[Code of Federal Regulations]
[Title 38, Volume 2]
[Revised as of July 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 38CFR36.4286]

[Page 591-592]
 
            TITLE 38--PENSIONS, BONUSES, AND VETERANS' RELIEF
 
          CHAPTER I--DEPARTMENT OF VETERANS AFFAIRS (CONTINUED)
 
PART 36--LOAN GUARANTY--Table of Contents
 
Sec. 36.4286  Partial or total loss of guaranty.

    (a) There shall be no guaranty liability on the part of the 
Secretary in respect to any loan as to which a signature to the note, 
the mortgage or other security instrument is a forgery. Except as to a 
holder who acquired the loan instrument before maturity, for value, and 
without notice, and who has not directly or by agent participated in the 
fraud, or in the misrepresentation hereinafter specified, any willful 
and material misrepresentation or fraud by the lender, or by a holder, 
or the agent of either, in procuring the guaranty shall relieve the 
Secretary of liability, or shall constitute a defense against liability 
on account of the guaranty of the loan in respect to which the willful 
misrepresentation, or the fraud, is practiced: Provided, That if a 
misrepresentation, although material, is not made willfully, or with 
fraudulent intent, it shall have only the consequences prescribed in 
paragraphs (b) and (c) of this section.
    (b) In taking security required by 38 U.S.C. 3712 and the 
Sec. 36.4200 series, a holder shall obtain the required lien on real 
property the title to which is such as to be acceptable to prudent 
lending institutions, informed buyers, title companies, and attorneys, 
generally in the community in which the property is situated: Provided, 
That a title will not be unacceptable by reason of any of the 
limitations on the quantum or quality of the property or title stated in 
Sec. 36.4253. If such holder fails in this respect or fails to comply 
with any of the requirements of 38 U.S.C. 3712 and the Sec. 36.4200 
series with respect to:
    (1) Obtaining and retaining a lien of the dignity prescribed on all 
property upon which a lien is required by 38 U.S.C. 3712 or the 
Sec. 36.4200 series,
    (2) Inclusion of power to substitute trustees,
    (3) The procurement and maintenance of insurance coverage,
    (4) Advice to Secretary as to default,
    (5) Notice of intention to begin action,
    (6) Notice to the Secretary in any suit or action, or notice of 
sale,
    (7) The release, conveyance, substitution, or exchange of security,
    (8) Lack of legal capacity of a party to the transaction incident to 
which the guaranty is granted,
    (9) Failure of the lender to see that any escrowed or earmarked 
account is expended in accordance with the agreement,
    (10) The taking into consideration of limitations upon the quantum 
or quality of the estate or property,
    (11) Any other requirement of 38 U.S.C. 3712 or the Sec. 36.4200 
series which does not by the terms of said section or regulations result 
in relieving the Secretary of all liability with respect to the loan,

no claim on the guaranty shall be paid on account of the loan with 
respect to which such failure occurred, or in respect to which an 
unwillful misrepresentation occurred, until the amount by which the 
ultimate liability of the Secretary would thereby be increased has been 
ascertained. The burden of proof shall be upon the holder to establish 
that no increase of ultimate liability is attributable to such failure 
or misrepresentation. The amount of increased liability of the Secretary 
shall be offset by deduction from the amount of the guaranty otherwise 
payable, or if consequent upon loss of security shall be offset by 
crediting to the indebtedness the amount of the impairment as proceeds 
of the sale of security in the final accounting to the Secretary. To the 
extent the loss resultant from the failure of misrepresentation 
prejudices the Secretary's right of subrogation acceptance by the holder 
of the guaranty payment shall subordinate the holder's right to those of 
the Secretary.
    (c) If after the payment of a guaranty, or after a loan is 
transferred pursuant to Sec. 36.4281, the fraud, misrepresentation, or 
failure to comply with the regulations concerning guaranty of loans to 
veterans as provided in this section is discovered and the Secretary 
determines that an increased loss to the Government resulted therefrom,

[[Page 592]]

the transferee or person to whom such payment was made shall be liable 
to the Secretary for the amount of the loss caused by such 
misrepresentation or failure.