[Federal Register Volume 76, Number 25 (Monday, February 7, 2011)]
[Rules and Regulations]
[Pages 6555-6559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2566]
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DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
RIN 2900-AN78
Loan Guaranty Revised Loan Modification Procedures
AGENCY: Department of Veterans Affairs.
ACTION: Interim final rule.
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SUMMARY: This document amends a Department of Veterans Affairs (VA)
Loan Guaranty regulation related to modification of guaranteed housing
loans in default. Specifically, changes are made to requirements
related to maximum interest rates on modified loans and to items that
may be capitalized in a modified loan amount. In addition, we are
revising the regulation to clarify that the holder of a loan may seek
VA approval for a loan modification that does not otherwise meet
prescribed conditions. The amendments are intended to liberalize the
requirements for modification of VA-guaranteed loans and provide
holders more options for working with veterans to avoid foreclosure.
DATES: This interim final rule is effective February 7, 2011. Comments
must be received on or before April 8, 2011.
ADDRESSES: Written comments may be submitted through http://www.Regulations.gov; by mail or hand-delivery to Director, Regulations
Management (02REG), Department of Veterans Affairs, 810 Vermont Ave.,
NW., Room 1068, Washington, DC 20420; or by fax to (202) 273-9026.
Comments should indicate that they are submitted in response to ``RIN
2900-AN78--Loan Guaranty Revised Loan Modification Procedures.'' Copies
of comments received will be available for public inspection in the
Office of
[[Page 6556]]
Regulation Policy and Management, Room 1063B, between the hours of 8
a.m. and 4:30 p.m., Monday through Friday (except holidays). Please
call (202) 461-4923 for an appointment. (This is not a toll-free
number.) In addition, during the comment period, comments may be viewed
online through the Federal Docket Management System (FDMS) at http://www.Regulations.gov.
FOR FURTHER INFORMATION CONTACT: Mike Frueh, Assistant Director for
Loan Management (261), Veterans Benefits Administration, Department of
Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420, at
202-461-9521. (This is not a toll-free telephone number.)
SUPPLEMENTARY INFORMATION: Under 38 U.S.C. chapter 37, VA guarantees
loans made by private lenders to veterans for the purchase,
construction, and refinancing of homes owned and occupied by veterans.
On February 1, 2008, VA published in the Federal Register (73 FR 6294)
a final rule that extensively revised 38 CFR part 36 to modernize
procedures for servicing VA-guaranteed home loans. A new subpart F was
added to include Sec. 36.4815, which provided detailed parameters for
private loan servicers to modify delinquent loans without seeking prior
approval from VA, thereby enabling servicers to quickly assist veteran
borrowers in avoiding foreclosure. On June 15, 2010, VA published in
the Federal Register (75 FR 33704) a final rule that redesignated
subpart F (the 36.4800 series) to replace obsolete subpart B (the
36.4300 series) in its entirety.
Loan modifications typically give a borrower a fresh start by
adding all or a portion of the delinquent amounts to the loan balance
and resetting the due date for payments. Modifications usually adjust
the terms of the loan agreement by: capitalizing delinquent interest,
advances, or other amounts due; extending the repayment terms; changing
the interest rate payable; or combining some or all of these or other
adjustments to the loan terms.
In developing the parameters for acceptable loan modifications, we
considered many options to balance the program mission of assisting
veteran borrowers in retaining homeownership against the needs of
private investors to receive a fair profit on their investments. We
believed we had adequately addressed those concerns in the 2008
amendments to VA's loan guaranty regulations. However, since those
amendments, we have encountered two sets of circumstances that have
caused difficulty in easily modifying loans to assist veterans in
retaining their homes.
In light of the continuing difficulties in the housing industry
that are affecting the ability of many veterans to retain ownership of
their homes, and in keeping with the Administration's plan to help
borrowers retain home ownership through affordable loan modifications,
this interim final rule is issued to immediately rectify those two
issues. In addition, this interim final rule revises the regulation to
clarify in Sec. 36.4315(b) that holders may seek VA approval for a
loan modification if the proposed modification does not otherwise meet
the conditions prescribed in Sec. 36.4315(a).
The first problem noted since the 2008 amendments concerns interest
rates on modified loans. Current 38 CFR 36.4315(c) establishes the
maximum interest rate on a modified loan as the previous month's
Government National Mortgage Association (GNMA) coupon plus \1/2\
percent. We understood that the vast majority of VA-guaranteed loans
were placed in GNMA pools, and by allowing the maximum rate on a
modified loan to equal that of a newly originated loan, we believed the
mortgage industry would be able to easily modify loans to help veterans
avoid foreclosure and place those modified loans in new GNMA pools.
However, we have learned that this requirement is not quite as
effective as planned in helping veterans to avoid foreclosure through
loan modification. VA-guaranteed loans that are held by State housing-
finance authorities often specifically prohibit changes in the interest
rate when modifying loans. In the present low-interest-rate
environment, current Sec. 36.4315(c) creates difficulties in modifying
loans that were originated with State housing-finance authority
assistance at higher interest rates. Therefore, we are modifying Sec.
36.4315 to allow the interest rate on a modified loan to remain the
same as the original interest rate when the loan is held by a State
housing-finance authority where the law precludes a rate revision. See
38 CFR 36.4315(a)(8)(iii).
We are further modifying Sec. 36.4315 to allow for easier
calculation of the maximum interest rate on all other modified loans
(i.e., those loans not held by a State housing-finance authority). In
September 2009, the Department of Housing and Urban Development (HUD)
issued Mortgagee Letter 2009-35 to change the maximum interest rate on
modified loans to no more than 50 basis points above the most recent
Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year
fixed-rate conforming mortgages (U.S. average), rounded to the nearest
one-eighth of one percent (0.125%), as of the date the Modification
Agreement is executed. Because the information on GNMA coupon rates is
not as widely available as that of the Freddie Mac Market Survey Rate
(which may be found online at http://www.freddiemac.com/pmms/, as well
as in the list of Selected Interest Rates that the Federal Reserve
Board publishes weekly in its Statistical Release H.15 at http://www.federalreserve.gov/releases/h15/), we are amending Sec. 36.4315 to
adopt a similar standard. Under Sec. 36.4315(a)(8)(i), the interest
rate on a modified VA-guaranteed loan (not held by a State housing-
finance authority) may not exceed 50 basis points above the most recent
Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year
fixed-rate conforming mortgages (U.S. average), rounded to the nearest
one-eighth of one percent (0.125%), as of the date the Modification
Agreement is executed.
Using the Freddie Mac Market Rate as a basis for computing the
maximum interest rate on a modified loan establishes uniformity with
another large Federal home loan program, and will enable loan servicers
to more easily determine maximum allowable rates for loan
modifications. This will enable veterans to receive the benefits of
capitalization and/or extension on a modified loan, even if the present
interest rate environment is higher than at loan origination. The
majority of VA-guaranteed loans are in GNMA pools, which require
servicers to ``buy-out'' the loans from the pools in order to modify
them. GNMA determines the guidelines for determining when loans can be
bought out of pools, and this interim final rule does not release loan
holders from requirements under the contracts they have with GNMA. (For
more details see http://www.ginniemae.gov/apm/apm_pdf/10-01.pdf). A
servicer is then faced with the task of attempting to find another
group of loans with similar interest rates in order to ``repool'' the
modified loan. By allowing the modified loan rate to be the Freddie Mac
rate plus 50 basis points, which is similar to that of other new VA-
guaranteed loans being originated, the servicer will be better able to
repool a modified loan and should be more willing to complete a
modification.
Although monthly loan payments may increase slightly under the
interim final rule due to capitalization or small increases in interest
rates, elimination of the delinquency by modification will benefit
individual veterans by avoiding
[[Page 6557]]
foreclosure and receiving a fresh start after resolving financial
difficulties. However, we will require the servicer to submit to VA for
prior approval any loan modification where the interest rate will
increase more than one percent over the existing interest rate on the
loan. This will provide us an opportunity to determine if it is perhaps
more appropriate to utilize our authority under 38 U.S.C. 3732 to
refund (purchase) the loan and modify the loan at a lower-than-market
interest rate.
The second problem noted after the 2008 amendments concerns those
items that may be included in a modified loan amount. After we proposed
former Sec. 36.4815 (redesignated as current Sec. 36.4315), public
comments suggested that the new modification procedures should provide
for other expenses of modification. Under former Sec. 36.4815, loan
modification expenses could not be included in the modified loan
amount. In the 2008 amendments, we allowed inclusion of unpaid
principal, accrued interest, and deficits in the taxes and insurance
impound accounts in the modified indebtedness. Also permitted were
advances required to preserve the lien position, such as homeowner
association fees, special assessments, and water and sewer liens. We
specifically excluded other costs such as late fees, legal fees, and
related foreclosure costs.
In Mortgagee Letter 2008-21, HUD issued a change in its position
that allows foreclosure costs actually incurred to be capitalized into
the modified loan balance. The Letter states that, in some cases where
foreclosure had been initiated and the borrowers' circumstances had
improved to the point that a modification could allow them to resume
making regular monthly payments, HUD found the borrowers had
insufficient funds to pay legal fees and other foreclosure costs.
Therefore, the borrowers could not complete loan modifications without
a change in the HUD loss-mitigation program. While the hope remains
that modifications can be completed early in the course of a default--
before accrual of costly fees and expenses--we realize that may not
always be the case.
In order to allow veteran borrowers to avail themselves of the
opportunity to retain homeownership by means of a loan modification
(even after the foreclosure process has started), we are amending
current Sec. 36.4315 to allow legal fees and foreclosure costs to be
capitalized into the modified loan balance. See Sec. 36.4315(a)(10).
Under paragraph (a)(10), VA is also allowing capitalization of the cost
of a title insurance policy endorsement or other form of update on the
modified loan. HUD requires that any late charges should be waived in
connection with a modification to give the borrower a fresh start. VA
agrees with this beneficial approach and has included it in Sec.
36.4315(a)(11). The incentive paid for a successful loan modification
should more than offset any lost late charge income due to the
amendment requiring waiver of late charges when a loan is modified.
Finally, we are reorganizing Sec. 36.4315 to clarify in paragraph
(b) that holders may seek VA approval for a loan modification if the
proposed modification does not otherwise meet the conditions prescribed
in paragraph (a). Current Sec. 36.4315(a) and (b) specifically include
language stating that, without the prior approval of the Secretary of
Veterans Affairs, a loan may be modified if the conditions of those
sections are met. However, this structure does not adequately reflect
our intent that a holder may seek prior approval for a loan
modification that does not meet other conditions for modification.
Therefore, this interim final rule redesignates current Sec.
36.4315(b) through (i) as Sec. 36.4315(a)(7) through (a)(14) to
clarify that, if the paragraph (a) conditions are met, a loan may be
modified without prior approval of the Secretary and that the holder
may seek prior approval for a modification not meeting one of those
conditions. In light of these clarifying amendments, we are deleting
language in current paragraphs (a) and (b) that is unnecessary. A new
paragraph (b) has been added to specifically state, rather than leave
for inference, that if a loan fails to meet one or more of the
conditions within the section, the holder must submit the loan file to
the Secretary for approval before entering into any loan modification
agreement. This new paragraph provides a guiding principle that the
Secretary will approve such a request when he determines that it is in
the best interests of the veteran and the Government after balancing
the risks of non-approval versus approval despite the absence of one or
more of the conditions identified in paragraph (a). Current Sec.
36.4315(j) has been redesignated as Sec. 36.4315(c) and notes that the
provisions of Sec. 36.4315 do not create a right to a loan
modification, but simply authorizes the holder to modify a loan in
certain situations without prior approval of the Secretary or upon the
Secretary's approval in other situations.
Administrative Procedures Act
Pursuant to 5 U.S.C. 553(b)(B) and (d)(3), we find that there is
good cause to dispense with advance public notice and opportunity to
comment on this rule and good cause to publish this rule with an
immediate effective date. This interim final rule is necessary to
immediately allow private loan holders to assist more veteran borrowers
by authorizing loan modifications under the new rules.
VA has seen monthly foreclosures of VA-guaranteed loans increase
from 545 in September 2007 (the end of fiscal year 2007) to 1,328 in
December 2009, to 2,054 in August of 2010 (the most recent data as of
preparation of this document). Delay in the implementation of this rule
could prevent some veteran borrowers from obtaining loan modifications,
which will lead to additional foreclosures. This means that more
veterans will lose their homes and their entitlement to VA loan
guaranty benefits (unless the loss is repaid). It also means that more
families will be displaced and have to begin the long road to financial
and credit recovery, which can take years. Moreover, for each
additional guaranty claim VA must make, the taxpayer must shoulder some
of the financial responsibility.
Immediate implementation of the rule will not only assist veterans
and other taxpayers, but will do so without having an adverse impact on
the mortgage industry. The new rule will enable servicers to offer more
loss mitigation opportunities and continue servicing VA-guaranteed
loans, rather than seeing their servicing fees terminated as the loans
are foreclosed.
We started tracking completed loan modifications after the 2008
amendments to VA's loan guaranty regulations. During fiscal year 2009
the number of modifications completed averaged 360 per month. However,
there have been many direct inquiries from loan servicers asking about
other loss mitigation options when State housing-finance authorities
are unable to modify loans at lower interest rates. Other than VA
refunding (purchasing) some of those loans and reducing the interest
rates, there have been no other viable alternatives to help Veterans in
those situations avoid foreclosure. Refunding by VA essentially
replaces private financing with Government funds, and requires a
substantial initial investment that takes as long as 30 years to
recover, so it may not always be the best option for the Government.
The ability to complete loan modifications at existing interest rates
will enable private loan servicers to help more veteran borrowers
remain in their homes and avoid foreclosure. When veterans are able to
reinstate delinquent loans by modifying their loans and avoiding
foreclosure, VA will be required to pay
[[Page 6558]]
fewer claims under its loan guaranty. In addition, by allowing
inclusion of legal fees for actual termination expenses incurred prior
to modification, more veterans will be able to afford the other up-
front expenses associated with modification and avoid foreclosure.
For the foregoing reasons, we have determined that delay in
implementing these regulations is unnecessary, impractical under the
circumstances, and contrary to the public interest. Accordingly, we are
issuing this rule as an interim final rule with immediate effect.
Paperwork Reduction Act of 1995
This document contains no provisions constituting a collection of
information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3521).
Unfunded Mandates
The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C.
1532, that agencies prepare an assessment of anticipated costs and
benefits before issuing any rule that may result in an expenditure by
State, local, and Tribal governments, in the aggregate, or by the
private sector, of $100 million or more in any given year. This rule
will have no such effect on State, local, and Tribal governments, or on
the private sector.
Executive Order 12866
Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, when regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety,
and other advantages; distributive impacts; and equity). The Executive
Order classifies a ``significant regulatory action,'' requiring review
by the Office of Management and Budget (OMB) unless OMB waives such
review, as any regulatory action that is likely to result in a rule
that may: (1) Have an annual effect on the economy of $100 million or
more or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities; (2) create a serious inconsistency or otherwise interfere
with an action taken or planned by another agency; (3) materially alter
the budgetary impact of entitlements, grants, user fees, or loan
programs or the rights and obligations of recipients thereof; or (4)
raise novel legal or policy issues arising out of legal mandates, the
President's priorities, or the principles set forth in the Executive
Order.
The economic, interagency, budgetary, legal, and policy
implications of this interim final rule have been examined, and it has
been determined to be a significant regulatory action under Executive
Order 12866 because it may raise novel legal or policy issues arising
out of legal mandates, the President's priorities, or the principles
set forth in the Executive Order. Accordingly, this rule was submitted
to OMB for review.
Regulatory Flexibility Act
The Secretary hereby certifies that this interim final rule would
not have a significant economic impact on a substantial number of small
entities as they are defined in the Regulatory Flexibility Act, 5
U.S.C. 601-612. The vast majority of VA loans are serviced by very
large financial companies. Only a handful of small entities service VA
loans and they service only a very small number of loans. This interim
final rule, which only impacts Veterans, other individual obligors with
guaranteed loans, and companies that service VA loans, will have very
minor economic impact on a very small number of small entities
servicing such loans. Therefore, pursuant to 5 U.S.C. 605(b), this rule
is exempt from the initial and final regulatory flexibility analysis
requirements of sections 603 and 604.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance number and title for the
program affected by this document is 64.114, Veterans Housing--
Guaranteed and Insured Loans.
Signing Authority
The Secretary of Veterans Affairs, or designee, approved this
document and authorized the undersigned to sign and submit the document
to the Office of the Federal Register for publication electronically as
an official document of the Department of Veterans Affairs. John R.
Gingrich, Chief of Staff, Department of Veterans Affairs, approved this
document on November 1, 2010, for publication.
List of Subjects in 38 CFR Part 36
Condominiums, Handicapped, Housing, Indians, Individuals with
disabilities, Loan programs--housing and community development, Loan
programs--Indians, Loan programs--Veterans, Manufactured homes,
Mortgage insurance, Reporting and recordkeeping requirements, Veterans.
Dated: February 1, 2011
Robert C. McFetridge,
Director, Regulations Policy and Management, Department of Veterans
Affairs.
For the reasons stated in the preamble, VA amends 38 CFR part 36 as
follows:
PART 36--LOAN GUARANTY
0
1. The authority citation for part 36 continues to read as follows:
Authority: 38 U.S.C. 501 and as otherwise noted.
0
2. Revise Sec. 36.4315 to read as follows:
Sec. 36.4315 Loan modifications.
(a) The terms of any guaranteed loan may be modified by written
agreement between the holder and the borrower, without prior approval
of the Secretary, if all of the following conditions are met:
(1) The loan is in default;
(2) The event or circumstances that caused the default has been or
will be resolved and it is not expected to re-occur;
(3) The obligor is considered to be a reasonable credit risk, based
on a review by the holder of the obligor's creditworthiness under the
criteria specified in Sec. 36.4340, including a current credit report.
The fact of the recent default will not preclude the holder from
determining the obligor is now a satisfactory credit risk provided the
holder determines that the obligor is able to resume regular mortgage
installments when the modification becomes effective based upon a
review of the obligor's current and anticipated income, expenses, and
other obligations as provided in Sec. 36.4340;
(4) At least 12 monthly payments have been paid since the closing
date of the loan;
(5) The current owner(s) is obligated to repay the loan, and is
party to the loan modification agreement;
(6) The loan will be reinstated to performing status by virtue of
the loan modification;
(7) A loan has not been modified more than once in a 3-year period
or more than 3 times during the life of the loan;
(8) The loan as modified will bear a fixed-rate of interest,
which--
(i) May not exceed the most recent Freddie Mac Weekly Primary
Mortgage Market Survey Rate for 30-year fixed-rate conforming mortgages
(U.S. Average), rounded to the nearest one-eighth of one percent
(0.125%), as of the date the Modification Agreement is executed, plus
50 basis points;
(ii) After being determined and selected in accordance with
paragraph
[[Page 6559]]
(i), is not more than one percent higher than the existing rate on the
loan; or,
(iii) In the case of a loan in which a State, Territorial, or local
governmental agency provided assistance to the veteran for the
acquisition of the dwelling, and the law providing that assistance
precludes any revision in the interest rate on the loan, then the
interest rate on the modified loan is the same or less than that on the
original note evidencing the loan;
(9) The unpaid balance of the modified loan will be re-amortized
over the remaining life of the loan, or if the loan term is to be
extended, the maturity date will not exceed the shorter of:
(i) 360 months from the due date of the first installment required
under the modification, or
(ii) 120 months after the original maturity date of the loan
(unless the original term was less than 360 months, in which case the
term may be extended to 480 months from the due date of the first
installment on the original loan);
(10) Only the following items may be included in the modified
indebtedness: Unpaid principal; accrued interest; deficits in the taxes
and insurance impound accounts; amounts incurred to pay actual legal
fees and foreclosure costs related to the canceled foreclosure; the
cost of a title insurance policy endorsement or other update for the
modified loan; and advances required to preserve the lien position,
such as homeowner association fees, special assessments, water and
sewer liens, etc. Late fees and other charges may not be capitalized;
(11) The holder will not charge a processing fee, and all unpaid
late fees will be waived. Any other actual costs incurred and legally
chargeable, but which cannot be capitalized in the modified
indebtedness, may be collected directly from the borrower as part of
the modification process or waived, at the discretion of the servicer;
(12) Holders will ensure the first lien status of the modified
loan;
(13) The dollar amount of the guaranty will not exceed the greater
of:
(i) The original guaranty amount of the loan being modified (but if
the modified loan amount is less than the original loan amount, then
the amount of guaranty will be equal to the original guaranty
percentage applied to the modified loan), or
(ii) 25 percent of the loan being modified subject to the statutory
maximum specified at 38 U.S.C. 3703(a)(1)(B); and
(14) The obligor will not receive any cash back from the
modification.
(b) If a loan fails to meet one or more of the conditions
identified in paragraph (a), the holder must submit the loan file to
the Secretary for approval before entering into any loan modification
agreement. The Secretary will grant such approval if the Secretary
determines that the modification is in the best interests of the
veteran and the Government after balancing the risks of non-approval
versus approval despite the absence of one or more of the conditions
identified in paragraph (a) of this section.
(c) This section does not create a right of a borrower to have a
loan modified, but simply authorizes the loan holder to modify a loan
in certain situations without the prior approval of the Secretary.
[FR Doc. 2011-2566 Filed 2-4-11; 8:45 am]
BILLING CODE 8320-01-P