously obtained by the borrower. For the purposes of

this paragraph, the Secretary will be deemed to have incurred actual

loss on a guaranteed or insured loan if the Secretary has paid a

guaranty or insurance claim thereon and the veteran's resultant

indebtedness to the Government has not been paid in full, and to have

incurred actual liability on a guaranteed or insured loan if the

Secretary is in receipt of a claim on the guaranty or insurance or is

in receipt of a notice of default. In the case of a direct loan, the

Secretary will be deemed to have incurred an actual loss if the loan is

in default. A loan, the proceeds of which are to be disbursed

progressively or at intervals, will be deemed to have been closed for

the purposes of this paragraph if the loan has been completed in all

respects excepting the actual ``payout'' of the entire loan proceeds.

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

(i) Any amounts that are disbursed for an ineligible purpose shall

be excluded in computing the amount of guaranty or insurance credit.

(j) Notwithstanding the lender has erroneously, but without intent

to misrepresent, made certification with respect to paragraph (a)(1) of

this section, the guaranty or insurance will become effective upon the

curing of such default and its continuing current for a period of not

less than 60 days thereafter. For the purpose of this paragraph a loan

will be deemed current so long as the installment is received within 30

days after its due date.

(k) No guaranty or insurance commitment or evidence of guaranty or

insurance will be issuable in respect to any loan to finance a contract

which:

(1) Is for the purchase, construction, repair, alteration, or

improvement of a dwelling or farm residence;

(2) Is dated on or after June 4, 1969;

(3) Provides for a purchase price or cost to the veteran in excess

of the reasonable value established by the Secretary; and

(4) Was signed by the veteran prior to the veteran's receipt of

notice of such reasonable value; unless such contract includes, or is

amended to include, a provision substantially as follows:

It is expressly agreed that, notwithstanding any other

provisions of this contract, the purchaser shall not incur any

penalty by forfeiture of earnest money or otherwise or be obligated

to complete the purchase of the property described herein, if the

contract purchase price or cost exceeds the reasonable value of the

property established by the Department of Veterans Affairs. The

purchaser shall, however, have the privilege and option of

proceeding with the consummation of this contract without regard to

the amount of the reasonable value established by the Department of

Veterans Affairs.

(Authority: 38 U.S.C. 501, 3703(c)(1))

(l) With respect to any loan for which a commitment was made on or

after March 1, 1988, the Secretary must be notified whenever the holder

receives knowledge of disposition of the residential property securing

a VA guaranteed loan.

(1) If the seller applies for prior approval of the assumption of

the loan, then:

(i) A holder (or its authorized servicing agent) who is an

automatic lender must examine the creditworthiness of the purchaser and

determine compliance with the provisions of 38 U.S.C. 3714. The

creditworthiness review must be performed by the party that has

automatic authority. If both the holder and its servicing agent are

automatic lenders, then they must decide between themselves which one

will make the determination of creditworthiness, whether the loan is

current and whether there is a contractual obligation to assume the

loan, as required by 38 U.S.C. 3714. If the actual loan holder does not

have automatic authority and its servicing agent is an automatic

lender, then the servicing agent must make the determinations required

by 38 U.S.C. 3714 on behalf of the holder. The actual holder will

remain ultimately responsible for any failure of its servicing agent to

comply with the applicable law and VA. regulations.

(A) If the assumption is approved and the transfer of the security

is completed, then the notice required by this paragraph shall consist

of the credit package (unless previously provided in accordance with

paragraph (k)(1)(i)(B) of this section) and a copy of the executed deed

and/or assumption agreement as required by VA office of jurisdiction.

The notice shall be submitted to the Department with VA receipt for the

funding fee provided for in Sec. 36.4312(e)(3) of this part.

(B) If the application for assumption is disapproved, the holder

shall notify the seller and the purchaser that the decision may be

appealed to VA office of jurisdiction within 30 days. The holder shall

make available to that VA office all items used by the holder in making

the holder's decision in case the decision is appealed to VA. If the

application remains disapproved after 60 days (to allow time for appeal

to and review by VA), then the holder must refund $50 of any fee

previously collected under the provisions of Sec. 36.4312(d)(8) of this

part. If the application is subsequently approved and the sale is

completed, then the holder (or its authorized servicing agent) shall

provide the notice described in paragraph (k)(1)(i)(A) of this section.

(C) In performing the requirements of paragraph (k)(1)(i)(A) or

(k)(1)(i)(B) of this section, the holder must complete its examination

of the creditworthiness of the prospective purchaser and advise the

seller no later than 45 days after the date of receipt by the holder of

a

[[Page 37829]]

complete application package for the approval of the assumption. The

45-day period may be extended by an interval not to exceed the time

caused by delays in processing of the application that are documented

as beyond the control of the holder, such as employers or depositories

not responding to requests for verifications, which were timely

forwarded, or follow-ups on those requests.

(ii) If neither the holder nor its authorized servicing agent is an

automatic lender, the notice to VA shall include:

(A) Advice regarding whether the loan is current or in default;

(B) A copy of the purchase contract; and

(C) A complete credit package developed by the holder which the

Secretary may use for determining the creditworthiness of the

purchaser.

(D) The notice and documents required by this section must be

submitted to VA office of jurisdiction no later than 35 days after the

date of receipt by the holder of a complete application package for the

approval of the assumption, subject to the same extensions as provided

in paragraph (k)(1)(i) of this section. If the assumption is not

automatically approved by the holder or its authorized agent, pursuant

to the automatic authority provisions, $50 of any fee collected in

accordance with Sec. 36.4312(d)(8) of this part must be refunded. If

the Department of Veterans Affairs does not approve the assumption, the

holder will be notified and an additional $50 of any fee collected

under Sec. 36.4312(d)(8) must be refunded following the expiration of

the 30-day appeal period set out in paragraph (k)(1)(i)(B) of this

section. If such an appeal is made to the Department of Veterans

Affairs, then the review will be conducted at the Department of

Veterans Affairs office of jurisdiction by an individual who was not

involved in the original disapproval decision. If the application for

assumption is approved and the transfer of security is completed, then

the holder (or its authorized servicing agent) shall provide the notice

required in paragraph (k)(1)(i)(A) of this section.

(2) If the seller fails to notify the holder before disposing of

property securing the loan, the holder shall notify the Secretary

within 60 days after learning of the transfer. Such notice shall advise

whether or not the holder intends to exercise its option to immediately

accelerate the loan and whether or not an opportunity will be extended

to the transferor and transferee to apply for retroactive approval of

the assumption under the terms of this paragraph.

(Authority: 38 U.S.C. 3714)

(Approved by the Office of Management and Budget (OMB) under control

number 2900-0516)

3. Section 36.4330 is revised to read as follows:

Sec. 36.4330 Maintenance of records.

(a) The holder shall maintain a record of the amounts of payments

received on the obligation and disbursements chargeable thereto and the

dates thereof. This record shall be maintained until the Secretary

ceases to be liable as guarantor or insurer of the loan. For the

purpose of any accounting with the Secretary or computation of a claim,

any holder who fails to maintain such record shall be presumed to have

received on the dates due all sums which by the terms of the contract

are payable prior to date of claim for default, and the burden of going

forward with evidence and of ultimate proof of the contrary shall be on

such holder.

(b) The lender shall retain copies of all loan origination records

on a VA guaranteed loan for at least two years from the date of loan

closing. Loan origination records include the loan application,

including any preliminary application, verifications of employment and

deposit, all credit reports, including preliminary credit reports,

copies of each sales contract and addendums, letters of explanation for

adverse credit items, discrepancies and the like, direct references

from creditors, correspondence with employers, appraisal and compliance

inspection reports, reports on termite and other inspections of the

property, builder change orders, and all closing papers and documents.

(Authority: 38 U.S.C. 501, 3703(c)(1))

(c) The Secretary has the right to inspect, examine, or audit, at a

reasonable time and place, the records or accounts of a lender or

holder pertaining to loans guaranteed or insured by the Secretary.

(Approved by OMB under control number 2900-0515)

Sec. 36.4335 [Amended]

4. In Sec. 36.4335, paragraphs (a) and (b) are removed; and

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

paragraphs (a), (b), (c), (d), (e), and (f), respectively. In addition,

the authority citation after the newly redesignated paragraph (e) is

removed.

5. In Sec. 36.4348, paragraphs (d), (e), and (f) are redesignated

as paragraphs (e), (f), and (g), respectively; paragraphs (b), (c), and

newly redesignated (e) are revised and a new paragraph (d) is added to

read as follows:

Sec. 36.4348 Authority to close loans on the automatic basis.

* * * * *

(b) Non-supervised lenders of the class described in 38 U.S.C.

3702(d)(3) must apply to the Secretary for authority to process loans

on the automatic basis. Each of the minimum requirements listed below

must be met by applicant lenders.

(1) Experience. The firm must meet one of the following experience

requirements:

(i) The firm must have been actively engaged in originating VA

loans for at least two years, have a VA Lender ID number and have

originated and closed a minimum of ten VA loans within the past two

years, excluding interest rate reduction refinance loans (IRRRLs), that

have been properly documented and submitted in compliance with VA

requirements and procedures; or

(ii) The firm must have a VA ID number and, if active for less than

two years, have originated and closed at least 25 VA loans, excluding

IRRRLs, that have been properly documented and submitted in compliance

with VA requirements and procedures; or

(iii) Each principal officer of the firm, who is actively involved

in managing origination functions, must have a minimum of two recent

years' management experience in the origination of VA loans. This

experience may be with the current or prior employer. For the purposes

of this requirement, principal officer is defined as president or vice

president; or

(iv) If the firm has been operating as an agent for a non-

supervised automatic lender (sponsoring lender), the firm must submit

documentation confirming that it has a VA Lender ID number and has

originated a minimum of ten VA loans, excluding IRRRLs, over the past

two years. If active for less than two years, the agent must have

originated at least 25 VA loans. The required documentation is a copy

of the VA letter approving the firm as an agent for the sponsoring

lender; a copy of the corporate resolution, describing the functions

the agent was to perform, submitted to VA by the sponsoring lender; and

a letter from a senior officer of the sponsoring lender indicating the

number of VA loans submitted by the agent each year and that the loans

have been properly documented and submitted in compliance with VA

requirements and procedures.

(2) Underwriter. A senior officer of the firm must nominate a full-

time qualified employee(s) to act in the firm's behalf as

[[Page 37830]]

underwriter(s) to personally review and make underwriting decisions on

VA loans to be closed on the automatic basis.

(i) Nominees for underwriter must have a minimum of three years

experience in processing, pre-underwriting or underwriting mortgage

loans. At least one recent year of this experience must have included

making underwriting decisions on VA loans. (Recent is defined as within

the past three years.) A VA nomination and current resume, outlining

the underwriter's specific experience with VA loans, must be submitted

for each underwriter nominee.

(ii) Alternatively, if an underwriter does not have the experience

outlined above, the underwriter must submit documentation verifying

that he or she is a current Accredited Residential Underwriter (ARU) as

designated by the Mortgage Bankers Association (MBA).

(iii) If an underwriter is not located in the lender's corporate

office, then a senior officer must certify that the underwriter reports

to and is supervised by an individual who is not a branch manager or

other person with production responsibilities.

(iv) All VA approved underwriters must attend a 1-day (eight-hour)

training course on underwriter responsibilities, VA underwriting

requirements, and VA administrative requirements, including the usage

of VA forms, within 90 days of approval (if VA is unable to make such

training available within 90 days, the underwriter must attend the

first available training). Immediately upon approval of a VA

underwriter, the office of jurisdiction will contact the underwriter to

schedule this training at a VA regional office (VARO) of the

underwriter's choice. This training is required for all newly approved

VA underwriters, including those who qualified for approval based on an

ARU designation, as well as VA approved underwriters who have not

underwritten VA guaranteed loans in the past 24 months. Furthermore,

and at the discretion of any VARO in whose jurisdiction the lender is

originating VA loans, VA approved underwriters who consistently approve

loans that do not meet VA credit standards may be required to retake

this training.

(3) Underwriter Certification. The lender must certify that all

underwriting decisions as to whether to accept or reject a VA loan will

be made by a VA approved underwriter. In addition each VA approved

underwriter will be required to certify on each VA loan that he or she

approves that the loan has been personally reviewed and approved by the

underwriter.

(4) Financial Requirements. Each application must include the most

recent annual financial statement audited and certified by a certified

public accountant (CPA). If the date of the annual financial statement

precedes that of the application by more than six months, the lender

must also attach a copy of its latest internal financial statement.

Lenders are required to meet either the working capital or the minimum

net worth financial requirement as defined below.

(i) Working Capital. A minimum of $50,000 in working capital must

be demonstrated.

(A) Working capital is a measure of a firm's liquidity, or the

ability to pay its short-term debts. Working capital is defined as the

excess of current assets over current liabilities. Current assets are

defined as cash or other liquid assets convertible into cash within a

1-year period. Current liabilities are defined as debts that must be

paid within the same 1-year time frame.

(B) The VA determination of whether a lender has the required

minimum working capital is based on the balance sheet of the lender's

annual audited financial statement. Therefore, either the balance sheet

must be classified to distinguish between current and fixed assets and

between current and long-term liabilities or the information must be

provided in a footnote to the statement.

(ii) Net Worth. Lenders must show evidence of a minimum of $250,000

in adjusted net worth. Net worth is a measure of a firm's solvency, or

its ability to exist in the long run, quantified by the payment of

long-term debts. Net worth as defined by generally accepted accounting

principles (GAAP) is total assets minus total liabilities. Adjusted net

worth for VA purposes is the same as the adjusted net worth required by

the Department of Housing and Urban Development (HUD), net worth less

certain unacceptable assets including:

(A) Any assets of the lender pledged to secure obligations of

another person or entity.

(B) Any asset due from either officers or stockholders of the

lender or related entities, in which the lender's officers or

stockholders have a personal interest, unrelated to their position as

an officer or stockholder.

(C) Any investment in related entities in which the lender's

officers or stockholders have a personal interest unrelated to their

position as an officer or stockholder.

(D) That portion of an investment in joint ventures, subsidiaries,

affiliates and/or other related entities which is carried at a value

greater than equity, as adjusted. ``Equity as adjusted'' means the book

value of the related entity reduced by the amount of unacceptable

assets carried by the related entity.

(E) All intangibles, such as goodwill, covenants not to compete,

franchisee fees, organization costs, etc., except unamortized servicing

costs carried at a value established by an arm's-length transaction and

presented in accordance with generally accepted accounting principles.

(F) That portion of an asset not readily marketable and for which

appraised values are very subjective, carried at a value in excess of a

substantially discounted appraised value. Assets such as antiques, art

work and gemstones are subject to this provision and should be carried

at the lower of cost or market.

(G) Any asset that is principally used for the personal enjoyment

of an officer or stockholder and not for normal business purposes.

Adjusted net worth must be calculated by a CPA using an audited and

certified balance sheet from the lender's latest financial statements.

``Personal interest'' as used in this section indicates a relationship

between the lender and a person or entity in which that specified

person (e.g., spouse, parent, grandparent, child, brother, sister,

aunt, uncle or in-law) has a financial interest in or is employed in a

management position by the lender.

(5) Lines of credit. The lender applicant must have one or more

lines of credit aggregating at least $l million. The identity of the

source(s) of warehouse lines of credit must be submitted to VA and the

applicant must agree that VA may contact the named source(s) for the

purpose of verifying the information. A line of credit must be

unrestricted, that is, funds are available upon demand to close loans

and are not dependent on prior investor approval. A letter from the

company(ies) verifying the unrestricted line(s) of credit must be

submitted with the application for automatic authority.

(6) Permanent investors. If the lender customarily sells loans it

originates, it must have a minimum of two permanent investors. The

names, addresses and telephone numbers of the permanent investors must

be submitted with the application.

(7) Liaison. The lender applicant must designate an employee and an

alternate to be the primary liaison with VA. The liaison officers

should be thoroughly familiar with the lender's entire operation and be

able to respond to any query from VA concerning a particular VA loan or

the firm's automatic authority.

[[Page 37831]]

(8) Other considerations. All applications will also be reviewed in

light of the following considerations:

(i) There must be no factors which indicate that the firm would not

exercise the care and diligence required of a lender originating and

closing VA loans on the automatic basis; and

(ii) In the event the firm, any member of the board of directors,

or any principal officer has ever been debarred or suspended by any

Federal agency or department, or any of its directors or officers has

been a director or officer of any other lender or corporation that was

so debarred or suspended, or if the lender applicant ever had a

servicing contract with an investor terminated for cause, a statement

of the facts must be submitted with the application for automatic

authority.

(9) Quality Control System. In order to be approved as a non-

supervised lender for automatic-processing authority, the lender must

implement a written quality control system which ensures compliance

with VA requirements. The lender must agree to furnish findings under

its systems to VA on demand. The elements of the quality control system

must include the following:

(i) Underwriting policies. Each office of the lender shall maintain

copies of VA credit standards and all available VA underwriting

guidelines.

(ii) Corrective measures. The system should ensure that effective

corrective measures are taken promptly when deficiencies in loan

originations are identified by either the lender or VA. Any cases

involving major discrepancies which are discovered under the system

must be reported to VA.

(iii) System integrity. The quality control system should be

independent of the mortgage loan production function.

(iv) Scope. The review of underwriting decisions and certifications

must include compliance with VA underwriting requirements, sufficiency

of documentation and soundness of underwriting judgments.

(v) Appraisal quality. For lenders approved for the Lender

Appraisal Processing Program (LAPP), the quality control system must

specifically contain provisions concerning the adequacy and quality of

real property appraisals. While the lender's quality control personnel

need not be appraisers, they should have basic familiarity with

appraisal theory and techniques so that they can select appropriate

cases for review if discretionary sampling is used, and prescribe

appropriate corrective action(s) in the appraisal review process when

discrepancies or problems are identified. Copies of the lender's

quality control plan or self-policing system evidencing appraisal

related matters must be provided to the VA office of jurisdiction.

(10) Courtesy closing. The lender-applicant must certify to VA that

it will not close loans on an automatic basis as a courtesy or

accommodation for other mortgage lenders, whether or not such lenders

are themselves approved to close on an automatic basis without the

express approval of VA. However, a lender with automatic authority may

close loans for which information and supporting credit data have been

developed on its behalf by a duly authorized agent.

(11) Probation. Lenders meeting these requirements will be approved

to close VA loans on an automatic basis for a 1-year period. At the end

of this period, the lender's quality of underwriting, the completeness

of loan submissions, compliance with VA requirements and procedures,

and the delinquency and foreclosure rates will be reviewed.

(12) Extensions of Automatic Authority. When a lender wants its

automatic authority extended to another State, the request must be

submitted, with the fee designated in paragraph (e)(5) of this section,

to the VA regional office having jurisdiction in the State where the

lender's corporate office is located.

(i) When a lender wants its automatic authority to include loans

involving a real estate brokerage and/or a residential builder or

developer in which it has a financial interest, owns, is owned by, or

with which it is affiliated, the following documentation must be

submitted:

(A) A corporate resolution from the lender and each affiliate

indicating that they are separate entities operating independently of

each other. The lender's corporate resolution must indicate that it

will not give more favorable underwriting consideration to its

affiliate's loans, and the affiliate's corporate resolution must

indicate that it will not seek to influence the lender to give their

loans more favorable underwriting consideration.

(B) Letters from permanent investors indicating the percentage of

all VA loans based on the affiliate's production originated by the

lender over a 1-year period that are past due 90 days or more. This

delinquency ratio must be no higher than the national average for the

same period for all mortgage loans.

(ii) When a lender wants its automatic authority extended to

additional States, the lender must indicate how it plans to originate

VA loans in those States. Unless a lender proposes a telemarketing

plan, VA requires that a lender have a presence in the State, that is,

a branch office, an agent relationship, or that it is a reasonable

distance from one of its offices in an adjacent State, i.e., 50 miles.

If the request is based on an agency relationship, the documentation

outlined in paragraph (b)(13) of this section must be submitted with

the request for extension.

(13) Use of Agents. A lender using an agent to perform a portion of

the work involved in originating and closing a VA guaranteed loan on an

automatic basis must take full responsibility by certification for all

acts, errors and omissions of the agent or other entity and its

employees for the work performed. Any such acts, errors or omissions

will be treated as those of the lender and appropriate sanctions may be

imposed against the lender and its agent. Lenders requesting an agent

must submit the following documentation to the VA regional office

having jurisdiction for the lender's corporate office:

(i) A corporate resolution certifying that the lender takes full

responsibility for all acts, errors and omissions of the agent that it

is requesting. The corporate resolution must also identify the agent's

name and address, the geographic area in which the agent will be

originating and/or closing VA loans; whether the agent is authorized to

issue interest rate lock-in agreements on behalf of the lender; and

outline the functions the agent is to perform. Alternatively, the

lender may submit a blanket corporate resolution which sets forth the

functions of any and all agents and identifies individual agents by

name, address, and geographic area in separate letters which refer to

the blanket resolution.

(ii) When the VA regional office having jurisdiction for the

lender's corporate office acknowledges receipt of the lender's request

in writing, the agent is thereby authorized to originate VA loans on

the lender's behalf.

(Authority: 38 U.S.C. 501(a), 3702(d))

(c) A lender approved to close loans on the automatic basis who

subsequently fails to meet the requirements of this section must report

to VA the circumstances surrounding the deficiency and the remedial

action to be taken to cure it. Failure to advise VA in a timely manner

could result in a lender's loss of its approval to close VA loans on

the automatic basis.

(Authority: 38 U.S.C. 501(a), 3702(d))

(d) Annual recertification. Non-supervised lenders of the class

described in 38 U.S.C. 3702(d)(3) must be recertified annually for

authority to process loans on the automatic basis.

[[Page 37832]]

The following minimum annual recertification requirements must be met

by each lender approved for automatic authority:

(1) Financial requirements. A lender must submit, within 120 days

following the end of its fiscal year, an audited and certified

financial statement with a classified balance sheet or a separate

footnote for adjusted net worth to VA Central Office (264) for review.

The same minimum financial requirements described in Sec. 36.4348(b)(5)

must be maintained and verified annually in order to be recertified for

automatic authority.

(2) Processing annual lender data. The VA regional office having

jurisdiction for the lender's corporate office will mail an annual

notice to the lender requesting current information on the lender's

personnel and operation. The lender is required to complete the form

and return it with the appropriate annual renewal fees to the VA

regional office.

(Authority: 38 U.S.C. 501(a), 3702(d))

(e) Lender fees. To participate as a VA automatic lender, non-

supervised lenders of the class described in 38 U.S.C. 3702(d)(3) shall

pay fees as follows:

(1) $500 for new applications;

(2) $200 for reinstatement of lapsed or terminated automatic

authority;

(3) $100 for each underwriter approval;

(4) $100 for each agent approval;

(5) A minimum fee of $100 for any other VA administrative action

pertaining to a lender's status as an automatic lender;

(6) $200 annually for certification of home offices; and

(7) $100 annually for each agent renewal.

* * * * *

5. In Sec. 36.4349, paragraph (a)(2) is revised to read as follows:

Sec. 36.4349 Withdrawal of authority to close loans on the automatic

basis.

(a)(1) * * *

(2) Automatic processing authority may be withdrawn at any time for

failure to meet basic qualifying and/or annual recertification

criteria.

(i) Non-supervised lenders. (A) Automatic authority may be

withdrawn for lack of a VA approved underwriter, failure to maintain

$50,000 in working capital or $250,000 in adjusted net worth, or

failure to file required financial information.

(B) During the 1-year probationary period for newly approved

lenders, automatic authority may be temporarily or permanently

withdrawn for any of the reasons set forth in this section regardless

of whether deficiencies previously have been brought to the attention

of the probationary lender.

(ii) Supervised lenders. Automatic authority will be withdrawn for

loss of status as an entity subject to examination and supervision by a

Federal or State supervisory agency as required by 38 U.S.C. 3702(d).

(Authority: 38 U.S.C. 501(a), 3702(d))

* * * * *

[FR Doc. 97-18496 Filed 7-14-97; 8:45 am]

BILLING CODE 8320-01-P