Loan Guaranty: Credit Standards

DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AI16

Loan Guaranty: Credit Standards

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

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

loan guaranty regulations regarding credit standards used by lenders to

evaluate the creditworthiness of veteran-borrowers for home loans. VA

is committed to regular review and revision of the standards used to

determine the creditworthiness of veteran-applicants as issues arise

and as the mortgage industry changes. These changes are designed to

keep VA in step with the rest of the home mortgage industry, at least

to an extent appropriate for a Government benefit-related mortgage

program.

DATES: Effective Date: November 17, 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, NW,

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

SUPPLEMENTARY INFORMATION: In a document published in the Federal

Register on May 7, 1997 (62 FR 24874), VA proposed to amend its loan

guaranty credit standards, set forth at 38 CFR 36.4337, used by lenders

to evaluate the creditworthiness of veteran-borrowers for home loans.

Based on the rationale set forth in the proposed rule and this document

the proposed changes are adopted, with differences explained below.

Please refer to the May 7, 1997, Federal Register for a complete

discussion of the proposed amendments. Interested persons were given 60

days to submit comments. The comment period ended July 7, 1997. VA

received three comments regarding the proposed changes.

The first commenter, an association which represents mortgage

lenders, supported adoption of the proposed rule.

The second commenter, an association representing home builders,

suggested that the language of proposed paragraph 36.4337(c)(5)(xii) be

changed to accept other forms of tax credits in addition to those for

child care as compensating factors. This was intended to cover child

care tax credits of a continuing nature. VA agrees that there is no

basis for distinguishing child care tax credits from other forms of tax

credits of a continuing nature. The final rule at paragraph

36.4337(c)(5)(xii) is changed accordingly.

The third commenter, a lender who actively participates in the VA

Guaranteed Home Loan Program, expressed general support for the

proposed rule, but raised several concerns. The first concern related

to proposed paragraphs 36.4337 (d) and (f), which would allow lenders

to ``gross up'' income to account for the impact of tax-free income on

the debt-to-income-ratio when underwriting a loan. The commenter

observed that the ``grossing-up'' calculations should be kept simple

and suggested that it would be helpful if VA could provide an example

or formula of how ``grossing up'' calculations are performed. We agree

that the ``grossing up'' calculation needs to be simple and

understandable and believe that the revised regulations on this point

are simple and understandable. Also, we note that the term ``grossing

up'' is well understood by the mortgage industry. The mortgage industry

has been ``grossing up'' income on conventional loans for many years.

Under paragraph 36.4337(f)(4), the adjustment may be made by using

current income tax tables. The lender need only determine what amount

of income, when taxed at the proper combination of State and Federal

rates, would yield an after-tax income equivalent to the tax-free

income the veteran actually receives. The purpose of allowing lenders

to ``gross up'' income is to enable the lender to calculate the debt-

to-income ratio as if the veteran's tax-free income were ``after-tax''

income. The arithmetic will vary by State, depending on various State

and local tax rates. The lender would then use this amount to calculate

the veteran's debt-to-income ratio, while using the actual tax-free

income to calculate the residual income.

For example, in a State with no income tax, the lender could simply

show that, for a veteran in the 15 percent Federal income tax bracket,

$1,000 of tax-free income is equivalent

[[Page 53964]]

to 85 percent of taxable income. Thus, by dividing $1,000 by .85, it is

possible to calculate that the ``grossed up'' income is $1,176.50. In a

State with a 5 percent income tax, the ``grossed up'' income would be

calculated by combining the State and Federal tax rates, 20 percent.

Thus in the same example, $1,000 of tax-free income would be ``grossed

up'' by dividing it by .80 and the ``grossed up'' income is $1,250.

Note: This amount is a close estimate if the veteran itemizes

deductions, since the State income tax is deductible in calculating

federal income tax. No particular form is prescribed for this

material (see paragraph 36.4337(f)(4)). It can be on a separate

sheet of paper, or simply explained on the loan analysis form, so

long as the explanation is one that would be understandable to a VA

or other agency loan specialist trained in reviewing loan

applications, or can be made understandable with any further

information the lender wishes to submit.

The commenter questioned whether the change to VA's residual income

guidelines in paragraph 36.4337(e) is a one-time adjustment or whether

VA was providing for automatic future annual adjustments. The answer is

that this is a one-time increase. Paragraph 36.4337(e) is being changed

by increasing the amount of residual income required for family support

by 4 percent for all categories. The computation of the Residual Income

tables is based upon cost-of-living and expenditure data compiled by

the U.S. Bureau of Labor Statistics. These tables have not been

increased since 1992. This amendment increases the Residual Income

amounts by 4 percent across the board. Any future adjustments will be

made by separate regulatory actions.

This commenter also raised an issue regarding the inclusion of all

household members in the residual income calculations set forth in

paragraph 36.4337(e). More specifically, the commenter questioned

whether lenders would be required to verbally confirm that there are no

additional non-claimed dependents in the veteran's household. No

changes are made based on this comment. Prudent lenders clearly would

discuss the information provided by the veteran and a lender would need

to ask sufficient questions to ensure the completeness and accuracy of

the information provided for a loan.

In its comments, this commenter stated that imposing the same

documentation requirements for Reserve and National Guard applicants

that are currently required for active military personnel within 12

months of release is somewhat burdensome. Currently, under paragraph

36.4337(f)(2)(ii), active duty military personnel who are within 12

months of release must provide one of the following: (1) Documentation

that the servicemember has in fact already reenlisted or extended his/

her period of active duty to a date beyond the 12-month period

following the projected closing of the loan; (2) Verification of a

valid offer of local civilian employment following release from active

duty, which includes all data pertinent to sound underwriting

procedures such as date employment will begin, earnings, etc.; (3) A

statement from the servicemember that he/she intends to reenlist or

extend his/her period of active duty to a date beyond the 12 month

period following the projected loan closing date, and a statement from

the servicemember's commanding officer confirming that the

servicemember is eligible to reenlist or extend his/her active duty as

indicated and that the commanding officer has no reason to believe that

such reenlistment or extension of active duty will not be granted; or

(4) Other unusually strong positive underwriting factors, such as a

downpayment of at least 10 percent, significant cash reserves, or clear

evidence of strong ties to the community coupled with a nonmilitary

spouse's income so high that only a minimal income from the active duty

servicemember is needed to qualify.

In light of the fact that members of the Selected Reserves are

subject to the same downsizing as the regular military, we believe that

if the income from service in the Reserves is necessary to qualify it

must likewise be subject to the same stability criteria. For this

reason, VA does not believe any substantive change to this paragraph of

the proposed regulatory amendments is warranted.

Finally, this commenter has requested further clarification

regarding the treatment of employment history and the probability of

the veteran's continued employment. If a veteran has a short-term

employment history or has recently changed to a new career, it very

well may not be possible to determine that the veteran's income is

stable. The purpose of the change is to remove the burden of trying to

follow up with an employer when the employer declines to verify the

probability of continued employment. Instead, reliability will be

determined based on the duration of the borrower's current employment

together with his or her overall documented employment history.

Nonsubstantive changes have been made for purposes of

clarification.

Paperwork Reduction Act

Information collection and recordkeeping requirements in 38 CFR

36.4337 have been approved by the Office of Management and Budget (OMB)

under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C.

3501-3520) and have been assigned OMB control number 2900-0521. The

information collection subject to this rulemaking concerns the

information to be submitted for approval of a VA loan guaranty and

contains material which further explains the quality of the information

needed for approval.

OMB assigns a control number for each collection 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. The valid OMB control number

assigned to the collection of information in this final rule is

displayed at the end of the affected section of the regulations.

Interested persons were invited to submit comments on the

collection of information. All comments received are discussed above.

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. Industry norms for other lending programs already require lenders

to comply with most of the standards set forth in this final rule.

Further, activities concerning loans subject to the VA Loan Guaranty

Program do not constitute a significant portion of activities of small

businesses. 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

64.106, 64.114, 64.118 and 64.119.

List of Subjects in 38 CFR Part 36

Condominiums, Handicapped, Housing, Loan programs--housing and

community development, Reporting and recordkeeping requirements,

Veterans.

Approved: September 5, 1997.

Hershel W. Gober,

Acting 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 continues to read as follows:

[[Page 53965]]

Authority: 38 U.S.C. 501, 3701-3704, 3707, 3710-3714, 3719,

3720, 3729, 3762, unless otherwise noted.

2. In Sec. 36.4337, the section heading; paragraphs (c) through

(h), (j ) through (l), and (n); and the section authority citation are

revised to read as follows:

Sec. 36.4337 Underwriting standards, processing procedures, lender

responsibility, and lender certification.

* * * * *

(c) Methods. The two primary underwriting tools that will be used

in determining the adequacy of the veteran's present and anticipated

income are debt-to-income ratio and residual income analysis. They are

described in paragraphs (d) through (f) of this section. Ordinarily, to

qualify for a loan, the veteran must meet both standards. Failure to

meet one standard, however, will not automatically disqualify a

veteran. The following shall apply to cases where a veteran does not

meet both standards:

(1) If the debt-to-income ratio is 41 percent or less, and the

veteran does not meet the residual income standard, the loan may be

approved with justification, by the underwriter's supervisor, as set

out in paragraph (c)(4) of this section.

(2) If the debt-to-income ratio is greater than 41 percent (unless

it is larger due solely to the existence of tax-free income which

should be noted in the loan file), the loan may be approved with

justification, by the underwriter's supervisor, as set out in paragraph

(c)(4) of this section.

(3) If the ratio is greater than 41 percent and the residual income

exceeds the guidelines by at least 20 percent, the second level review

and statement of justification are not required.

(4) In any case described by paragraphs (c)(1) and (c)(2) of this

section, the lender must fully justify the decision to approve the loan

or submit the loan to the Secretary for prior approval in writing. The

lender's statement must not be perfunctory, but should address the

specific compensating factors, as set forth in paragraph (c)(5) of this

section, justifying the approval of the loan. The statement must be

signed by the underwriter's supervisor. It must be stressed that the

statute requires not only consideration of a veteran's present and

anticipated income and expenses, but also that the veteran be a

satisfactory credit risk. Therefore, meeting both the debt-to-income

ratio and residual income standards does not mean that the loan is

automatically approved. It is the lender's responsibility to base the

loan approval or disapproval on all the factors present for any

individual veteran. The veteran's credit must be evaluated based on the

criteria set forth in paragraph (g) of this section as well as a

variety of compensating factors that should be evaluated.

(5) The following are examples of acceptable compensating factors

to be considered in the course of underwriting a loan:

(i) Excellent long-term credit;

(ii) Conservative use of consumer credit;

(iii) Minimal consumer debt;

(iv) Long-term employment;

(v) Significant liquid assets;

(vi) Downpayment or the existence of equity in refinancing loans;

(vii) Little or no increase in shelter expense;

(viii) Military benefits;

(ix) Satisfactory homeownership experience;

(x) High residual income;

(xi) Low debt-to-income ratio;

(xii) Tax credits of a continuing nature, such as tax credits for

child care; and

(xiii) Tax benefits of home ownership.

(6) The list in paragraph (c)(5) of this section is not exhaustive

and the items are not in any priority order. Valid compensating factors

should represent unusual strengths rather than mere satisfaction of

basic program requirements. Compensating factors must be relevant to

the marginality or weakness.

(d) Debt-to-income ratio. A debt-to-income ratio that compares the

veteran's anticipated monthly housing expense and total monthly

obligations to his or her stable monthly income will be computed to

assist in the assessment of the potential risk of the loan. The ratio

will be determined by taking the sum of the monthly Principal,

Interest, Taxes and Insurance (PITI) of the loan being applied for,

homeowners and other assessments such as special assessments,

condominium fees, homeowners association fees, etc., and any long-term

obligations divided by the total of gross salary or earnings and other

compensation or income. The ratio should be rounded to the nearest two

digits; e.g., 35.6 percent would be rounded to 36 percent. The standard

is 41 percent or less. If the ratio is greater than 41 percent, the

steps cited in paragraphs (c)(1) through (c)(6) of this section apply.

(e) Residual income guidelines. The guidelines provided in this

paragraph for residual income will be used to determine whether the

veteran's monthly residual income will be adequate to meet living

expenses after estimated monthly shelter expenses have been paid and

other monthly obligations have been met. All members of the household

must be included in determining if the residual income is sufficient.

They must be counted even if the veteran's spouse is not joining in

title or on the note, or if there are any other individuals depending

on the veteran for support, such as children from a spouse's prior

marriage who are not the veteran's legal dependents. It is appropriate,

however, to reduce the number of members of a household to be counted

for residual income purposes if there is sufficient verified income not

otherwise included in the loan analysis, such as child support being

regularly received as discussed in paragraph (e)(4) of this section. In

the case of a spouse not to be obligated on the note, verification that

he/she has stable and reliable employment as discussed in paragraph

(f)(3) of this section would allow not counting the spouse in

determining the sufficiency of the residual income. The guidelines for

residual income are based on data supplied in the Consumer Expenditure

Survey (CES) published by the Department of Labor's Bureau of Labor

Statistics. Regional minimum incomes have been developed for loan

amounts up to $79,999 and for loan amounts of $80,000 and above. It is

recognized that the purchase price of the property may affect family

expenditure levels in individual cases. This factor may be given

consideration in the final determination in individual loan analyses.

For example, a family purchasing in a higher-priced neighborhood may

feel a need to incur higher-than-average expenses to support a

lifestyle comparable to that in their environment, whereas a

substantially lower-priced home purchase may not compel such

expenditures. It should also be clearly understood from this

information that no single factor is a final determinant in any

applicant's qualification for a VA-guaranteed loan. Once the residual

income has been established, other important factors must be examined.

One such consideration is the amount being paid currently for rental or

housing expenses. If the proposed shelter expense is materially in

excess of what is currently being paid, the case may require closer

scrutiny. In such cases, consideration should be given to the ability

of the borrower and spouse to accumulate liquid assets, such as cash

and bonds, and to the amount of debts incurred while paying a lesser

amount for shelter. For example, if an application indicates little or

no capital reserves and excessive obligations, it may not be

[[Page 53966]]

reasonable to conclude that a substantial increase in shelter expenses

can be absorbed. Another factor of prime importance is the applicant's

manner of meeting obligations. A poor credit history alone is a basis

for disapproving a loan, as is an obviously inadequate income. When one

or the other is marginal, however, the remaining aspect must be closely

examined to assure that the loan applied for will not exceed the

applicant's ability or capacity to repay. Therefore, it is important to

remember that the figures provided below for residual income are to be

used as a guide and should be used in conjunction with the steps

outlined in paragraphs (c) through (j) of this section. The residual

income guidelines are as follows:

(1) Table of residual incomes by region (for loan amounts of

$79,999 and below):

Table of Residual Incomes by Region

[For loan amounts of $79,999 and below]

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Family size * Northeast Midwest South West

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1................................. 390 382 382 425

2................................. 654 641 641 713

3................................. 788 772 772 859

4................................. 888 868 868 967

5................................. 921 902 902 1,004

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* For families with more than five members, add $75 for each additional

member up to a family of seven. ``Family'' includes all members of the

household.

(2) Table of residual incomes by region (for loan amounts of

$80,000 and above):

Table of Residual Incomes by Region

[For loan amounts of $80,000 and above]

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Family size * Northeast Midwest South West

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1................................. 450 441 441 491

2................................. 755 738 738 823

3................................. 909 889 889 990

4................................. 1,025 1,003 1,003 1,117

5................................. 1,062 1,039 1,039 1,158

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* For families with more than five members, add $80 for each additional

member up to a family of seven. ``Family'' includes all members of the

household.

(3) Geographic regions for residual income guidelines: Northeast--

Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York,

Pennsylvania, Rhode Island and Vermont; Midwest--Illinois, Indiana,

Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota,

Ohio, South Dakota and Wisconsin; South--Alabama, Arkansas, Delaware,

District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland,

Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina,

Tennessee, Texas, Virginia, West Virginia; West--Alaska, Arizona,

California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico,

Oregon, Utah, Washington and Wyoming.

(4) Military adjustments. For loan applications involving an

active-duty servicemember or military retiree, the residual income

figures will be reduced by a minimum of 5 percent if there is a clear

indication that the borrower or spouse will continue to receive the

benefits resulting from the use of facilities on a nearby military

base. (This reduction applies to tables in paragraph (e) of this

section.)

(f) Stability and reliability of income. Only stable and reliable

income of the veteran and spouse can be considered in determining

ability to meet mortgage payments. Income can be considered stable and

reliable if it can be concluded that it will continue during the

foreseeable future.

(1) Verification. Income of the borrower and spouse which is

derived from employment and which is considered in determining the

family's ability to meet the mortgage payments, payments on debts and

other obligations, and other expenses must be verified. If the spouse

is employed and will be contractually obligated on the loan, the

combined income of both the veteran and spouse is considered when the

income of the veteran alone is not sufficient to qualify for the amount

of the loan sought. In other than community property states, if the

spouse will not be contractually obligated on the loan, Regulation B

(12 CFR part 202), promulgated by the Federal Reserve Board pursuant to

the Equal Credit Opportunity Act, prohibits any request for, or

consideration of, information concerning the spouse (including income,

employment, assets, or liabilities), except that if the applicant is

relying on alimony, child support, or maintenance payments from a

spouse or former spouse as a basis for repayment of the loan,

information concerning such spouse or former spouse may be requested

and considered (see paragraph (f)(4) of this section). In community

property states, information concerning a spouse may be requested and

considered in the same manner as that for the applicant. The standards

applied to income of the veteran are also applicable to that of the

spouse. There can be no discounting of income on account of sex,

marital status, or any other basis prohibited by the Equal Credit

Opportunity Act. Income claimed by an applicant that is not or cannot

be verified cannot be considered when analyzing the loan. If the

veteran or spouse has been employed by a present employer for less than

2 years, a 2-year history covering prior employment, schooling, or

other training must be secured. Any periods of unemployment must be

explained. Employment verifications and pay stubs must be no more than

120 days (180 days for new construction) old to be considered valid.

For loans closed automatically, this requirement will be considered

satisfied if the date of the employment verification is within 120 days

(180 days for new construction) of the date the note is signed. For

prior approval loans, this requirement will be considered satisfied if

the verification of employment is dated within 120 days of the date the

application is received by VA.

(2) Active-duty, Reserve, or National Guard applicants. (i) In the

case of an active-duty applicant, a military Leave & Earnings Statement

is required and will be used instead of an employment verification. The

statement must be no more than 120 days old (180 days for new

construction) and must be the original or a lender-certified copy of

the original. For loans closed automatically, this requirement is

satisfied if the date of the Leave & Earnings Statement is within 120

days (180 days for new construction) of the date the note is signed.

For prior approval loans, this requirement will be considered satisfied

if the verification of employment is dated within 120 days of the date

the application is received by VA.

(ii) For servicemembers within 12 months of release from active

duty, or members of the Reserves or National Guard within 12 months of

release, one of the following is also required:

(A) Documentation that the servicemember has in fact already

reenlisted or extended his/her period of active duty or Reserve or

National Guard service to a date beyond the 12-month period following

the projected closing of the loan.

(B) Verification of a valid offer of local civilian employment

following release from active duty. All data pertinent to sound

underwriting procedures (date employment will begin, earnings, etc.)

must be included.

(C) A statement from the servicemember that he/she intends to

reenlist or extend his/her period of active duty or Reserve or National

Guard service to a date beyond the 12 month period following the

projected loan closing date, and a statement from the servicemember's

commanding

[[Page 53967]]

officer confirming that the servicemember is eligible to reenlist or

extend his/her active duty or Reserve or National Guard service as

indicated and that the commanding officer has no reason to believe that

such reenlistment or extension will not be granted.

(D) Other unusually strong positive underwriting factors, such as a

downpayment of at least 10 percent, significant cash reserves, or clear

evidence of strong ties to the community coupled with a nonmilitary

spouse's income so high that only minimal income from the active duty

servicemember or member of the Reserves or National Guard is needed to

qualify.

(iii) Each active-duty member who applies for a loan must be

counseled through the use of VA Form 26-0592, Counseling Checklist for

Military Homebuyers. Lenders must submit a signed and dated VA Form 26-

0592 with each prior approval loan application or automatic loan report

involving a borrower on active duty.

(3) Income reliability. Income received by the borrower and spouse

is to be used only if it can be concluded that the income will continue

during the foreseeable future and, thus, should be properly considered

in determining ability to meet the mortgage payments. If an employer

puts N/A or otherwise declines to complete a verification of employment

statement regarding the probability of continued employment, no further

action is required of the lender. Reliability will be determined based

on the duration of the borrower's current employment together with his

or her overall documented employment history. There can be no

discounting of income solely because it is derived from an annuity,

pension or other retirement benefit, or from part-time employment.

However, unless income from overtime work and part-time or second jobs

can be accorded a reasonable likelihood that it is continuous and will

continue in the foreseeable future, such income should not be used.

Generally, the reliability of such income cannot be demonstrated unless

the income has continued for 2 years. The hours of duty and other work

conditions of the applicant's primary job, and the period of time in

which the applicant was employed under such arrangement, must be such

as to permit a clear conclusion as to a good probability that overtime

or part-time or secondary employment can and will continue. Income from

overtime work and part-time jobs not eligible for inclusion as primary

income may, if properly verified for at least 12 months, be used to

offset the payments due on debts and obligations of an intermediate

term, i.e., 6 to 24 months. Such income must be described in the loan

file. The amount of any pension or compensation and other income, such

as dividends from stocks, interest from bonds, savings accounts, or

other deposits, rents, royalties, etc., will be used as primary income

if it is reasonable to conclude that such income will continue in the

foreseeable future. Otherwise, it may be used only to offset

intermediate-term debts, as described in this paragraph. Also, the

likely duration of certain military allowances cannot be determined

and, therefore, will be used only to offset intermediate-term debts, as

described in this paragraph. Such allowances are: Pro-pay, flight or

hazard pay, and overseas or combat pay, all of which are subject to

periodic review and/or testing of the recipient to ascertain whether

eligibility for such pay will continue. Only if it can be shown that

such pay has continued for a prolonged period and can be expected to

continue because of the nature of the recipient's assigned duties, will

such income be considered as primary income. For instance, flight pay

verified for a pilot can be regarded as probably continuous and, thus,

should be added to the base pay. Income derived from service in the

Reserves or National Guard may be used if the applicant has served in

such capacity for a period of time sufficient to evidence good

probability that such income will continue beyond 12 months. The total

period of active and reserve service may be helpful in this regard.

Otherwise, such income may be used to offset intermediate-term debts.

There are a number of additional income sources whose contingent nature

precludes their being considered as available for repayment of a long-

term mortgage obligation. Temporary income items such as VA educational

allowances and unemployment compensation do not represent stable and

reliable income and will not be taken into consideration in determining

the ability of the veteran to meet the income requirement of the

governing law. As required by the Equal Opportunity Act Amendments of

1976, Public Law 94-239, income from public assistance programs is used

to qualify for a loan if it can be determined that the income will

probably continue for 3 years or more.

(4) Tax-exempt income. Special consideration can be given to

verified nontaxable income once it has been established that such

income is likely to continue (and remain untaxed) into the foreseeable

future. Such income includes certain military allowances, child support

payments, workers' compensation benefits, disability retirement

payments and certain types of public assistance payments. In such

cases, current income tax tables may be used to determine an amount

which can be prudently employed to adjust the borrower's actual income.

This adjusted or ``grossed up'' income may be used to calculate the

monthly debt-to-income ratio, provided the analysis is documented. Only

the borrower's actual income may be used to calculate the residual

income. Care should be exercised to ensure that the income is in fact

tax-exempt.

(5) Alimony, child support, maintenance, workers' compensation,

foster care payments. (i) If an applicant chooses to reveal income from

alimony, child support or maintenance payments (after first having been

informed that any such disclosure is voluntary pursuant to the Federal

Reserve Board's Regulation B), such payments are considered as income

to the extent that the payments are likely to be consistently made.

Factors to be considered in determining the likelihood of consistent

payments include, but are not limited to: Whether the payments are

received pursuant to a written agreement or court decree; the length of

time the payments have been received; the regularity of receipt; the

availability of procedures to compel payment; and the creditworthiness

of the payor, including the credit history of the payor when available

under the Fair Credit Reporting Act or other applicable laws. However,

the Fair Credit Reporting Act (15 U.S.C. 1681(b)) limits the

permissible purposes for which credit reports may be ordered, in the

absence of written instructions of the consumer to whom the report

relates, to business transactions involving the subject of the credit

report or extensions of credit to the subject of the credit report.

(ii) If the applicant chooses to reveal income related to workers'

compensation, it will be considered as income to the extent it can be

determined such income will continue.

(iii) Income received specifically for the care of any foster

child(ren) may be counted as income if documented. Generally, however,

such foster care income is to be used only to balance the expenses of

caring for the foster child(ren) against any increased residual income

requirements.

(6) Military quarters allowance. With respect to off-base housing

(quarters) allowances for service personnel on active duty, it is the

policy of the Department of Defense to utilize available on-base

housing when possible. In order for a quarters

[[Page 53968]]

allowance to be considered as continuing income, it is necessary that

the applicant furnish written authorization from his or her commanding

officer for off-base housing. This authorization should verify that

quarters will not be made available and that the individual should make

permanent arrangements for nonmilitary housing. A Department of Defense

form, DD Form 1747, Status of Housing Availability, is used by the

Family Housing Office to advise personnel regarding family housing. The

applicant's quarters allowance cannot be considered unless item b

(Permanent) or d is completed on DD Form 1747, dated October 1990. Of

course, if the applicant's income less quarters allowance is

sufficient, there is no need for assurance that the applicant has

permission to occupy nonmilitary housing provided that a determination

can be made that the occupancy requirements of the law will be met.

Also, authorization to obtain off-base housing will not be required

when certain duty assignments would clearly qualify service personnel

with families for quarters allowance. For instance, off-base housing

authorizations need not be obtained for service personnel stationed

overseas who are not accompanied by their families, recruiters on

detached duty, or military personnel stationed in areas where no on-

base housing exists. In any case in which no off-base housing

authorization is obtained, an explanation of the circumstances

justifying its omission must be included with the loan application

except when it has been established by the VA facility of jurisdiction

that the waiting lists for on-base housing are so long that it is

improbable that individuals desiring to purchase off-base housing would

be precluded from doing so in the foreseeable future. If stations make

such a determination, a release shall be issued to inform lenders.

(7) Automobile (or similar) allowance. Generally, automobile

allowances are paid to cover specific expenses related to an

applicant's employment, and it is appropriate to use such income to

offset a corresponding car payment. However, in some instances, such an

allowance may exceed the car payment. With proper documentation, income

from a car allowance which exceeds the car payment can be counted as

effective income. Likewise, any other similar type of allowance which

exceeds the specific expense involved may be added to gross income to

the extent it is documented to exceed the actual expense.

(8) Commissions. When all or a major portion of the veteran's

income is derived from commissions, it will be necessary to establish

the stability of such income if it is to be considered in the loan

analysis for the repayment of the mortgage debt and/or short-term

obligations. In order to assess the value of such income, lenders

should obtain written verification of the actual amount of commissions

paid to date, the basis for the payment of such commissions and when

commissions are paid; i.e., monthly, quarterly, semiannually, or

annually. Lenders should also obtain signed and dated individual income

tax returns, plus applicable schedules, for the previous 2 years, or

for whatever additional period is deemed necessary to properly

demonstrate a satisfactory earnings record. The length of the veteran's

employment in the type of occupation for which commissions are paid is

also an important factor in the assessment of the stability of the

income. If the veteran has been employed for a relatively short time,

the income should not normally be considered stable unless the product

or service was the same or closely related to the product or service

sold in an immediate prior position. Generally, income from commissions

is considered stable when the applicant has been receiving such income

for at least 2 years. Less than 2 years of income from commissions

cannot usually be considered stable. When an applicant has received

income from commissions for less than 1 year, it will rarely be

possible to demonstrate that the income is stable for qualifying

purposes; such cases would require in-depth development.

(9) Self-employment. Generally, income from self-employment is

considered stable when the applicant has been in business for at least

2 years. Less than 2 years of income from self-employment cannot

usually be considered stable unless the applicant has had previous

related employment and/or extensive specialized training. When an

applicant has been self-employed less than 1 year, it will rarely be

possible to demonstrate that the income is stable for qualifying

purposes; such cases would require in-depth development. The following

documentation is required for all self-employed borrowers:

(i) A profit-and-loss statement for the prior fiscal year (12-month

accounting cycle), plus the period year to date since the end of the

last fiscal year (or for whatever shorter period records may be

available), and balance sheet based on the financial records. The

financial statement must be sufficient for a loan underwriter to

determine the necessary information for loan approval and an

independent audit (on the veteran and/or the business) by a Certified

Public Accountant will be required if necessary for such determination;

and

(ii) Copies of signed individual income tax returns, plus all

applicable schedules for the previous 2 years, or for whatever

additional period is deemed necessary to properly demonstrate a

satisfactory earnings record, must be obtained. If the business is a

corporation or partnership, copies of signed Federal business income

tax returns for the previous two years plus all applicable schedules

for the corporation or partnership must be obtained; and

(iii) If the business is a corporation or partnership, a list of

all stockholders or partners showing the interest each holds in the

business will be required. Some cases may justify a written credit

report on the business as well as the applicant. When the business is

of an unusual type and it is difficult to determine the probability of

its continued operation, explanation as to the function and purpose of

the business may be needed from the applicant and/or any other

qualified party with the acknowledged expertise to express a valid

opinion.

(10) Recently discharged veterans. Loan applications received from

recently discharged veterans who have little or no employment

experience other than their military occupation and from veterans

seeking VA-guaranteed loans who have retired after 20 years of active

military duty require special attention. The retirement income of the

latter veterans in many cases may not be sufficient to meet the

statutory income requirements for the loan amount sought. Many have

obtained full-time employment and have been employed in their new jobs

for a very short time.

(i) It is essential in determining whether veterans in these

categories qualify from the income standpoint for the amount of the

loan sought, that the facts in respect to their present employment and

retirement income be fully developed, and that each case be considered

on its individual merits.

(ii) In most cases the veteran's current income or current income

plus his or her retirement income is sufficient. The problem lies in

determining whether it can be properly concluded that such income level

will continue for the foreseeable future. If the veteran's employment

status is that of a trainee or an apprentice, this will, of course, be

a factor. In cases of the self-employed, the question to be resolved is

whether there are reasonable prospects that the business enterprise

will be successful and produce the required income. Unless a favorable

conclusion can be made, the income from such source

[[Page 53969]]

should not be considered in the loan analysis.

(iii) If a recently discharged veteran has no prior employment

history and the veteran's verification of employment shows he or she

has not been on the job a sufficient time in which to become

established, consideration should be given to the duties the veteran

performed in the military service. When it can be determined that the

duties a veteran performed in the service are similar or are in direct

relation to the duties of the applicant's present position, such duties

may be construed as adding weight to his or her present employment

experience and the income from the veteran's present employment thus

may be considered available for qualifying the loan, notwithstanding

the fact that the applicant has been on the present job only a short

time. This same principle may be applied to veterans recently retired

from the service. In addition, when the veteran's income from

retirement, in relation to the total of the estimated shelter expense,

long-term debts and amount available for family support, is such that

only minimal income from employment is necessary to qualify from the

income standpoint, it would be proper to resolve the doubt in favor of

the veteran. It would be erroneous, however, to give consideration to a

veteran's income from employment for a short duration in a job

requiring skills for which the applicant has had no training or

experience.

(iv) To illustrate the provisions of paragraph (f)(10), it would be

proper to use short-term employment income in qualifying a veteran who

had experience as an airplane mechanic in the military service and the

individual's employment after discharge or retirement from the service

is in the same or allied fields; e.g., auto mechanic or machinist. This

presumes, however, that the verification of employment included a

statement that the veteran was performing the duties of the job

satisfactorily, the possibility of continued employment was favorable

and that the loan application is eligible in all other respects. An

example of nonqualifying experience is that of a veteran who was an Air

Force pilot and has been employed in insurance sales on commission for

a short time. Most cases, of course, fall somewhere between those

extremes. It is for this reason that the facts of each case must be

fully developed prior to closing the loan automatically or submitting

the case to VA for prior approval.

(11) Employment of short duration. The provisions of paragraph

(f)(7) of this section are similarly applicable to applicants whose

employment is of short duration. Such cases will entail careful

consideration of the employer's confirmation of employment, probability

of permanency, past employment record, the applicant's qualifications

for the position, and previous training, including that received in the

military service. In the event that such considerations do not enable a

determination that the income from the veteran's current position has a

reasonable likelihood of continuance, such income should not be

considered in the analysis. Applications received from persons employed

in the building trades, or in other occupations affected by climatic

conditions, should be supported by documentation evidencing the

applicant's total earnings to date and covering a period of not less

than 1 year as well as signed and dated copies of complete income tax

returns, including all schedules for the past 2 years or for whatever

additional period is deemed necessary to properly demonstrate a

satisfactory earnings record. If the applicant works out of a union,

evidence of the previous year's earnings should be obtained together

with a verification of employment from the current employer.

(12) Rental income--(i) Multi-unit subject property. When the loan

pertains to a structure with more than a one-family dwelling unit, the

prospective rental income will not be considered unless the veteran can

demonstrate a reasonable likelihood of success as a landlord, and

sufficient cash reserves are verified to enable the veteran to carry

the mortgage loan payments (principal, interest, taxes, and insurance)

without assistance from the rental income for a period of at least 6

months. The determination of the veteran's likelihood of success as a

landlord will be based on documentation of any prior experience in

managing rental units or other collection activities. The amount of

rental income to be used in the loan analysis will be based on 75

percent of the amount indicated on the lease or rental agreement,

unless a greater percentage can be documented.

(ii) Rental of existing home. Proposed rental of a veteran's

existing property may be used to offset the mortgage payment on that

property, provided there is no indication that the property will be

difficult to rent. If available, a copy of the rental agreement should

be obtained. It is the responsibility of the loan underwriter to be

aware of the condition of the local rental market. For instance, in

areas where the rental market is very strong the absence of a lease

should not automatically prohibit the offset of the mortgage by the

proposed rental income.

(iii) Other rental property. If income from rental property will be

used to qualify for the new loan, the documentation required of a self-

employed applicant should be obtained together with evidence of cash

reserves equaling 3 months PITI on the rental property. As for any

self-employed earnings (see paragraph (f)(7) of this section),

depreciation claimed may be added back in as income. In the case of a

veteran who has no experience as a landlord, it is unlikely that the

income from a rental property may be used to qualify for the new loan.

(13) Taxes and other deductions. Deductions to be applied for

Federal income taxes and Social Security may be obtained from the

Employer's Tax Guide (Circular E) issued by the Internal Revenue

Service (IRS). (For veterans receiving a mortgage credit certificate

(MCC), see paragraph (f)(14) of this section.) Any State or local taxes

should be estimated or obtained from charts similar to those provided

by IRS which may be available in those states with withholding taxes. A

determination of the amount paid or withheld for retirement purposes

should be made and used when calculating deductions from gross income.

In determining whether a veteran-applicant meets the income criteria

for a loan, some consideration may be given to the potential tax

benefits the veteran will realize if the loan is approved. This can be

done by using the instructions and worksheet portion of IRS Form W-4,

Employee's Withholding Allowance Certificate, to compute the total

number of permissible withholding allowances. That number can then be

used when referring to IRS Circular E and any appropriate similar State

withholding charts to arrive at the amount of Federal and State income

tax to be deducted from gross income.

(14) Mortgage credit certificates. (i) The Internal Revenue Code

(26 U.S.C.) as amended by the Tax Reform Act of 1984, allows states and

other political subdivisions to trade in all or part of their authority

to issue mortgage revenue bonds for authority to issue MCCs. Veterans

who are recipients of MCCs may realize a significant reduction in their

income tax liability by receiving a Federal tax credit for a percentage

of their mortgage interest payment on debt incurred on or after January

1, 1985.

(ii) Lenders must provide a copy of the MCC to VA with the home

loan application. The MCC will specify the rate of credit allowed and

the amount of certified indebtedness; i.e., the

[[Page 53970]]

indebtedness incurred by the veteran to acquire a principal residence

or as a qualified home improvement or rehabilitation loan.

(iii) For credit underwriting purposes, the amount of tax credit

allowed to a veteran under an MCC will be treated as a reduction in the

monthly Federal income tax. For example, a veteran having a $600

monthly interest payment and an MCC providing a 30-percent tax credit

would receive a $180 (30 percent x $600) tax credit each month.

However, because the annual tax credit, which amounts to $2,160

(12 x $180), exceeds $2,000 and is based on a 30-percent credit rate,

the maximum tax credit the veteran can receive is limited to $2,000 per

year (Pub. L. 98-369) or $167 per month ($2,000/12). As a consequence

of the tax credit, the interest on which a deduction can be taken will

be reduced by the amount of the tax credit to $433 ($600-$167). This

reduction should also be reflected when calculating Federal income tax.

(iv) For underwriting purposes, the amount of the tax credit is

limited to the amount of the veteran's maximum tax liability. If, in

the example in paragraph (f)(14)(iii) of this section, the veteran's

tax liability for the year were only $1,500, the monthly tax credit

would be limited to $125 ($1,500/12).

(g) Credit. The conclusion reached as to whether or not the veteran

and spouse are satisfactory credit risks must also be based on a

careful analysis of the available credit data. Regulation B (12 CFR

part 202), promulgated by the Federal Reserve Board pursuant to the

Equal Credit Opportunity Act, requires that lenders, in evaluating

creditworthiness, shall consider, on the applicant's request, the

credit history, when available, of any account reported in the name of

the applicant's spouse or former spouse which the applicant can

demonstrate accurately reflects the applicant's creditworthiness. In

other than community property states, if the spouse will not be

contractually obligated on the loan, Regulation B prohibits any request

for or consideration of information about the spouse concerning income,

employment, assets or liabilities. In community property states,

information concerning a spouse may be requested and considered in the

same manner as that for the applicant.

(1) Adverse data. If the analysis develops any derogatory credit

information and, despite such facts, it is determined that the veteran

and spouse are satisfactory credit risks, the basis for the decision

must be explained. If a veteran and spouse have debts outstanding which

have not been paid timely, or which they have refused to pay, the fact

that the outstanding debts are paid after the acceptability of the

credit is questioned or in anticipation of applying for new credit does

not, of course, alter the fact that the record for paying debts has

been unsatisfactory. With respect to unpaid debts, lenders may take

into consideration a veteran's claim of bona fide or legal defenses.

Such defenses are not applicable when the debt has been reduced to

judgment. Where a collection account has been established, if it is

determined that the borrower is a satisfactory credit risk, it is not

mandatory that such an account be paid off in order for a loan to be

approved. Court-ordered judgments, however, must be paid off before a

new loan is approved.

(2) Bankruptcy. When the credit information shows that the borrower

or spouse has been discharged in bankruptcy under the ``straight''

liquidation and discharge provisions of the bankruptcy law, this would

not in itself disqualify the loan. However, in such cases it is

necessary to develop complete information as to the facts and

circumstances concerning the bankruptcy. Generally speaking, when the

borrower or spouse, as the case may be, has been regularly employed

(not self-employed) and has been discharged in bankruptcy within the

last one to two years, it probably would not be possible to determine

that the borrower or spouse is a satisfactory credit risk unless both

of the following requirements are satisfied:

(i) The borrower or spouse has obtained credit subsequent to the

bankruptcy and has met the credit payments in a satisfactory manner

over a continued period; and

(ii) The bankruptcy was caused by circumstances beyond the control

of the borrower or spouse, e.g., unemployment, prolonged strikes,

medical bills not covered by insurance. Divorce is not generally viewed

as beyond the control of the borrower and/or spouse. The circumstances

alleged must be verified. If a borrower or spouse is self-employed, has

been adjudicated bankrupt, and subsequently obtains a permanent

position, a finding as to satisfactory credit risk may be made provided

there is no derogatory credit information prior to self-employment,

there is no derogatory credit information subsequent to the bankruptcy,

and the failure of the business was not due to misconduct. If a

borrower or spouse has been discharged in bankruptcy within the past 12

months, it will not generally be possible to determine that the

borrower or spouse is a satisfactory credit risk.

(3) Petition under Chapter 13 of Bankruptcy Code. A petition under

chapter 13 of the Bankruptcy Code (11 U.S.C.) filed by the borrower or

spouse is indicative of an effort to pay their creditors. Some plans

may provide for full payment of debts while others arrange for payment

of scaled-down debts. Regular payments are made to a court-appointed

trustee over a 2- to 3-year period (or up to 5 years in some cases).

When the borrowers have made all payments in a satisfactory manner,

they may be considered as having reestablished satisfactory credit.

When they apply for a home loan before completion of the payout period,

favorable consideration may nevertheless be given if at least 12

months' worth of payments have been made satisfactorily and the Trustee

or Bankruptcy Judge approves of the new credit.

(4) Foreclosures. (i) When the credit information shows that the

veteran or spouse has had a foreclosure on a prior mortgage; e.g., a

VA-guaranteed or HUD-insured mortgage, this will not in itself

disqualify the borrower from obtaining the loan. Lenders and field

station personnel should refer to the preceding guidelines on

bankruptcies for cases involving foreclosures. As with a borrower who

has been adjudicated bankrupt, it is necessary to develop complete

information as to the facts and circumstances of the foreclosure.

(ii) When VA pays a claim on a VA-guaranteed loan as a result of a

foreclosure, the original veteran may be required to repay any loss to

the Government. In some instances VA may waive the veteran's debt, in

part or totally, based on the facts and circumstances of the case.

However, guaranty entitlement cannot be restored unless the

Government's loss has been repaid in full, regardless of whether or not

the debt has been waived, compromised, or discharged in bankruptcy.

Therefore, a veteran who is seeking a new VA loan after having

experienced a foreclosure on a prior VA loan will in most cases have

only remaining entitlement to apply to the new loan. The lender should

assure that the veteran has sufficient entitlement for its secondary

marketing purposes.

(5) Federal debts. An applicant for a Federally-assisted loan will

not be considered a satisfactory credit risk for such loan if the

applicant is presently delinquent or in default on any debt to the

Federal Government, e.g., a Small Business Administration loan, a U.S.

Guaranteed Student loan, a debt to the Public Health Service, or where

there is a judgment lien against the applicant's property for a debt

owed to the

[[Page 53971]]

Government. The applicant may not be approved for the loan until the

delinquent account has been brought current or satisfactory

arrangements have been made between the borrower and the Federal agency

owed, or the judgment is paid or otherwise satisfied. Of course, the

applicant must also be able to otherwise qualify for the loan from an

income and remaining credit standpoint. Refinancing under VA's interest

rate reduction refinancing provisions, however, is allowed even if the

borrower is delinquent on the VA guaranteed mortgage being refinanced.

Prior approval processing is required in such cases.

(6) Absence of credit history. The fact that recently discharged

veterans may have had no opportunity to develop a credit history will

not preclude a determination of satisfactory credit. Similarly, other

loan applicants may not have established credit histories as a result

of a preference for purchasing consumer items with cash rather than

credit. There are also cases in which individuals may be genuinely wary

of acquiring new obligations following bankruptcy, consumer credit

counseling (debt proration), or other disruptive credit occurrence. The

absence of the credit history in these cases will not generally be

viewed as an adverse factor in credit underwriting. However, before a

favorable decision is made for cases involving bankruptcies or other

derogatory credit factors, efforts should be made to develop evidence

of timely payment of non-installment debts such as rent and utilities.

It is anticipated that this special consideration in the absence of a

credit history following bankruptcy would be the rare case and

generally confined to bankruptcies that occurred over 3 years ago.

(7) Consumer credit counseling plan. If a veteran, or veteran and

spouse, have prior adverse credit and are participating in a Consumer

Credit Counseling plan, they may be determined to be a satisfactory

credit risk if they demonstrate 12 months' satisfactory payments and

the counseling agency approves the new credit. If a veteran, or veteran

and spouse, have good prior credit and are participating in a Consumer

Credit Counseling plan, such participation is to be considered a

neutral factor, or even a positive factor, in determining

creditworthiness.

(8) Re-establishment of satisfactory credit. In circumstances not

involving bankruptcy, satisfactory credit is generally considered to be

reestablished after the veteran, or veteran and spouse, have made

satisfactory payments for 12 months after the date of the last

derogatory credit item.

(9) Long-term v. short-term debts. All known debts and obligations

including any alimony and/or child support payments of the borrower and

spouse must be documented. Significant liabilities, to be deducted from

the total income in determining ability to meet the mortgage payments

are accounts that, generally, are of a relatively long term, i.e., 10

months or over. Other accounts for terms of less than 10 months must,

of course, be considered in determining ability to meet family

expenses. Certainly, any severe impact on the family's resources for

any period of time must be considered in the loan analysis. For

example, monthly payments of $300 on an auto loan with a remaining

balance of $1,500 would be included in those obligations to be deducted

from the total income regardless of the fact that the account can be

expected to pay out in 5 months. It is clear that the applicant will,

in this case, continue to carry the burden of those $300 payments for

the first, most critical months of the home loan.

(10) Requirements for verification. If the credit investigation

reveals debts or obligations of a material nature which were not

divulged by the applicant, lenders must be certain to obtain

clarification as to the status of such debts from the borrower. A

proper analysis is obviously not possible unless there is total

correlation between the obligations claimed by the borrower and those

revealed by a credit report or deposit verification. Conversely,

significant debts and obligations reported by the borrower must be

dated. If the credit report fails to provide necessary information on

such accounts, lenders will be expected to obtain their own

verifications of those debts directly from the creditors. Credit

reports and verifications must be no more than 120 days old (180 days

for new construction) to be considered valid. For loans closed

automatically, this requirement will be considered satisfied if the

date of the credit report or verification is within 120 days (180 days

for new construction) of the date the note is signed. For prior

approval loans, this requirement will be considered satisfied if the

date of the credit report or verification is within 120 days of the

date of the application is received by VA. Of major significance are

the applicant's rental history and outstanding or recently retired

mortgages, if any, particularly prior VA loans. Lenders should be sure

ratings on such accounts are obtained; a written explanation is

required when ratings are not available. A determination is necessary

as to whether alimony and/or child support payments are required.

Verification of the amount of such obligations should be obtained,

although documentation concerning an applicant's divorce should not be

obtained automatically unless it is necessary to verify the amount of

any alimony or child support liability indicated by the applicant. If

in the routine course of processing the loan application, however,

direct evidence is received (e.g., from the credit report) that an

obligation to pay alimony or child support exists (as opposed to mere

evidence that the veteran was previously divorced), the discrepancy

between the loan application and credit report can and should be fully

resolved in the same manner as any other such discrepancy would be

handled. When a pay stub or leave-and-earnings statement indicates an

allotment, the lender must investigate the nature of the allotment(s)

to determine whether the allotment is related to a debt. Debts assigned

to an ex-spouse by a divorce decree will not generally be charged

against a veteran-borrower.

(11) Job-related expenses. Known job-related expenses should be

documented. This will include costs for any dependent care, significant

commuting costs, etc. When a family's circumstances are such that

dependent care arrangements would probably be necessary, it is

important to determine the cost of such services in order to arrive at

an accurate total of deductions.

(12) Credit reports. Credit reports obtained by lenders on VA-

guaranteed loan applications must be either a three-file Merged Credit

Report (MCR) or a Residential Mortgage Credit Report (RMCR). If used,

the RMCR must meet the standards formulated jointly by the Department

of Veterans Affairs, Federal National Mortgage Association, Federal

Home Loan Mortgage Corporation, Federal Housing Administration, Farmers

Home Administration, credit repositories, repository affiliated

consumer reporting agencies and independent consumer reporting

agencies. All credit reports obtained by the lender must be submitted

to VA.

(h) Borrower's personal and financial status. The number and ages

of dependents have an important bearing on whether income after

deduction of fixed charges is sufficient to support the family. Type

and duration of employment of both the borrower and spouse are

important as an indication of stability of their employment. The amount

of liquid assets owned by the borrower or spouse, or both, is an

important factor in determining that they have sufficient funds to

close the

[[Page 53972]]

loan, as well as being significant in analyzing the overall

qualifications for the loan. (It is imperative that adequate cash

assets from the veteran's own resources are verified to allow the

payment (see Sec. 36.4336(a)(3)) of any difference between the sales

price of the property and the loan amount, in addition to that

necessary to cover closing costs, if the sales price exceeds the

reasonable value established by VA.) Verifications must be no more than

120 days old (180 days for new construction) to be considered valid.

For loans closed on the automatic basis, this requirement will be

considered satisfied if the date of the deposit verification is within

120 days (180 days for new construction) of the date of the veteran's

application to the lender. For prior approval loans, this requirement

will be considered satisfied if the verification of employment is dated

within 120 days of the date the application is received by VA. Current

monthly rental or other housing expense is an important consideration

when compared to that to be undertaken in connection with the

contemplated housing purchase.

* * * * *

(j) Lender responsibility. (1) Lenders are fully responsible for

developing all credit information; i.e., for obtaining verifications of

employment and deposit, credit reports, and for the accuracy of the

information contained in the loan application.

(2) Verifications of employment and deposits, and requests for

credit reports and/or credit information must be initiated and received

by the lender.

(3) In cases where the real estate broker/agent or any other party

requests any of this information, the report(s) must be returned

directly to the lender. This fact must be disclosed by appropriately

completing the required certification on the loan application or report

and the parties must be identified as agents of the lender.

(4) Where the lender relies on other parties to secure any of the

credit or employment information or otherwise accepts such information

obtained by any other party, such parties shall be construed for

purposes of the submission of the loan documents to VA to be authorized

agents of the lender, regardless of the actual relationship between

such parties and the lender, even if disclosure is not provided to VA

under paragraph (j)(3) of this section. Any negligent or willful

misrepresentation by such parties shall be imputed to the lender as if

the lender had processed those documents and the lender shall remain

responsible for the quality and accuracy of the information provided to

VA.

(5) All credit reports secured by the lender or other parties as

identified in paragraphs (j)(3) and (j)(4) of this section shall be

provided to VA. If updated credit reports reflect materially different

information than that in other reports, such discrepancies must be

explained by the lender and the ultimate decision as to the effects of

the discrepancy upon the loan application fully addressed by the

underwriter.

(k) Lender certification. Lenders originating loans are responsible

for determining and certifying to VA on the appropriate application or

closing form that the loan meets all statutory and regulatory

requirements. Lenders will affirmatively certify that loans were made

in full compliance with the law and loan guaranty regulations as

prescribed in this section.

(1) Definitions. The definitions contained in part 42 of this title

and the following definitions are applicable in this section.

(i) Another appropriate amount. In determining the appropriate

amount of a lender's civil penalty in cases where the Secretary has not

sustained a loss or where two times the amount of the Secretary's loss

on the loan involved does not exceed $10,000, the Secretary shall

consider:

(A) The materiality and importance of the false certification to

the determination to issue the guaranty or to approve the assumption;

(B) The frequency and past pattern of such false certifications by

the lender; and

(C) Any exculpatory or mitigating circumstances.

(ii) Complaint includes the assessment of liability served pursuant

to this section.

(iii) Defendant means a lender named in the complaint.

(iv) Lender includes the holder approving loan assumptions pursuant

to 38 U.S.C. 3714.

(2) Procedures for certification. (i) As a condition to VA issuance

of a loan guaranty on all loans closed on or after October 27, 1994,

and as a prerequisite to an effective loan assumption on all loans

assumed pursuant to 38 U.S.C. 3714 on or after November 17, 1997, the

following certification shall accompany each loan closing or assumption

package:

The undersigned lender certifies that the (loan) (assumption)

application, all verifications of employment, deposit, and other

income and credit verification documents have been processed in

compliance with 38 CFR part 36; that all credit reports obtained or

generated in connection with the processing of this borrower's

(loan) (assumption) application have been provided to VA; that, to

the best of the undersigned lender's knowledge and belief the (loan)

(assumption) meets the underwriting standards recited in chapter 37

of title 38 United States Code and 38 CFR part 36; and that all

information provided in support of this (loan) (assumption) is true,

complete and accurate to the best of the undersigned lender's

knowledge and belief.

(ii) The certification shall be executed by an officer of the

lender authorized to execute documents and act on behalf of the lender.

(3) Any lender who knowingly and willfully makes a false

certification required pursuant to Sec. 36.4337(k)(2) shall be liable

to the United States Government for a civil penalty equal to two times

the amount of the Secretary's loss on the loan involved or to another

appropriate amount, not to exceed $10,000, whichever is greater.

(l) Assessment of liability. (1) Upon an assessment confirmed by

the Under Secretary for Benefits, in consultation with the

Investigating Official, that a certification, as required in this

section, is false, a report of findings of the Under Secretary for

Benefits shall be submitted to the Reviewing Official setting forth:

(i) The evidence that supports the allegations of a false

certification and of liability;

(ii) A description of the claims or statements upon which the

allegations of liability are based;

(iii) The amount of the VA demand to be made; and

(iv) Any exculpatory or mitigating circumstances that may relate to

the certification.

(2) The Reviewing Official shall review all of the information

provided and will either inform the Under Secretary for Benefits and

the Investigating Official that there is not adequate evidence, that

the lender is liable, or serve a complaint on the lender stating:

(i) The allegations of a false certification and of liability;

(ii) The amount being assessed by the Secretary and the basis for

the amount assessed;

(iii) Instructions on how to satisfy the assessment and how to file

an answer to request a hearing, including a specific statement of the

lender's right to request a hearing by filing an answer and to be

represented by counsel; and

(iv) That failure to file an answer within 30 days of the complaint

will result in the imposition of the assessment without right to appeal

the assessment to the Secretary.

* * * * *

(n) Additional remedies. Any assessment under this section may be

in

[[Page 53973]]

addition to other remedies available to VA, such as debarment and

suspension pursuant to 38 U.S.C. 3704 and part 44 of this title or loss

of automatic processing authority pursuant to 38 U.S.C. 3702, or other

actions by the Government under any other law including but not limited

to title 18 U.S.C. and 31 U.S.C. 3732.

(The information collection requirements in this section have been

approved by the Office of Management and Budget under control

numbers 2900-0521)

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

[FR Doc. 97-27564 Filed 10-16-97; 8:45 am]

BILLING CODE 8320-01-P