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: Final rule.

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

loan guaranty regulations in the areas of automatic processing

authority, late reporting, and record retention requirements.

First, the criteria used to approve non-supervised lenders to

process VA-guaranteed loans on the automatic basis are revised to

reduce the experience requirements for lenders and their underwriters,

thereby making it easier for them to qualify for automatic processing

authority. High underwriting standards will be maintained by requiring

that all VA-approved underwriters receive training in VA credit

underwriting procedures.

Second, the regulation provides that if a lender does not report

the loan within 60 days following full disbursement, its report must be

accompanied by a signed statement certifying that the loan is current

and offering an explanation for the late reporting. This simplifies the

prior procedure under which a lender had to formally request a waiver

of the 60-day reporting requirement. VA will continue to guarantee the

loan even if it is reported late. 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.

Third, lenders are now required to retain all loan origination

records for at least two years from the date of loan closing. The

previous requirement was one year. This will improve VA's ability to

monitor lender performance and conduct underwriting reviews.

DATES: Effective Date: April 13, 1998.

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 July 15, 1997 (62 FR 37824), VA proposed to amend its loan

guaranty regulations concerning automatic processing authority, late

reporting, and record retention requirements. Based on the rationale

set forth in the proposed rule and this document, the changes are

adopted as originally proposed.

Please refer to the July 15, 1997, Federal Register for a complete

discussion of the proposed amendments. Interested persons were given 60

days to submit comments. The comment period ended September 15, 1997.

VA received two comments regarding the proposed changes.

The first commenter, an association which represents mortgage

lenders, supported adoption of the proposed rule.

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

Guaranteed Home Loan Program, expressed support for the proposed

elimination of the waiver requirement for late reporting. However, they

noted that there was no meaningful reduction in compliance burden for

lenders, since the requirement to provide an explanation for the late

reporting is retained. The commenter is correct. The purpose of the

amendment was to reduce the burden currently placed on VA field

stations of having to process formal waiver requests. This VA burden is

reduced, while no new burdens are placed on lenders. However, it is

still important for lenders to report loans to VA in a timely manner,

and we are retaining the requirement that lenders explain why the loan

was reported late. As stated in the proposal, ``the statement of the

reasons for late reporting [must] continue to be submitted to VA so

that these reasons for late reporting * * * could be considered in

deciding if the lenders' personnel might need additional training or

whether automatic lending authority should be withdrawn''. By generally

reporting loans to VA within 60 days of disbursement, a lender can

avoid the necessity of explaining the delay.

The commenter also noted that the increase in the length of time a

lender must retain loan origination records from one year to two years

was potentially burdensome on lenders and served no valid purpose. We

disagree. As noted in the preamble to the proposed regulations

published in the Federal Register on July 15, 1997 (62 FR 37824), the

purpose of this amendment was 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. A two-year period provides a

more realistic time in which to plan and complete these loan audits.

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

amendment conforms VA's record retention requirement to industry

standards. This will improve VA's ability to monitor loan performance

and to identify lenders who may be having particular trouble

underwriting loans.

Paperwork Reduction Act

Information collection and recordkeeping requirements in 36.4303

(a), (c), (d), (e), (f), (g), (i) and (l), and in 36.4330 (a) and (b);

and in 38 CFR 36.4348 (b), (c) and (d) 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 2900-0574. The information collection subject to this

rulemaking concerns the information to be submitted for approval as a

lender with automatic processing authority and contains material that

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.

[[Page 12002]]

List of Subjects in 38 CFR Part 36

Condominiums, Housing, Individuals with disabilities, Loan

programs--housing and community development, Reporting and

recordkeeping requirements, Veterans.

Approved: February 24, 1998.

Togo D. West, Jr.,

Acting Secretary.

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

as set forth below:

PART 36--LOAN GUARANTY

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

36.4375 continues to read as follows:

Authority: Sections 36.4300 through 36.4375 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 that 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 servicemember,

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 that 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 veterans' spouse shall make 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

[[Page 12003]]

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

that 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

that:

(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 the 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 paragraphs (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 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

[[Page 12004]]

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 the 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)(l)(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) of this section must be refunded

following the expiration of the 30-day appeal period set out in

paragraph (k)(l)(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)(l)(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)

(The Information collection requirements in this section have been

approved by the Office of Management and Budget 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.

(The information collection requirements in this section have been

approved by the Office of Management and Budget 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 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

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

[[Page 12005]]

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 $1 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.

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

light of the following considerations:

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

exercise the care and diligence required

[[Page 12006]]

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

origination's 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) 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, and 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. The following

minimum annual recertification requirements must be met by each lender

approved for automatic authority:

[[Page 12007]]

(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 and a parenthetical

is added at the end of the section to read as follows:

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

basis.

(a)(l) * * *

(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))

* * * * *

(The information collection requirements in this section have been

approved by the Office of Management and Budget under control

numbers 2900-0574)

[FR Doc. 98-6411 Filed 3-11-98; 8:45 am]

BILLING CODE 8320-01-P