565 Part 36—Loan Guaranty

Department of Veterans Affairs Pt. 36

(3) Permits, license, and other use Vermont Avenue NW., Washington, DC agreements or grants of real property 20420. for use by non-VA groups; and, (Authority: 42 U.S.C. 4321–4370a) (4) Application for grants-in-aid for acquisition, construction, expansion or improvement of state veterans’ health PART 36—LOAN GUARANTY care facilities or cemeteries. (c) Public notices or other means Subpart A—Guaranty of Loans to Veterans used to inform or solicit applicants for to Purchase Manufactured Homes and permits, leases, or related actions will Lots, Including Site Preparation describe the environmental documents, Sec. studies or information foreseeably re- 36.4201 Applicability of the § 36.4200 series. quired for later action by VA elements 36.4202 Definitions. and will advise of the assistance available to applicants by VA element. GENERAL PROVISIONS (d) When VA owned land is leased or 36.4203 Eligibility of the veteran for the otherwise provided to non-VA groups, manufactured home loan benefit under 38 VA element affected will initiate the U.S.C. 3712. NEPA process pursuant to these regu- 36.4204 Loan purposes, maximum loan lations. amounts and terms. (e) When VA grant funds are re- 36.4205 Computation of guaranty. 36.4206 Underwriting standards, occupancy, quested by a State agency, VA element and non-discrimination requirements. affected will initiate the NEPA process 36.4207 Manufactured home standards. and ensure compliance with VA envi- 36.4208 Manufactured home location stand- ronmental program. The environ- ards. mental documents prepared by the 36.4209 Reporting requirements. grant applicant shall assure full com- 36.4210 Joint loans. pliance with State and local regula- 36.4211 Amortization—prepayment. tions as well as NEPA before the pro- 36.4212 Interest rates and late charges. 36.4213 Capacity of parties. posed action is approved. 36.4214 Geographical limits. (Authority: 42 U.S.C. 4321–4370a) 36.4215 Maintenance of records. 36.4217 Delivery of notice. § 26.9 Information on and public par- 36.4218 Payment in full; termination of ticipation in VA environmental guaranty. process. 36.4219 Incorporation by reference. 36.4220 Substantive and procedural require- (a) During the preparation of envi- ments; waiver. ronmental documents, the responsible 36.4221 Delegation of authority. VA element shall include the participa- 36.4222 Hazard insurance. tion of environmental agencies, appli- 36.4223 Interest rate reduction refinancing cants, State and local governments and loan. the public to the extent practicable 36.4224 Refinancing existing manufactured and in conformance with CEQ Regula- home loan including purchase of lot. 36.4225 Authority to close manufactured tions. Information or status reports on home loans on the automatic basis. environmental documents shall be pro- 36.4226 Withdrawal of authority to close vided to interested persons upon re- manufactured home loans on the auto- quest. matic basis. (b) Notice of availability or filing re- 36.4227 Advertising and solicitation require- quirements vary, depending on the ments. type of environmental documents re- FINANCING MANUFACTURED HOME UNITS quested. Specific requirements and procedures are defined for each VA ele- 36.4231 Warranty requirements. ment. 36.4232 Allowable fees and charges; manu- (c) For those actions relating specifi- factured home unit. 36.4234 Title and lien requirements. cally to the Secretary of Veterans Af- fairs, the Office of Environmental Af- COMBINATION AND MANUFACTURED HOME LOT fairs, or a VA element, information is LOANS available by writing to the Director, 36.4251 Loans to finance the purchase of Office of Environmental Affairs, De- manufactured homes and the cost of nec- partment of Veterans Affairs, 810 essary site preparation.

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36.4252 Loans for purchase or refinancing of 36.4328 Capacity of parties to contract. a manufactured home. 36.4329 Geographical limits. 36.4253 Title and lien requirements. 36.4330 Maintenance of records. 36.4254 Fees and charges. 36.4332 Delivery of notice. 36.4255 Loans for the acquisition of a lot. 36.4333 Satisfaction of indebtedness. 36.4334 Incorporation by reference. SERVICING, LIQUIDATION OF SECURITY AND 36.4335 Supplementary administrative ac- CLAIM tion. 36.4275 Events constituting default and ac- 36.4336 Eligibility of loans; reasonable value ceptability of partial payments. requirements. 36.4276 Advances and other charges. UNDERWRITING STANDARDS, PROCESSING PRO- 36.4277 Release of security. CEDURES, AND LENDER RESPONSIBILITY AND 36.4278 Servicing procedures for holders CERTIFICATION 36.4279 Extensions and reamortizations. 36.4280 Reporting of defaults. 36.4337 Underwriting standards, processing 36.4281 Refunding of loans in default. procedures, lender responsibility, and 36.4282 Legal proceedings (notice of repos- lender certification. session). 36.4338 Death or insolvency of holder. 36.4283 Foreclosure or repossession. 36.4339 Qualification for designated fee ap- 36.4284 Computation of guaranty claims. praisers. 36.4285 Subrogation and indemnity. 36.4340 Restriction on designated fee ap- 36.4286 Partial or total loss of guaranty. praisers. 36.4287 Substitution of trustees. 36.4342 Delegation of authority. 36.4343 Cooperative loans. Subpart B—Guaranty or Insurance of Loans 36.4344 Lender Appraisal Processing Pro- to Veterans gram. 36.4344a Servicer appraisal processing pro- 36.4300 Applicability of §§ 36.4300 to 36.4393, gram (SAPP). inclusive. 36.4345 Waivers, consents, and approvals; 36.4301 Definitions. when effective. 36.4346 Servicing procedures for holders. GENERAL PROVISIONS 36.4347 Minimum property and construction 36.4302 Computation of guaranties or insur- requirements. ance credits. 36.4348 Authority to close loans on the auto- 36.4303 Reporting requirements. matic basis. 36.4304 Deviations; changes of identity. 36.4349 Withdrawal of authority to close 36.4305 Partial disbursement. loans on the automatic basis. 36.4306 Refinancing of mortgage or other 36.4350 Estate of veteran in real property. lien indebtedness. 36.4351 Loans, first, second, or unsecured. 36.4306a Interest rate reduction refinancing 36.4352 Tax, special assessment and other loan. liens. 36.4307 Joint loans. 36.4353 Combination residential and busi- 36.4308 Transfer of title by borrower or ma- ness property. turity by demand or acceleration. 36.4354 [Reserved] 36.4309 Amortization. 36.4355 Supplemental loans. 36.4310 Prepayment. 36.4356 Condominium loans—general. 36.4311 Interest rates. 36.4357 Acceptable ownership arrangements 36.4312 Charges and fees. and documentation. 36.4313 Advances and other charges. 36.4358 Rights and restrictions. 36.4314 Extensions and reamortizations. 36.4359 Miscellaneous legal requirements. 36.4315 Notice of default and acceptability 36.4360 Documentation and related require- of partial payments. ments—flexible condominiums and con- 36.4316 Continued default. dominiums with offsite facilities. 36.4317 Notice of intention to foreclose. 36.4360a Appraisal requirements. 36.4318 Refunding of loans in default. 36.4362 Requirement of construction war- 36.4319 Legal proceedings. ranty. 36.4320 Sale of security. 36.4363 Nondiscrimination and equal oppor- 36.4321 Computation of guaranty claims; tunity in housing certification require- subsequent accounting. ments. 36.4322 Computation of indebtedness. 36.4364 Correction of structural defects. 36.4323 Subrogation and indemnity. 36.4365 Advertising and solicitation require- 36.4324 Release of security. ments. 36.4325 Partial or total loss of guaranty or LOANS UNDER 38 U.S.C. 3703 insurance. 36.4326 Hazard insurance. 36.4370 Insured loan and insurance account. 36.4327 Substitution of trustees. 36.4372 Transfer of insured loans.

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36.4373 Debits and credits to insurance ac- 36.4526 Issuance of fund reservation com- count under § 36.4318. mitments. 36.4374 Payment of insurance. 36.4527 Direct housing loans to Native 36.4375 Reports of insured institutions. American veterans on trust lands.

FEDERALLY ASSISTED CONSTRUCTION CON- Subpart E—Sale of Loans, Guarantee of TRACTS—NONDISCRIMINATION IN EMPLOY- Payment, and Flood Insurance MENT—EXECUTIVE ORDERS 11246 AND 11375 36.4390 Purpose. 36.4600 Sale of loans, guarantee of payment. 36.4391 Applicability. 36.4700 Authority, purpose, and scope. 36.4392 Certification requirements. 36.4701 Definitions. 36.4393 Complaint and hearing procedure. 36.4702 Requirement to purchase flood insurance where available. Subpart C—Assistance to Certain Disabled 36.4703 Exemptions. Veterans in Acquiring Specially 36.4704 Escrow requirement. 36.4705 Required use of standard flood haz- Adapted Housing ard determination form. 36.4400 Applicability. 36.4706 Forced placement of flood insurance. 36.4401 Definitions. 36.4707 Determination fees. 36.4402 Eligibility. 36.4708 Notice of special flood hazards and 36.4403 Joint ownership of housing unit. availability of Federal disaster relief as- 36.4404 Computation of cost. sistance. 36.4405 Submission of proof to the Sec- 36.4709 Notice of servicer’s identity. retary. 36.4406 Disbursement of benefit authorized. Subpart F—Guaranty or Insurance of Loans 36.4407 Supplementary administrative ac- to Veterans With Electronic Reporting tion. 36.4800 Applicability of this subpart. 36.4408 Delegation of authority. 36.4801 Definitions. 36.4409 Guaranteed or insured loans under 38 36.4802 Computation of guaranties or insur- U.S.C. Chapter 37. ance credits. 36.4410 Allocation of the funds of the grant. 36.4803 Reporting requirements. 36.4411 Geographical limits. 36.4804 Deviations; changes of identity. Subpart D—Direct Loans 36.4805 Partial disbursement. 36.4806 Refinancing of mortgage or other 36.4500 Applicability. lien indebtedness. 36.4501 Definitions. 36.4807 Interest rate reduction refinancing 36.4502 Use of guaranty entitlement. loan. 36.4503 Amount and amortization. 36.4808 Joint loans. 36.4504 Loan closing expenses. 36.4809 Transfer of title by borrower or ma- 36.4505 Maturity of loan. turity by demand or acceleration. 36.4506 Recasting. 36.4810 Amortization. 36.4507 Refinancing of mortgage or other 36.4811 Prepayment. lien indebtedness. 36.4812 Interest rates. 36.4508 Transfer of property by borrower. 36.4813 Charges and fees. 36.4509 Joint loans. 36.4814 Advances and other charges. 36.4510 Prepayment, acceleration, and liq- 36.4815 Loan modifications. uidation. 36.4816 Acceptability of partial payments. 36.4511 Advances after loan closing. 36.4817 Servicer reporting requirements. 36.4512 Taxes and insurance. 36.4818 Servicer tier ranking—temporary 36.4513 Foreclosure and liquidation. procedures. 36.4514 Eligibility requirements. 36.4819 Servicer loss-mitigation options and 36.4515 Estate of veteran in real property. incentives. 36.4516 Lien requirements. 36.4820 Refunding of loans in default. 36.4517 Incorporation by reference. 36.4821 Service of process. 36.4518 Supplementary administrative ac- 36.4822 Loan termination. tion. 36.4823 Election to convey security. 36.4519 Eligible purposes and reasonable 36.4824 Guaranty claims; subsequent ac- value requirements. counting. 36.4520 Delegation of authority. 36.4825 Computation of indebtedness. 36.4521 Minimum property and construction 36.4826 Subrogation and indemnity. requirements. 36.4827 Release of security. 36.4522 Waivers, consents, and approvals. 36.4828 Partial or total loss of guaranty or 36.4523 Geographical limits. insurance. 36.4524 Sale of loans. 36.4829 Hazard insurance. 36.4525 Requirement of a construction war- 36.4830 Substitution of trustees. ranty. 36.4831 Capacity of parties to contract.

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36.4832 Geographical limits. APPENDIX A TO PART 36—SAMPLE FORM OF 36.4833 Maintenance of records. NOTICE OF SPECIAL FLOOD HAZARDS AND 36.4835 Delivery of notice. AVAILABILITY OF FEDERAL DISASTER RE- 36.4836 [Reserved] LIEF ASSISTANCE 36.4837 Conformance of loan instruments. 36.4838 Supplementary administrative ac- AUTHORITY: 38 U.S.C. 501 and as otherwise tion. noted. 36.4839 Eligibility of loans; reasonable value EDITORIAL NOTE: Nomenclature changes to requirements. part 36 appear at 61 FR 7217, Feb. 27, 1996. 36.4840 Underwriting standards, processing procedures, lender responsibility, and lender certification. Subpart A—Guaranty of Loans to 36.4841 Death or insolvency of holder. Veterans to Purchase Manu- 36.4842 Qualification for designated fee ap- factured Homes and Lots, In- praisers. 36.4843 Restriction on designated apprais- cluding Site Preparation ers. 36.4845 Delegation of authority. SOURCE: Sections 36.4201 through 36.4287 ap- 36.4846 Cooperative loans. pear at 36 FR 1253, Jan. 27, 1971, unless other- 36.4847 Lender Appraisal Processing Pro- wise noted. gram. NOTE: Those requirements, conditions, or 36.4848 Servicer Appraisal Processing Pro- limitations which are expressly set forth in gram. 36.4849 Waivers, consents, and approvals; 38 U.S.C. 3712 and are not restated herein when effective. must be taken into consideration in conjunc- 36.4850 Servicing procedures for holders. tion with the § 36.4200 series. 36.4851 Minimum property and construction requirements. § 36.4201 Applicability of the § 36.4200 36.4852 Authority to close loans on the auto- series. matic basis. The § 36.4200 series shall be applicable 36.4853 Withdrawal of authority to close to each loan entitled to guaranty under loans on the automatic basis. 38 U.S.C. 3712 on or after the date of 36.4854 Estate of veteran in real property. 36.4855 Loans, first, second, or unsecured. publication thereof in the FEDERAL 36.4856 Tax, special assessment and other REGISTER. liens. 36.4857 Combination residential and busi- § 36.4202 Definitions. ness property. Wherever used in 38 U.S.C. 3712 or the 36.4858 [Reserved] § 36.4200 series, unless the context oth- 36.4859 Supplemental loans. erwise requires, the terms defined in 36.4860 Condominium loans—general. 36.4861 Acceptable ownership arrangements this section shall have the meaning and documentation. herein stated. 36.4862 Rights and restrictions. Automatic lender. A lender that may 36.4863 Miscellaneous legal requirements. process a loan or assumption without 36.4864 Documentation and related require- submitting the credit package to the ments—flexible condominiums and con- Department of Veterans Affairs for un- dominiums with offsite facilities. derwriting review. Pursuant to 38 36.4865 Appraisal requirements. 36.4867 Requirement of construction war- U.S.C. 3702(d) there are two categories ranty. of lenders who may process loans auto- 36.4868 Nondiscrimination and equal oppor- matically: (1) Entities such as banks, tunity in housing certification require- savings and loan associations, and ments. mortgage and loan companies that are 36.4869 Correction of structural defects. subject to examinations by an agency 36.4870 Advertising and solicitation require- of the United States or any State and ments. (2) lenders approved by the Department 36.4875 Insured loan and insurance account. 36.4877 Transfer of insured loans. of Veterans Affairs pursuant to stand- 36.4878 Debits and credits to insurance ac- ards established by the Department of count under § 36.4820. Veterans Affairs. 36.4879 Payment of insurance. 36.4880 Reports of insured institutions. (Authority: 38 U.S.C. 3702(d)) 36.4890 Purpose. 36.4891 Applicability. Credit package. Any information, re- 36.4892 Certification requirements. port of verifications used by a lender, 36.4893 Complaint and hearing procedure. holder or authorized servicing agent to

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determine the creditworthiness of an security deeds, security instruments, applicant for a Department of Veterans mechanics’ liens, lease-purchase con- Affairs guaranteed loan or the assumer tracts, conditional sales contracts, of such a loan. consignments. Loan. Unpaid principal balance plus (Authority: 38 U.S.C. 3710 and 3714) unpaid earned interest due under the Date of first uncured default. The due terms of the obligation. date of the earliest payment not fully Lot. A parcel of land acceptable to satisfied by the proper application or the Secretary as a manufactured home available credits or deposits. site. Default. Failure of a borrower to Manufactured home. A movable dwell- comply with the terms of a loan agree- ing unit designed and constructed for ment. year-round occupancy on land by a sin- Guaranty. The obligation of the gle family, which dwelling unit con- United States, assumed by virtue of 38 tains permanent eating, cooking, sleep- U.S.C. 3712, to repay a specified per- ing, and sanitary facilities. A double- centage of a loan upon default of the primary debtor, which guaranty pay- wide manufactured home is a movable ment shall be made after liquidation of dwelling designed for occupancy by one the security for the loan and an ac- family consisting of (1) two or more counting with the Secretary. units intended to be joined together Holder. The lender or any subsequent horizontally when located on a site, assignee or transferee of the guaran- but capable of independent movement teed obligation or the authorized serv- or (2) a unit having a section or sec- icing agent of the lender or of the as- tions which unfold along the entire signee or transferee if the obligation length of the unit. has been assigned or transferred. Manufacturer’s invoice. A document, Indebtedness. The unpaid principal issued by a manufacturer and provided and interest plus any other amounts with a manufactured home to a retail allowable under the terms of a loan in- dealer, acceptable in form and content cluding those authorized by statute to the Secretary which indicates the and consistent with the § 36.4200 series, wholesale (base) price at the factory of which have been paid and debited to the manufactured home model or series the loan account. Unpaid late charges including any furnishings, equipment may not be included in the indebted- and accessories installed by the manu- ness. facturer, net of all rebates to the deal- Lender. The payee or assignee or er. The following certification or a rea- transferee of an obligation at the time it is guaranteed. This term also in- sonable facsimile thereof, signed by an cludes any sole proprietorship, partner- authorized representative of the manu- ship, or corporation and the owners, of- facturer, must appear on the invoice: ficers, and employees of a sole propri- ‘‘The undersigned certifies that the etorship, partnership, or corporation manufacturer’s invoice price shown on engaged in the origination, procure- this invoice reflects the dealer’s cost at ment, transfer, servicing, or funding of point of manufacture, exclusive of any a loan which is guaranteed by VA. and all freight or transportation charges, net of any and all discounts, (Authority: 38 U.S.C. 3704(d), 3712(g)) bonuses, refunds, rebates (including Lien. Any interest in, or power over, volume rebates), prizes or anything of real or personal property, reserved by value which will inure to the benefit of the vendor, or created by the parties or the dealer at the time of purchase or at by operation of law, chiefly or solely any future date.’’ for the purpose of assuring the pay- Necessary site preparation. Those im- ment of the purchase price, or a debt, provements essential to render a manu- and irrespective of the identity of the factured home site acceptable to the party in whom title to the property is Secretary including, but not limited vested, including but not limited to to, the installation of utility connec- mortgages, deeds with a defeasance tions, sanitary facilities and paving, therein or collaterally, deeds of trust, and the construction of a suitable pad.

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New manufactured home. A manufac- specified period of time. All such tured home which, at the time of pur- wholesale (base) prices shall exclude chase by the veteran-borrower, has not any costs of trade association fees or been previously occupied and was man- charges, discounts, refunds, rebates, ufactured less than 1 year prior to the prizes, loan discount points or other fi- date of application to the Department nancing charges, or anything else of of Veterans Affairs for loan guaranty. more than a nominal value of $10 which will inure to the benefit of a dealer (Authority: Sec. 406, Pub. L. 97–306) and/or home purchaser at any date, as required to be disclosed in the manu- Reasonable value means that figure facturer’s invoice. Each price list and which represents the amount a rep- amendment shall be retained by the utable and qualified appraiser, unaf- manufacturer for a minimum period of fected by personal interest, bias, or six years from the date of publication prejudice, would recommend to a pro- to be available to VA and other Federal spective purchaser as a proper price or agencies upon request. cost in the light of prevailing conditions. [36 FR 1253, Jan. 27, 1971, as amended at 40 Repossession—repossessed means re- FR 13212, Mar. 25, 1975; 43 FR 37197, Aug. 22, covery or acquisition of such physical 1978; 44 FR 22723, Apr. 17, 1979; 48 FR 40227, Sept. 6, 1983; 50 FR 13193, Apr. 3, 1985; 54 FR control of property (pursuant to the 34988, Aug. 23, 1989; 55 FR 37471, Sept. 12, 1990; provisions of the security instrument 58 FR 29114, May 19, 1993; 58 FR 37858, July 14, or as otherwise provided by law) as to 1993] make further legal or other action unnecessary in order to obtain actual pos- GENERAL PROVISIONS session of the property or to dispose of the same by sale or otherwise. § 36.4203 Eligibility of the veteran for Resale means sale of the property by the manufactured home loan benefit under 38 U.S.C. 3712. the holder to a third party for the purpose of liquidating the security for the (a) To be eligible for the manufac- loan after having acquired the property tured home loan benefit a veteran must by repossession, public or private sale, have loan guaranty entitlement for or by any other means. manufactured home purposes available Secretary. The Secretary of Veterans for use. Notwithstanding the provisions Affairs, or any employee of the Depart- of § 36.4205(e), the Secretary may ex- ment of Veterans Affairs authorized to clude the amount of guaranty entitle- act in the Secretary’s stead. ment used for any guaranteed manu- Servicing agent. An agent designated factured home loan provided: by the loan holder as the entity to col- (1) The property which served as select installments on the loan and/or curity for the loan has been disposed of perform other functions as necessary by the veteran, or has been destroyed to protect the interests of the holder. by fire or other natural hazard; and (2)(i) The loan has been repaid in full (Authority: 38 U.S.C. 3714) or the Secretary has been released from liability as to the loan, or if the Used manufactured home. A manufac- Secretary has suffered a loss on said tured home which has been previously loan, such loss has been paid in full; or occupied or which was manufactured (ii) A veteran-transferee has agreed more than 1 year prior to date of loan to assume the outstanding balance on application. the loan and consented to the use of his Wholesale (base) price list. The price or her entitlement to the extent the list(s) as periodically amended, pub- entitlement of the veteran-transferor lished and distributed by a home manu- had been used originally, and the vet- facturer to all retail dealers in a given eran-transferee otherwise meets the re- marketing area, quoting the actual quirements of 38 U.S.C. chapter 37. wholesale (base) price at the factory (3) In a case in which the veteran for specific models or series of manu- still owns a property purchased with a factured homes, itemized options, VA-guaranteed loan, the Secretary itemized furniture, and specialty items may, one time only, restore entitle- offered for sale to such dealers during a ment if:

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(i) The loan has been repaid in full, Provided, That if the Secretary issues or, if the Secretary has suffered a loss or has issued a certificate of commit- on the loan, the loss has been paid in ment covering the loan described in the full; or application for guaranty or in the loan (ii) The Secretary has been released report, the amount and percentage of from liability as to the loan and, if the guaranty contemplated by the certifi- Secretary has suffered a loss on the cate of commitment shall not be sub- loan, the loss has been paid in full. ject to reduction if the loan has been or (4) The Secretary may, in any case is closed on a date which is not later involving circumstances deemed appro- than the expiration date of the certifi- priate, waive either or both of the re- cate of commitment, notwithstanding quirements set forth in paragraphs that the Secretary in the meantime (a)(1) and (a)(2)(i) of this section. and prior to the issuance of the evidence of guaranty shall have incurred (Authority: 38 U.S.C. 3702, 3712) actual liability or loss on a direct, guaranteed, or insured loan previously The Secretary may, in any case involv- obtained by the borrower. For the pur- ing circumstances deemed appropriate, poses of this paragraph, the Secretary waive either or both of the require- will be deemed to have incurred actual ments set forth in paragraph (a)(1) or loss on a guaranteed or insured loan if (2) of this section. the Secretary has paid a guaranty or (b) A veteran may use his or her re- insurance claim thereon and the vet- maining home loan guaranty entitle- eran’s resultant indebtedness to the ment for any purpose authorized by 38 Government has not been paid in full, U.S.C. 3710, 3711, or 3712 except that a and to have incurred actual liability on veteran who has purchased a manufac- a guaranteed or insured loan if the Sec- tured home unit may not purchase a retary is in receipt of a claim on the second manufactured home unit until guaranty or insurance or is in receipt the unit which secured the first loan of a notice of default. In the case of a has been disposed of by the veteran or direct loan, the Secretary will be has been destroyed by fire or other nat- deemed to have incurred an actual loss ural hazard. if the loan is in default. (c) The available entitlement of a veteran will be determined by the Sec- (Authority: 38 U.S.C. 3712(b)(1) and (2) and retary as of the date of receipt of an (c)(4)) application for guaranty of a manufactured home loan or loan report. Such [44 FR 22723, Apr. 17, 1979, as amended at 48 date of receipt shall be the date the ap- FR 40227, Sept. 6, 1983; 49 FR 28243, July 11, 1984; 60 FR 38257, July 26, 1995] plication or loan report is date stamped into the Department of Vet- § 36.4204 Loan purposes, maximum erans Affairs. Eligibility derived from loan amounts and terms. the most recent period of service (1) shall cancel any unused entitlement (a) A manufactured home loan may derived from any earlier period of serv- be guaranteed if the loan is for one of ice, and (2) shall be reduced by the the following purposes; amount by which entitlement from (1) To purchase a lot on which to service during any earlier period has place a manufactured home already been used to obtain a direct, guaran- owned by the veteran; teed, or insured loan: (2) To purchase a single-wide manu- (i) On property which the veteran factured home; owns at the time of application; or (3) To purchase a single-wide manu- (ii) As to which the Secretary has in- factured home and a lot on which to curred actual liability or loss, unless in place such home; the event of loss or the incurrence and (4) To purchase a double-wide manu- payment of such liability by the Sec- factured home; retary the resulting indebtedness of (5) To purchase a double-wide manu- the veteran to the United States has factured home and lot on which to been paid in full. place such home;

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(6) To refinance an existing loan, in- necessary site preparation for an unde- cluding a previously refinanced pur- veloped lot. chase money loan, that was made for (3) The maximum loan amount for a the purchase of and is secured by a used manufactured home may not ex- manufactured home and to purchase a ceed the reasonable value as estab- lot on which the manufactured home is lished by the Secretary, plus: or will be placed; or (i) Actual fees or charges for required (7) To refinance in accordance with recordation of documents; § 36.4223 an existing manufactured (ii) The amount of any documentary home loan guaranteed, insured or made stamp taxes levied on the transactions; under paragraphs (a)(1) through (6) of (iii) The amount of State and local this section provided the amount of the taxes levied on the transactions; and loan to refinance does not exceed an (iv) The premium for customary amount equal to 95 percent of the rea- physical damage insurance and ven- sonable value of the manufactured dor’s single interest coverage on the home securing the loan, as determined manufactured home for an initial pol- by the Secretary. icy term not to exceed one year. (4) In the case of an interest rate re- (Authority: 38 U.S.C. 3712(a)(1)) duction refinancing loan (38 U.S.C. (b) In the case of a loan to purchase 3712(a)(1)(F)) the maximum loan may a new manufactured home unit only, not exceed the sum of: the loan amount shall not exceed the (i) The balance of the VA loan being lesser of an amount equal to 95 percent refinanced; of the purchase price of the property (ii) Closing costs as authorized by securing the loan or the amount com- § 36.4232 or § 36.4254, as appropriate; and puted in paragraph (c), of this section, (iii) Allowable discounts, provided provided the total loan amount does that: not exceed 145 percent of the manufac- (A) The loan application is submitted turer’s invoice. to the Secretary for prior approval; (c) For all manufactured home loans, (B) The amount of discount is dis- the maximum loan amount is as fol- closed to the Secretary and the veteran lows: prior to the issuance of the certificate (1) In the case of a loan to purchase of commitment by the Secretary. This a new manufactured home unit only, certificate of commitment shall specify the loan amount is to be computed as the discount to be paid by the veteran, the sum of: and this discount may not be increased (i) One hundred twenty-five (125) per- once the commitment has been issued cent of the figure produced by this without the approval of the Secretary; computation: (C) The discount has been determined Subtract from the manufacturer’s in- by the Secretary to be reasonable in voice cost the manufacturer’s invoice amount; and cost of any components (furnishings, (5) For a loan to refinance a purchase accessories, equipment) removed from money lien on a manufactured home the unit by the dealer. To the remain- and to purchase a lot (38 U.S.C. der add the dealer’s cost for any com- 3712(a)(1)(G)) on which the manufac- ponents added by such dealer. The sum tured home is or will be placed: so obtained shall be the figure to be (i) The loan must be secured by the multiplied by the specified percentage; same manufactured home which must and be owned and occupied by the veteran (ii) One hundred (100) percent of the as the veteran’s home; and actual amount of fees and charges per- (ii) The amount of the loan may not mitted in § 36.4232. exceed an amount equal to the sum of: (2) A loan to purchase a lot upon (A) The purchase price of the lot, not which a manufactured home owned by to exceed the reasonable value thereof, the veteran will be placed is limited to as authorized by § 36.4252; the reasonable value of a developed lot (B) The amount determined by the or the reasonable value plus such Secretary to be appropriate to cover amount determined by the Secretary the cost of necessary preparation of the to be appropriate to cover the cost of lot;

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(C) The balance of the loan being re- (ii) 100 percent of the actual amount financed; and of fees and charge permitted in (D) Closing costs, as authorized by § 36.4232. § 36.4232 or § 36.4254, as appropriate, and (2) In the case of a loan to purchase a reasonable discount with respect to a new manufactured home unit plus that portion of the loan used to refi- the cost of necessary site preparation nance the existing purchase money where the veteran owns the lot, the lien. loan amount shall be limited to the (iii) Allowable discounts may be amount determined in paragraph (d)(1) charged to the veteran on the portion of this section plus such costs of nec- of the loan used to refinance the exist- essary site preparation as are approved ing purchase money lien provided: by the Secretary. (3) In the case of a loan to purchase (A) The loan application is submitted a new manufactured home unit plus to the Secretary for prior approval; the purchase of an undeveloped lot on (B) The amount of discount to be which to place such home plus the cost paid on the unit portion of the loan is of necessary site preparation, the loan disclosed to the Secretary and the vet- amount shall be limited to the amount eran prior to the issuance of the cer- determined in paragraph (d)(1) of this tificate of commitment by the Sec- section plus the reasonable value of the retary. The certificate of commitment undeveloped lot as determined by the shall specify the discount to be paid by Secretary plus such costs of necessary the veteran on the unit portion of the site preparation as are approved by the loan, and this discount may not be in- Secretary. creased once the commitment has been (4) In the case of a loan to purchase issued without the approval of the Sec- a new manufactured home unit plus retary; and the cost of a suitably developed lot on (C) The discount on the unit portion which to place such home, the loan of the loan has been determined by the amount shall be limited to the amount Secretary to be reasonable in amount. determined in paragraph (d)(1) of this (6) All powers of the Secretary under section plus the reasonable value of the paragraphs (c) (4) and (5) of this sec- developed lot as determined by the tion, except the authority to revise the Secretary. discount after the commitment is (5) In the case of a loan to purchase issued, are hereby delegated to those a lot upon which will be placed a manu- officials designated by § 36.4221(b). The factured home owned by the veteran power of the Secretary to approve an the loan is limited to the reasonable increase in the discount on the unit value of a developed lot or the reason- portion of the loan after the commit- able value plus such amount as is de- ment is issued is delegated to those of- termined by the Secretary to be appro- ficials designated by § 36.4220(a). priate to cover the cost of necessary (d) The loan amount in an individual site preparation for an undeveloped lot. case shall not exceed the following: (6) In the case of a used manufactured home the maximum loan may (1) In the case of a loan to purchase not exceed the reasonable value as es- a new manufactured home unit only, tablished by the Secretary, plus; the loan amount shall not exceed the (i) Actual fees or charges for required sum of the following: recordation of documents; (i) 120 percent of the figure produced (ii) The amount of any documentary by the following computation: stamp taxes levied on the transaction; Subtract from the manufacturer’s in- (iii) The amount of State and local voice cost the manufactuer’s invoice taxes levied on the transaction; and cost of any components (furnishings, (iv) The premium for customary accessories, equipment) removed from physical damage insurance and ven- the unit by the dealer. To the remain- dor’s single interest coverage on the der add the dealer’s cost for any com- manufactured home for an initial pol- ponents added by such dealer. The sum icy term of not to exceed 5 years. so obtained shall be the figure to be (7) In the case of an interest rate re- multiplied by the specified percentage. duction refinancing loan (38 U.S.C.

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3712(a)(1)(F)) the maximum loan may (iii) Allowable discounts may be not exceed: charged to the veteran on the portion (i) The balance of the Department of of the loan used to refinance the exist- Veterans Affairs loan being refinanced; ing purchase money lien provided: (ii) Closing costs as authorized by (A) The loan application is submitted § 36.4232 or § 36.4254, as appropriate; and to the Secretary for prior approval; (iii) Allowable discounts provided: (B) The amount of discount to be (A) The loan application is submitted paid on the unit portion of the loan is to the Secretary for prior approval; disclosed to the Secretary and the vet- (B) The amount of discount is dis- eran prior to the issuance of the cer- closed to the Secretary and the veteran tificate of commitment by the Sec- prior to the issuance of the certificate retary. The certificate of commitment of commitment by the Secretary. Said shall specify the discount to be paid by certificate of commitment shall specify the veteran on the unit portion of the the discount to be paid by the veteran, loan, and this discount may not be in- and this discount may not be increased creased once the commitment has been once the commitment has been issued issued without the approval of the Sec- without the approval of the Secretary; retary; (C) The discount has been determined (C) The discount on the unit portion by the Secretary to be reasonable in of the loan has been determined by the amount; and Secretary to be reasonable in amount; (D) All powers of the Secretary under and this paragraph (d)(7) of this section, ex- (D) All powers of the Secretary under cept the authority to revise the dis- paragraph (d)(8) of this section, except count after the commitment is issued, the authority to revise the discount are hereby delegated to those officials after the commitment is issued, are designated by § 36.4221(b). The power of hereby delegated to those officials des- the Secretary to approve an increase in ignated by § 36.4221(b). The power of the the discount after the commitment is Secretary to approve an increase in the issued is delegated to those officials discount on the unit portion of the designated by § 36.4220(a). loan after the commitment is issued is delegated to those officials designated (Authority: 38 U.S.C. 3712 (a)(4) and (g)) by § 36.4220(a). (8) In the case of a loan to refinance a purchase money lien on a manufac- (Authority: 38 U.S.C. 3712 (a)(1)(G), (a)(5) and tured home and to buy a lot (38 U.S.C. (g)) 3712(a)(1)(G)) on which the manufac- EDITORIAL NOTE: At 58 FR 37858, July 14, tured home is or will be placed: 1993, the following paragraph (d) was redesig- (i) The loan must be secured by the nated from paragraph (b), effective August same manufactured home which must 13, 1993. However, paragraph (d) already ex- be owned and occupied by the veteran ists, and the redesignation resulted in two paragraph (d)s. as the veteran’s home; and (d) A loan for any of the purposes de- (ii) The amount of the loan may not scribed in paragraphs (a)(1) through (6) exceed an amount equal to the sum of: of this section may include an amount (A) The purchase price, not to exceed determined by the Secretary to be ap- the reasonable value of the lot, as au- propriate to cover the cost of necessary thorized by § 36.4252, preparation of a lot already owned or (B) The amount determined by the to be acquired by the veteran, includ- Secretary to be appropriate to cover ing the costs of installing utility con- the cost of necessary preparation of the nections and sanitary facilities, of pav- lot, ing, and of constructing a suitable pad (C) The balance of the loan being re- for the manufactured home. financed, and (D) Closing costs, as authorized by (e) The maximum permissible loan § 36.4232 or § 36.4254, as appropriate, and terms shall not exceed; a reasonable discount with respect to (1) 20 years and 32 days in the case of that portion of the loan used to refi- a loan to purchase a single-wide manu- nance the existing purchase money factured home or a single-wide manu- lien. factured home and lot;

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(2) 15 years and 32 days in the case of § 36.4205 Computation of guaranty. a loan to purchase a lot on which to (a) The amount of guaranty in replace a manufactured home already spect to a loan guaranteed under 38 owned by the veteran; U.S.C. 3712 shall be forty (40) percent of (3) 23 years and 32 days in the case of the original principal amount of the a loan to purchase a double-wide manu- loan or $20,000, whichever is less. With factured home, or 25 years and 32 days respect to a loan guaranteed under 38 in the case of a loan to purchase a dou- U.S.C. 3712(a)(1)(F), the dollar amount ble-wide manufactured home and lot; of guaranty may not exceed the origi- or nal dollar amount of guaranty on the (4) In the case of a used manufac- loan being refinanced. With respect to tured home the maximum term set a loan guaranteed under 38 U.S.C. forth in paragraph (c)(1) or (3) of this 3712(a)(1)(G), the dollar amount of section or the remaining physical life guaranty previously used to obtain a expectancy of the unit as established manufactured unit loan may be trans- by the Secretary, whichever is less. ferred pursuant to § 36.4224(b) for use in refinancing the unit when simulta- (Authority: 38 U.S.C. 3712(a)(1) and (2), (d)(1), neously acquiring a lot. (e)(4)(B)) (b) Subject to the provisions of para- (f) An itemized list of all items in- graph (c) of § 36.4203, the following for- cluded in the manufactured home loan mulas will determine the amount of as enumerated in § 36.4232 shall be pro- guaranty entitlement which remains vided to both the purchaser and the available to an eligible veteran after Secretary. At the time of loan origina- prior use of entitlement: tion an independent fee inspection (1) If a veteran previously secured a shall be conducted to assure that all nonrealty (business) loan, the amount items included in the loan amount are of nonrealty entitlement used is dou- accounted for and in place. A similar bled and subtracted from $36,000. The inspection will be conducted in the sum remaining is the amount of avail- event of repossession immediately able entitlement for use not to exceed prior to repossession. The costs of the $20,000 for manufactured home pur- fee inspections may be included in the poses. loan amount or the claim amount and (2) If a veteran previously secured a charged to the borrower pursuant to realty (home) loan, the amount of real- the provisions of § 36.4232 (a) and (b). ty (home) loan entitlement used is subtracted from $36,000. The sum remain- (The information collection requirements ing is the amount of available entitle- contained in § 36.4204(f) were approved by the ment for use not to exceed $20,000 for Office of Management and Budget under manufactured home purposes. OMB control number 2900–0516) (3) If a veteran previously secured a (g) The cost of the transaction which manufactured home loan, the amount cannot be paid from the proceeds of the of entitlement used for manufactured loan must be paid by the veteran in home purposes is subtracted from cash from the veteran’s own resources. $36,000. The sum remaining is the Except for interest rate reduction refi- amount of available entitlement for nancing loans pursuant to paragraph use for home loan purposes only. To de- (a)(7) of this section or loans to refi- termine the amount of additional enti- nance a manufactured home and to buy tlement available for manufactured a lot pursuant to paragraph (a)(8) of home purposes, the amount of entitle- this section, closing costs and prepaid ment previously used for manufactured items incident to the real estate por- home purposes is subtracted from tion of any manufactured home loan $20,000. Except for manufactured home must be paid in cash and may not be loans to be obtained pursuant to 38 included in the loan amount. U.S.C. 3712(a)(1)(F) or (G), the sum remaining is the amount of available en- (Authority: 38 U.S.C. 3712 (a)(4), (a)(5), (g)) titlement for use for manufactured [48 FR 40227, Sept. 6, 1983, as amended at 54 home purposes. FR 34988, Aug. 23, 1989; 58 FR 37858, July 14, (c) For the purpose of computing the 1993] remaining guaranty benefit to which a

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veteran is entitled, manufactured loan shall be considered to be eligible home and manufactured home lot loans for the 38 U.S.C. 3712(a)(1)(F) benefit. guaranteed prior to October 1, 1978, shall be taken into consideration as if (Authority: 38 U.S.C. 3712(a)(4)(C)) made subsequent thereto, and the vet- (g) Any evidence of guaranty issued eran’s entitlement will be reduced by by the Secretary in respect to such the amount of the Secretary’s guar- loan shall be conclusive evidence of the anty issued in the particular loan eligibility of the loan for guaranty and transaction. of the amount of such guaranty, Pro- (d) A guaranty is reduced or in- vided, however, That the Secretary may creased pro rata with any deduction or establish against the original lender, increase in the amount of the guaran- defenses based on fraud or material teed indebtedness, but in no event will misrepresentation and that the Sec- the amount payable on a guaranty ex- retary may by regulations in force at ceed the amount of the original guar- the date of such issuance establish par- anty or the percentage of the indebted- tial defenses to the amount payable on ness corresponding to that of the origi- the guaranty. nal guaranty. [44 FR 22724, Apr. 17, 1979, as amended at 46 (e) The amount of any guaranty for a FR 43669, Aug. 31, 1981; 48 FR 40228, Sept. 6, manufactured home or manufactured 1983; 58 FR 37859, July 14, 1993] home lot loan shall be charged against the original or remainder of the bor- § 36.4206 Underwriting standards, oc- rower’s guaranty benefit available for cupancy, and non-discrimination requirements. manufactured home purposes. Com- plete or partial liquidation, by pay- (a) Except for refinancing loans pur- ment or otherwise, of the veteran’s suant to 38 U.S.C. 3712(a)(1)(F), no loan guaranteed indebtedness does not in- shall be guaranteed unless the terms of crease the remainder of the guaranty repayment bear a proper relationship benefit, if any, otherwise available to to the veteran’s present and antici- the veteran. When the maximum guar- pated income and expenses, and the anty available legally to a veteran for veteran is a satisfactory credit risk, as manufactured home purposes shall determined by use of the standards in have been granted, no further guaranty § 36.4337 of this part. for manufactured home purposes shall be available to the veteran. (Authority: 38 U.S.C. 3712) (f)(1) The amount of guaranty enti- (b) Use of the standards in § 36.4337 of tlement, available and unused, of an el- this part for underwriting manufac- igible unremarried surviving spouse tured home loans will be waived only (whose eligibility does not result from in extraordinary circumstances. his or her own service) is determinable in the same manner as in the case of (Authority: 38 U.S.C. 3712) any veteran, and any entitlement (c) The lender responsibilities con- which the decedent (who was his or her tained in § 36.4337 of this part and the spouse) used shall be disregarded. A certification required and penalties to certificate as to the eligibility of such be assessed under § 36.4337A of this part surviving spouse, issued by the Sec- against lenders making false certifi- retary, shall be a condition precedent cations also apply to lenders origi- to the guaranty or insurance of any nating VA guaranteed manufactured loan made to a surviving spouse in home loans under the authority of 38 such capacity. U.S.C. 3712.

(Authority: 38 U.S.C. 3701(a)(2), 3712(c)(4)) (Authority: 38 U.S.C. 3712) (2) For the purpose of obtaining an (d) No loan shall be guaranteed pur- interest rate reduction refinancing suant to 38 U.S.C. 3712(a)(1) unless: loan purusant to 38 U.S.C. 3712(a)(1)(F), (1) The veteran certifies, in such form an unmarried surviving spouse who was as the Secretary shall prescribe, that a co-obligor under an existing Depart- he or she will personally occupy the ment of Veterans Affairs guaranteed property as his or her home or, if the

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veteran is on active duty status as a feet wide and have a minimum floor member of the Armed Forces and is for area of seven hundred (700) square feet. that reason unable to occupy the prop- (b) Be so constructed as to be towed erty, the veteran’s spouse must certify on its own chassis and undercarriage that he or she will personally occupy and/or independent undercarriage; the property as his or her home. For (c) Contain living facilities for year the purposes of this section, the words around occupancy by one family, in- personally occupy the property as his or cluding permanent provisions for heat, her home mean that the veteran as of sleeping, cooking, and sanitation; and the date of his or her certification ac- (d) Comply with the specifications in tually lives in the property personally effect at the time the loan is made that as his or her residence or actually in- are prescribed by the Secretary. tends upon completion of the loan and acquisition of the manufactured home (Authority: 38 U.S.C. 3712(h)(1)) to move into the home personally with- [36 FR 1253, Jan. 27, 1971, as amended at 40 in a reasonable time and to utilize the FR 13213, Mar. 25, 1975; 44 FR 22725, Apr. 17, home as his or her residence. 1979; 56 FR 9855, Mar. 8, 1991] (2) The veteran certifies, in such form as the Secretary shall prescribe that: § 36.4208 Manufactured home location (i) Neither the veteran, nor anyone standards. authorized to act for the veteran, will (a) Any rental site on which a manu- refuse to sell or rent, after the making factured home to be purchased with a of a bona fide offer, or refuse to nego- guaranteed loan will be placed must tiate for the sale or rental of, or other- qualify as an acceptable rental site as wise make unavailable or deny the follows: dwelling or property covered by this (1) Be located within a manufactured loan to any person because of race, home park or subdivision which is ac- color, religion, sex, handicap, familial ceptable to the Department of Vet- status, or national origin; erans Affairs; or (ii) The veteran recognizes that any (2) Be a site which is not within a restrictive covenant on the property manufactured home park or subdivi- relating to race, color, religion, sex, sion provided that (i) the site is deter- handicap, familial status, or national mined by the Department of Veterans origin is illegal and void and any such Affairs to be an acceptable rental site, covenant is specifically disclaimed; and or (ii) in the absence of a determina- (iii) The veteran understands that tion by the Department of Veterans Af- civil action for preventive relief may fairs in respect to such site the manu- be brought by the Attorney General of factured home purchaser and the dealer the United States in any appropriate certify to the Secretary as follows: U.S. district court against any person (A) Placement of the manufactured responsible for a violation of the appli- home on the site or lot is not a viola- cable law. tion of zoning laws or other local re- [46 FR 43670, Aug. 31, 1981, as amended at 56 quirements applicable to manufactured FR 9855, Mar. 8, 1991; 58 FR 37859, July 14, homes; 1993] (B) The site or lot is served by water and sanitary facilities which are ap- § 36.4207 Manufactured home stand- proved by the local public authority ards. and which are acceptable to the De- To qualify for purchase with a guar- partment of Veterans Affairs; anteed loan a manufactured home (C) The site or lot is served by an all- must: weather street or road; (a) Meet the following dimensional (D) The site or lot is not known to be requirements. subject to conditions that may be haz- (1) A single-wide unit must be a min- ardous to the health or safety of the imum of ten (10) feet wide and have a manufactured home occupants or that minimum floor area of four hundred may endanger the manufactured home; (400) square feet. and (2) A double-wide unit, when assem- (E) The site is free from, and the lo- bled, must be a minimum of twenty (20) cation of the manufactured home

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thereon will not substantially con- (3) That all property purchased with tribute to, adverse scenic or environ- the proceeds of the loan has been en- mental conditions. cumbered as required by the § 36.4200 (b) No manufactured home purchased series; with a guaranteed loan may be placed (4) In respect to any property pur- on a lot owned by an eligible veteran or chased with the loan proceeds as to on a lot to be purchased or improved which the Secretary issued a certifi- with the proceeds of a guaranteed man- cate of reasonable value which was ufactured home loan unless the lot conditioned upon completion of any owned or to be so purchased or im- construction, repairs, alterations or proved is determined by the Depart- improvements not inspected and ap- ment of Veterans Affairs to be an ac- proved subsequent to completion by a ceptable manufactured home site. compliance inspector designated by the (c) A manufactured home park or Secretary that such construction, re- subdivision which is not approved by pairs, alterations or improvements the Federal Housing Administration have been completed according to the will be acceptable to the Department plans and specifications upon which of Veterans Affairs for the purpose of such reasonable value was based; and 38 U.S.C. 3712 if the Secretary determines that the park or subdivision, (5) That the loan conforms otherwise whether existing or proposed, (1) is de- to the applicable provisions of 38 U.S.C. signed to encourage the maintenance chapter 37 and § 36.4200 series. and development of manufactured (c) A deviation of more than five (5) home sites which will be free from, and percent between the estimates upon not substantially contribute to, ad- which the certificate of commitment verse scenic and environmental condi- was issued and the report of final pay- tions, and (2) complies otherwise with ment of the proceeds of the loan, or a the applicable standards for planning, change in the identity of the property construction, and general acceptability acquired by the veteran with the loan prescribed by the Secretary. proceeds will invalidate the certificate of commitment, unless such deviation [36 FR 1253, Jan. 27, 1971, as amended at 55 or change is approved by the Secretary. FR 37472, Sept. 12, 1990; 56 FR 9855, Mar. 8, 1991] (d) Upon the failure of the lender to report in accordance with paragraph § 36.4209 Reporting requirements. (b) of this section, the certificate of (a) Each loan proposed for guaranty commitment shall have no further ef- under 38 U.S.C. 3712 shall, unless other- fect; Provided, nevertheless, That if the wise provided in the § 36.4200 series, be loan otherwise meets the requirements submitted to the Secretary for ap- of this section, said certificate of com- proval prior to closing. The Secretary mitment may be given effect by the upon determining any such proposed Secretary, notwithstanding the report loan to be eligible for guaranty will is received after the date otherwise re- issue a certificate of commitment. quired. (b) Except as provided in paragraph (e) Subject to compliance with the (c) of this section, a certificate of com- regulations concerning guaranty of mitment shall entitle the holder to the manufactured home loans to veterans, issuance of the evidence of guaranty the Certificate of Guaranty will be upon the ultimate actual payment of issuable within the available entitle- the full proceeds of the loan for the ment of the veteran on the basis of the purposes described in the original re- loan reported, except for refinancing port and upon the submission within 60 loans for interest rate reductions. No days thereafter of a supplemental re- certificate of commitment shall be port showing such fact and: issued, and no loan shall be guaran- (1) That the loan conforms to the teed, unless the lender, the veteran, terms of the certificate of commit- and the loan are shown to be eligible; ment; nor shall guaranty be issued on any (2) The identity of all property pur- manufactured home loan unless the chased therewith, including the Secretary determines that there has itemized list required by § 36.4204(f); been compliance by the veteran with

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the certification requirements of 38 does not have automatic authority and U.S.C. 3712(e)(5). its servicing agent is an automatic lender, then the servicing agent must (Authority: 38 U.S.C. 3712(a)(4), (c)(2), (e)(5)) make the determinations required by (f) Any amount of the loan that is 38 U.S.C. 3714 on behalf of the holder. disbursed for an ineligible purpose The actual holder will remain ulti- shall be excluded in computing the mately responsible for any failure of amount of guaranty. its servicing agent to comply with the (g) Approval by the Secretary pursu- applicable law and Department of Vet- ant to 38 U.S.C. 3712(c)(1) is required erans Affairs regulations. before a lender may close manufac- (A) If the assumption is approved and tured home loans or manufactured the transfer of the security is com- home lot loans on the automatic basis. pleted, then the notice required by this Evidence of guaranty will be issuable if paragraph shall consist of the credit the loan closed on the automatic basis package (unless previously provided in is reported to the Secretary within 60 accordance with paragraph (h)(1)(i)(B) days of full disbursement, and upon of this section) and a copy of the exe- certification of the lender that no de- cuted deed, bill of sale, transfer of eq- fault exists thereunder which has con- uity agreement, and/or assumption tinued for more than 30 days and that agreement as required by the VA office the loan complies with paragraphs of jurisdiction. The notice shall be sub- (b)(2), (3), (4), and (5), (e), and (f) of this mitted to the Department of Veterans section. Upon the failure of the lender Affairs with the Department of Vet- to report in accordance with this para- erans Affairs receipt for the funding fee graph the loan will not be eligible for provided for in §§ 36.4232(e)(3) or guaranty unless the lender submits 36.4254(d)(3) of this part. with the report a certification that the (B) If the application for assumption loan is not in default and an expla- is disapproved, the holder shall notify nation as to why the loan was not the seller and the purchaser that the timely reported. decision may be appealed to the De- partment of Veterans Affairs office of (Authority: 38 U.S.C. 3712 (c)(1) and (g)) jurisdiction within 30 days. The holder (h) With respect to any loan for shall make available to that Depart- which a commitment was made on or ment of Veterans Affairs office all after March 1, 1988, the Secretary must items used by the holder in making the be notified whenever the holder re- holder’s decision in case the decision is ceives knowledge of disposition of a appealed to the Department of Vet- manufactured home and/or lot securing erans Affairs. If the application re- a Department of Veterans Affairs guar- mains disapproved after 60 days (to anteed loan. allow time for appeal to and review by (1) If the seller applies for prior ap- the Department of Veterans Affairs) proval of the assumption of the loan, then the holder must refund $50 of any then: fee previously collected under the pro- (i) A holder (or its authorized serv- visions of § 36.4275(a)(3)(iii) of this part. icing agent) who is an automatic lend- If the application is subsequently ap- er must examine the creditworthiness proved and the sale is completed, then of the purchaser and determine compli- the holder (or its authorized servicing ance with the provisions of 38 U.S.C. agent) shall provide the notice de- 3714. The creditworthiness review must scribed in paragraph (h)(1)(i)(A) of this be performed by the party that has section. automatic authority. If both the holder (C) In performing the requirements of and its servicing agent are automatic paragraphs (h)(1)(i)(A) or (h)(1)(i)(B) of lenders, then they must decide between this section the holder must complete themselves which one will make the its examination of the creditworthiness determination of creditworthiness, of the prospective purchaser and advise whether the loan is current and wheth- the seller of its decision no later than er there is a contractual obligation to 45 days after the date of receipt by the assume the loan, as required by 38 holder of a complete application pack- U.S.C. 3714. If the actual loan holder age for the approval of the assumption.

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The 45-day period may be extended by the Secretary within 60 days after an interval not to exceed the time learning of the transfer. Such notice caused by delays in processing of the shall advise whether or not the holder application which are documented as intends to exercise its option to imme- beyond the control of the holder, such diately accelerate the loan or whether as employers or depositories not re- an opportunity will be extended to the sponding to requests for verifications, transferor and transferee to apply for which were timely forwarded, or retroactive approval of the assumption followups on those requests. under the terms of this paragraph (ii) If neither the holder nor its authorized servicing agent is an auto- (Authority: 38 U.S.C. 3714) matic lender, the notice to the Depart- (Approved by the Office of Management and ment of Veterans Affairs shall include: Budget under control number 2900–0516) (A) Advice regarding whether the loan is current or in default; [36 FR 1253, Jan. 27, 1971, as amended at 44 (B) A copy of the purchase contract; FR 22725, Apr. 17, 1979; 46 FR 43670, Aug. 31, and 1981; 55 FR 37472, Sept. 12, 1990; 58 FR 37859, July 14, 1993] (C) A complete credit package developed by the holder which the Secretary § 36.4210 Joint loans. may use for determining the creditworthiness of the purchaser. (a) Except as provided in paragraph (D) The notice and documents re- (b) of this section, the prior approval of quired by this section must be sub- the Secretary is required in respect to mitted to the Department of Veterans any manufactured home loan to be Affairs office of jurisdiction no later made to two or more borrowers who be- than 35 days after the date of receipt come jointly and severally liable, or by the holder of a complete application jointly liable therefor, and who will ac- package for the approval of the as- quire an undivided interest in the prop- sumption, subject to the same exten- erty to be purchased or who will other- sions as provided in paragraph (h)(1)(i) wise share in the proceeds of the loan, of this section. If the assumption is not or in respect to any loan to be made to automatically approved by the holder an eligible veteran whose interest in or its authorized agent pursuant to the the property owned, or to be acquired automatic authority provisions, $50 of with the loan proceeds, is an undivided any fee collected in accordance with interest only. The amount of the guar- § 36.4275(a)(3)(iii) of this part must be anty shall be computed in such cases refunded. If the Department of Vet- only on that portion of the loan allo- erans Affairs does not approve the as- cable to the eligible veteran which, sumption, the holder will be notified taking into consideration all relevant and an additional $50 of any fee col- factors, represents the proper contribu- lected under § 36.4275(a)(3)(iii) of this tion of the veteran to the transaction. part must be refunded following expira- Such loans shall be secured to the ex- tion of the 30-day appeal period set out tent required by 38 U.S.C. chapter 37 in paragraph (h)(1)(i)(B) of this section. and the regulations concerning guar- If such an appeal is made to the De- anty of manufactured home loans to partment of Veterans Affairs, then the veterans. review will be conducted at the Depart- (b) Notwithstanding the provisions of ment of Veterans Affairs office of juris- paragraph (a) of this section, the join- diction by an individual who was not der of the spouse of a veteran-borrower involved in the original disapproval de- in the ownership of property shall not cision. If the application for assump- require prior approval or preclude the tion is approved and the transfer of the issuance of a guaranty based upon the security is completed, then the holder entire amount of the loan. If both (or its authorized servicing agent) shall spouses be eligible veterans, either or provide the notice required in para- both, within permissible maxima, may graph (h)(1)(i)(A) of this section. utilize available guaranty entitlement. (2) If the seller fails to notify the (c) For the purpose of determining holder before disposing of property se- the rights and the liabilities of the Sec- curing the loan, the holder shall notify retary with respect to a loan subject to

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paragraph (a) of this section, credits le- for the purpose of curing or preventing gally applicable to the entire loan shall any subsequent default. Any prepay- be applied as follows: ment in full of the indebtedness (un- (1) Prepayments made expressly for paid principal balance plus earned in- credit to that portion of the indebted- terest) shall be credited on the date re- ness allocable to the veteran shall be ceived. In determining the amount reapplied to such portion of the indebted- quired to prepay the indebtedness in ness. All other payments shall be ap- full the holder of the loan shall exclude plied ratably to those portions of the all unearned interest or discount. loan allocable respectively to the vet- (d) Subject to paragraph (a) of this eran and to the other debtors. section any amounts which under the (2) Proceeds of the sale or other liq- terms of a loan do not become due and uidation of the security shall be ap- payable on or before the last maturity plied ratably to the respective portions date permissible for loans of its class of the loan, such portion of the pro- under the limitations contained in ceeds as represents the interest of the § 36.4204 shall automatically fall due on veteran being applied to that portion of such date. the loan allocable to such veteran. (Authority: 38 U.S.C. 3703(c)(1)) § 36.4212 Interest rates and late charges. [44 FR 22725, Apr. 17, 1979, as amended at 55 FR 37473, Sept. 12, 1990] (a) In guaranteeing or insuring loans under 38 U.S.C. chapter 37, the Sec- § 36.4211 Amortization—prepayment. retary may elect to require that such (a) To be eligible for guaranty under loans either bear interest at a rate that 38 U.S.C. 3712 a loan shall be amortized is agreed upon by the veteran and the fully within the term of the loan in ac- lender, or bear interest at a rate not in cordance with any generally recognized excess of a rate established by the Sec- plan of amortization requiring approxi- retary. The Secretary may, from time mately equal monthly payments. The to time, change that election by pub- loan shall not be payable on demand or lishing a notice in the FEDERAL REG- at sight or presentation, or at a time ISTER. Provided, however, that the in- not specified or computable from the terest rate of a loan for the purpose of language in the evidence of indebted- an interest rate reduction under 38 ness, or on a renewal basis at the op- U.S.C. 3712(a)(1)(F) must be less than tion of the holder. The first payment the interest rate of the VA loan being may be deferred not longer than 2 refinanced. This paragraph (a) does not months from the date the loan is apply in the case of an adjustable rate closed. mortgage being refinanced with a fixed (b) No guaranteed loan security in- rate loan. strument shall contain any provision giving the holder a right to declare the (Authority: 38 U.S.C. 3703, 3712) loan due or otherwise to declare a de- (b) For loans bearing an interest rate fault if the holder ‘‘shall feel insecure’’ agreed upon by the veteran and the or upon the occurrence of any similar lender, the veteran may pay reasonable condition at the holder’s option, with- discount points in connection with the out regard to any act or omission by loan. The discount points may not be the debtor. included in the loan amount, except for (c) The debtor shall have the right, interest rate reduction refinancing without penalty or fee, to prepay all or loans under 38 U.S.C. 3712(a)(1)(F). not less than one installment of the indebtedness at any time. Credit for any (Authority: 38 U.S.C. 3703, 3712) partial prepayment made on other than an installment due date may be post- (c) The rate of interest in instru- poned to the next installment due date. ments securing the indebtedness for all The holder and the debtor may agree at loans may be expressed in terms of add- any time that any prepayment not pre- on or discount. viously applied in satisfaction of matured installments shall be reapplied (Authority: 38 U.S.C. 3710, 3712)

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(d) Interest in excess of the rate re- index figure. The initial index figure ported by the lender when requesting shall be the most recent figure avail- evidence of guaranty or insurance shall able before the date of mortgage loan not be payable on any advance, or in origination. The current index figure the event of any delinquency or de- shall be the most recent index figure fault; Provided, that a late charge not available 30 days before the date of in excess of an amount equal to 4 per- each interest rate adjustment. cent of any installment paid more than (3) Method of rate changes. Interest 15 days after due date shall not be con- rate changes may only be implemented sidered a violation of this limitation. through adjustments to the borrower’s monthly payments. (Authority: 38 U.S.C. 3712) (4) Initial rate and magnitude of (e) Adjustable rate mortgage loans changes. The initial contract interest which comply with the requirements of rate of an adjustable rate mortgage this paragraph are eligible for guar- shall be agreed upon by the lender and anty. the veteran. The rate must be reflec- (1) Interest rate index. Changes in the tive of adjustable rate lending. Annual interest rate charged on an adjustable adjustments in the interest rate shall rate mortgage must correspond to be set at a certain spread or margin changes in the weekly average yield on over the interest rate index prescribed one year (52 week) Treasury bills ad- in paragraph (e)(1) of this section. Ex- justed to a constant maturity. Yields cept for the initial rate, this margin on one year Treasury bills at ‘‘constant shall remain constant over the life of maturity’’ are interpolated by the the loan. Annual adjustments to the United States Treasury from the daily contract interest rate shall correspond yield curve. This curve, which relates to annual changes in the interest rate the yield on the security to its time to index, subject to the following condi- maturity, is based on the closing mar- tions and limitations: ket bid yields on actively traded one (i) No single adjustment to the inter- year Treasury bills in the over-the- est rate may result in a change in ei- counter market. The weekly average ther direction of more than one per- one year constant maturity Treasury centage point from the interest rate in bill yields are published by the Federal effect for the period immediately pre- Reserve Board of the Federal Reserve ceding that adjustment. Index changes System. The Federal Reserve Statis- in excess of one percentage point may tical Release Report H.15 (519) is re- not be carried over for inclusion in an leased each Monday. These one year adjustment in a subsequent year. Ad- constant maturity Treasury bill yields justments in the effective rate of inter- are also published monthly in the Fed- est over the entire term of the mort- eral Reserve Bulletin, published by the gage may not result in a change in ei- Federal Reserve Board of the Federal ther direction of more than five per- Reserve System, as well as quarterly in centage points from the initial con- the Treasury Bulletin, published by the tract interest rate. Department of the Treasury. (ii) At each adjustment date, changes (2) Frequency of interest rate changes. in the index interest rate, whether in- Interest rate adjustments must occur creases or decreases, must be trans- on an annual basis, except that the lated into the adjusted mortgage inter- first adjustment may occur not sooner est rate, rounded to the nearest one- than 12 months nor later than 18 eighth of one percent, up or down. For months from the date of the borrower’s example, if the margin is 2 percent and first mortgage payment. The adjusted the new index figure is 6.06 percent, the rate will become effective the first day adjusted mortgage interest rate will be of the month following the adjustment 8 percent. If the margin is 2 percent date; the first monthly payment at the and the new index figure is 6.07 per- new rate will be due on the first day of cent, the adjusted mortgage interest the following month. To set the new in- rate will be 81⁄8 percent. terest rate, the lender will determine (5) Pre-loan disclosure. The lender the change between the initial (i.e., shall explain fully and in writing to the base) index figure and the current borrower, no later than on the date

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upon which the lender provides the pro- § 36.4214 Geographical limits. spective borrower with a loan applica- The site for any manufactured home tion, the nature of the obligation taken. The borrower shall certify in purchased with a guaranteed loan must writing that he or she fully under- be located within the United States of stands the obligation and a copy of the America, which for the purposes of 38 signed certification shall be placed in U.S.C. 3712 comprises the several the loan folder and included in the loan States, the Territories and possessions submission to VA. Such lender disclo- of the United States, the District of sure must include the following items: Columbia, the Commonwealth of Puer- (i) The fact that the mortgage inter- to Rico and the Commonwealth of the est rate may change, and an expla- Northern Mariana Islands. nation of how changes correspond to [46 FR 43670, Aug. 31, 1981, as amended at 48 changes in the interest rate index; FR 1717, Jan. 14, 1983] (ii) Identification of the interest rate index, its source of publication and § 36.4215 Maintenance of records. availability; (a) The holder shall maintain a (iii) The frequency (i.e., annually) record of the amounts of payments re- with which interest rate levels and ceived on the obligation and disburse- monthly payments will be adjusted, and the length of the interval that will ments chargable thereto and the dates precede the initial adjustment; and thereof. This record shall be main- (iv) A hypothetical monthly payment tained until the Secretary ceases to be schedule that displays the maximum liable as guarantor of the loan. For the potential increases in monthly pay- purpose of any accounting with the ments to the borrower over the first Secretary or computation of claim five years of the mortgage, subject to against the Secretary, any holder who the provisions of the mortgage instru- fails to maintain such record shall be ment. presumed to have received on the dates (6) Annual disclosure. At least 25 days due all sums which by the terms of the before any adjustment to a borrower’s contract are payable prior to date of monthly payment may occur, the lend- claim, and the burden of going forward er must provide a notice to the bor- with evidence and of ultimate proof of rower which sets forth the date of the the contrary shall be on such holder. notice, the effective date of the change, (b) The lender shall retain copies of the old interest rate, the new interest all loan origination records on VA rate, the new monthly payment guaranteed loan for at least one year amount, the current index and the date from the date of loan closing. Loan it was published, and a description of origination records include the loan ap- how the payment adjustment was cal- plication, including any preliminary culated. A copy of the annual disclo- application, verifications of employ- sure shall be made a part of the lend- ment and deposit, all credit reports, in- er’s permanent record on the loan. cluding preliminary credit reports, copies of each sales contract and (Authority: 38 U.S.C. 3707, 3712) addendums, letters of explanation for [60 FR 38257, July 26, 1995] adverse credit items, discrepancies and the like, direct references from credi- § 36.4213 Capacity of parties. tors, correspondence with employers, Nothing in the § 36.4200 series shall be appraisal reports, reports on other in- construed to relieve any lender of re- spections of the property, and all clos- sponsibility for any loss caused by lack ing papers and documents. of legal capacity of any person to contract, sell, convey or encumber, or by (Authority: 38 U.S.C. 501, 3703(c)(1), 3712(g)) the existence of other legal disability or defects invalidating or rendering unenforceable in whole or in part either the loan obligation or the security therefor.

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(c) The Secretary has the right to in- § 36.4220 Substantive and procedural spect, examine, or audit, at a reason- requirements; waiver. able time and place, the records or ac- (a) Notwithstanding any require- counts of a lender or holder pertaining ment, condition, or limitation stated to loans guaranteed by the Secretary. in or imposed by the regulations con- (Recordkeeping requirements contained in cerning the guaranty of manufactured § 36.4215 were approved by the Office of Man- home loans to veterans, the Under Sec- agement and Budget under OMB control retary for Benefits, or the Director, number 2900–0515) Loan Guaranty Service, within the limitations and conditions prescribed [36 FR 1253, Jan. 27, 1971, as amended at 40 FR 13214, Mar. 25, 1975; 55 FR 34913, Aug. 27, by the Secretary, is hereby authorized, 1990] if the Under Secretary for Benefits or Director, Loan Guaranty Service finds § 36.4217 Delivery of notice. the interests of the Government are not adversely affected, to relieve undue Any notice required by the § 36.4200 prejudice to a debtor, holder, or other series to be given the Secretary must person, which might otherwise result, be in writing or such other communica- provided no such action may be taken tions medium as may be approved by which would impair the vested rights an official designated in § 36.4221(b) and of any person affected thereby. If such delivered, by mail or otherwise, to the requirement, condition, or limitation VA office at which the guaranty was is of an administrative or procedural issued, or to any changed address of (not substantive) nature, any employee which the holder has been given notice. designated in § 36.4221 is hereby author- Such notice must plainly identify the ized to grant similar relief if the des- case by setting forth the name of the ignated employee finds the failure or original veteran-obligor and the file error of the lender was due to mis- number assigned to the case by the understanding or mistake and that the Secretary, if available, or otherwise interests of the Government are not the name and serial number of the vet- adversely affected. Provisions of the eran. If mailed, the notice shall be by regulations considered to be of an ad- certified mail when so provided by the ministrative or procedural (nonsub- § 36.4200 series. This section does not stantive) nature are limited to the fol- apply to legal process. (See § 36.4282.) lowing: (1) The requirement in § 36.4209(b) [58 FR 29114, May 19, 1993] that a lender originating a loan under a certificate of commitment report the § 36.4218 Payment in full; termination of guaranty. loan for issuance of guaranty evidence within 60 days following actual pay- Upon full satisfaction of a guaran- ment of the full proceeds of the loan. In teed loan by payment or otherwise the such cases it is not necessary that a instrument evidencing the guaranty finding be made that the loan is not in shall be returned to the Department of default. Veterans Affairs office issuing the (2) The requirements in § 36.4209(h) of same with the holder’s cancellation or this part concerning the giving of no- endorsement of release thereon. tice in assumption cases under 38 U.S.C. 3714. § 36.4219 Incorporation by reference. Department of Veterans Affairs regu- (Authority: 38 U.S.C. 3714) lations issued under 38 U.S.C. 3712, and (3) The requirement in § 36.4279 that a in effect on the date of any loan which holder promptly forward an advice of is submitted and accepted or approved the terms of any agreement effecting a for a guaranty thereunder, shall govern reamortization or extension of a loan. the rights, duties, and liabilities of the (4) The requirement in § 36.4280 con- parties to such loan and any provisions cerning the giving of notice of default. of the loan instruments inconsistent (5) The requirement in § 36.4280 that a with such regulations are hereby holder give 30 days advance notice of amended and supplemented to conform its intention to foreclose or repossess thereto. the security.

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(6) The requirement in § 36.4282 that a transfer, assignment, encumbrance, holder give notice of repossession of rental, or other disposition of real or personal property within 10 days after personal property, or of any right, such repossession has occurred. title, or interest therein, including, but (7) The requirement in § 36.4210(a) not limited to, contracts of sale, in- that a lender obtain the prior approval stallment contracts, deeds, leases, bills of the Secretary before closing a joint of sale, assignments, and releases; and loan if the lender or class of lenders is to approve disbursements to be made approved by the Secretary to close for any purpose authorized by 38 U.S.C. loans on the automatic basis pursuant chapter 37. to 38 U.S.C. 3712(c)(1). (b) Designated positions:

(Authority: 38 U.S.C. 3712(c)(1)) Under Secretary for Benefits. Director, Loan Guaranty Service. (b) No waiver, consent, or approval Director, Regional Office. required or authorized by the regula- Director, Medical and Regional Office Cen- tions concerning guaranty of loans to ter. veterans shall be valid unless in writ- Director, VA Regional Office and Insurance Center. ing signed by the Secretary or the em- Loan Guaranty Officer. ployee designated in § 36.4221. Assistant Loan Guaranty Officer. [36 FR 1253, Jan. 27, 1971, as amended at 46 FR 43670, Aug. 31, 1981; 49 FR 13352, Apr. 4, The authority hereby delegated to em- 1984; 55 FR 37473, Sept. 12, 1990; 61 FR 28058, ployees of the positions designated in June 4, 1996] this paragraph may, with the approval of the Under Secretary for Benefits, be § 36.4221 Delegation of authority. redelegated. (a) Except as hereinafter provided, (c) Nothing in this section shall be each employee of the Department of construed (1) to authorize any such em- Veterans Affairs heretofore or here- ployee to exercise the authority vested after appointed to, or lawfully filling, in the Secretary under 38 U.S.C. 501 or any position designated in paragraph 3715(b) or to sue, or enter appearance (b) of this section is hereby delegated for and on behalf of the Secretary, or authority, within the limitations and confess judgment against the Secretary conditions prescribed by law, to exer- in any court without prior authoriza- cise the powers and functions of the tion; or (2) to include the authority to Secretary with respect to the guaranty exercise those powers delegated to the of manufactured home loans and the Under Secretary for Benefits, or the rights and liabilities arising therefrom, Director, Loan Guaranty Service, including but not limited to the adju- under § 36.4220: Provided, That anything dication and allowance, disallowance, in the regulations concerning guaranty and compromise of claims; the collec- of loans to veterans to the contrary tion or compromise of amounts due, in notwithstanding, any evidence of guar- money or other property; the exten- anty issued on or after January 27, 1971 sion, rearrangement, or acquisition of by any of the employees designated in loans; the management and disposition paragraph (b) of this section or by any of secured and unsecured notes and employee designated an authorized other property; and those functions ex- agent or a loan guaranty agent shall be pressly or impliedly embraced within deemed to have been issued by the Sec- paragraphs (2) to (6), inclusive, of 38 retary, subject to the defenses reserved U.S.C. 3720(a). Incidental to the exer- in 38 U.S.C. 3721. cise and performance of the powers and (d) Each Regional Office, regional of- functions hereby delegated, each such fice and insurance center, and Medical employee is authorized to execute and and Regional Office Center shall main- deliver (with or without acknowledg- tain and keep current a cumulative list ment) for, and on behalf of, the Sec- of all employees of that Office or Cen- retary, evidence of guaranty and such ter who, since May 1, 1980, have occu- certificates, forms, conveyances, and pied the positions of Director, Loan other instruments as may be appro- Guaranty Officer and Assistant Loan priate in connection with the acquisi- Guaranty Officer. This list will include tion, ownership, management, sale, each employee’s name, title, date the

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employee assumed the position, and limited to, breakdown and transport the termination date, if applicable, of charges, permit and export fees, and an the employee’s tenure in such position. amount, limited by the Secretary, of The list shall be available for public in- unpaid park rent. spection and copying at the Regional (b) All monies under such policies Office, or Center, during normal busi- covering payment of insured losses ness hours. shall be applied to restoration of the security or to the loan balance. (Authority: 38 U.S.C. 501, 3720(a)(5)) [58 FR 37859, July 14, 1993, as amended at 62 [36 FR 1253, Jan. 27, 1971, as amended at 40 FR 5531, Feb. 6, 1997] FR 13214, Mar. 25, 1975; 44 FR 16014, Mar. 16, 1979; 45 FR 21243, Apr. 1, 1980; 46 FR 43671, § 36.4223 Interest rate reduction refi- Aug. 31, 1981; 49 FR 13352, Apr. 4, 1984; 61 FR nancing loan. 28058, June 4, 1996] (a) A veteran may refinance [38 § 36.4222 Hazard insurance. U.S.C. 3712(a)(1)(F)] an existing Depart- ment of Veterans Affairs guaranteed (a) The holder shall require insurance loan to reduce the interest rate pay- policies to be procured and maintained able on the Department of Veterans Af- in an amount sufficient to protect the fairs loan provided the following re- security against risks or hazards to quirements are met: which it may be subjected to the ex- (1) The loan application must be sub- tent customary in the locality. The mitted to the Secretary for prior ap- costs of such required insurance cov- proval unless the veteran is not erage may be paid for by the veteran. charged a discount, in which case the Only the costs for one year may be in- loan application may be processed on cluded in the loan amount. the automatic basis; (1) Flood insurance will be required (2) The loan must be secured by the on any manufactured home, building or same real property and/or personal personal property securing a loan at property as the loan being refinanced any time during the term of the loan and the veteran must own the manu- that such security is located in an area factured home and/or manufactured identified by the Federal Emergency home lot securing the loan; and Management Agency as having special (i) Presently occupy or have pre- flood hazards and in which flood insur- viously occupied the manufactured ance has been made available under the home, a manufactured home on the lot National Flood Insurance Act, as securing the loan, or the manufactured amended. The amount of flood insur- home and the lot securing the loan as ance must be at least equal to the less- his or her home and must certify in er of the outstanding principal balance such form as the Secretary shall pre- of the loan or the maximum limit of scribe that the veteran presently or coverage available for the particular has previously so occupied the manu- type of property under the National factured home or a manufactured home Flood Insurance Act, as amended. The on the lot; or Secretary cannot guarantee a loan for (ii) When a veteran is on Active Duty the acquisition or construction of prop- status as a member of the Armed erty located in an area identified by Forces and is unable to occupy the the Federal Emergency Management manufactured home or a manufactured Agency as having special flood hazards home on the lot securing the loan as a unless the community in which such home because of such status, the vet- area is situated is then participating in eran’s spouse must occupy or must the National Flood Insurance Program. have previously occupied the manufactured home or a manufactured home on (Authority: 42 U.S.C. 4012a, 4106(a)) the lot as the spouse’s home and must (2) Broad Lender’s Protection Insur- certify such occupancy in such form as ance or its equivalent is required to the Secretary shall prescribe. protect against loss for any items miss- (3) The amount of the refinancing ing from the manufactured home at loan may not exceed an amount equal time of repossession and to cover re- to the sum of the balance of the loan possession expenses including, but not being refinanced and such closing costs

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as authorized in § 36.4232 or § 36.4254, as § 36.4224 Refinancing existing manu- appropriate, and a discount not to ex- factured home loan including pur- ceed 2 percent of the loan amount; chase of lot. (a) A veteran may refinance (38 (Authority: 38 U.S.C. 3703, 3712) U.S.C. 3712(a)(1)(G)) an existing purchase money lien on a manufactured (4) The dollar amount of the guar- home owned and occupied by the vet- anty of the 38 U.S.C. 3712(a)(1)(F) loan eran as his or her home in conjunction may not exceed the greater of the with a loan to acquire a suitable lot on original guaranty amount of the loan which that manufactured home is or being refinanced, or 25 percent of the will be located provided the following loan; and requirements are met. (1) The loan application must be sub- (Authority: 38 U.S.C. 3703, 3712) mitted to the Secretary for prior ap- (5) The term of the refinancing loan proval; 38 U.S.C. 3712(a)(1)(F) may not exceed (2) The loan must be secured by the the original term of the loan being refi- same manufactured home which is nanced. being refinanced and the real property on which the manufactured home is or (b) Notwithstanding any other regu- will be located. latory provision, the interest rate re- (3) The amount of the loan may not duction refinancing loan may be guar- exceed an amount equal to the sum of anteed without regard to the amount the balance of the loan being refi- of guaranty entitlement for manufac- nanced; the purchase price, not to ex- tured home purposes available for use ceed the reasonable value of the lot, as by the veteran, and the amount of the authorized in § 36.4252; the costs of nec- veteran’s remaining guaranty entitle- essary site preparation of the lot as de- ment for manufactured home purposes termined by the Secretary; a reason- shall not be charged for an interest able discount as authorized in rate reduction refinancing loan. The § 36.4204(d)(8) with respect to that por- interest rate reduction refinancing tion of the loan used to refinance the loan will be guaranteed with the enti- existing purchase money lien on the tlement used by the veteran to obtain manufactured home, and closing costs the loan being refinanced. The vet- as authorized in § 36.4232 or § 36.4254, as eran’s loan guaranty entitlement used appropriate. originally for a purpose as enumerated (b) If the loan being refinanced was in 38 U.S.C. 3712(a)(1)(A) through (E) or guaranteed by the Department of Vet- (G) and subsequently transferred for erans Affairs, the portion of the loan use on an interest rate reduction refi- made for the purpose of refinancing an nancing loan (38 U.S.C. 3712(a)(1)(F)) existing purchase money manufactured home loan may be guaranteed without shall be eligible for restoration when regard to the outstanding guaranty en- the interest rate reduction refinancing titlement available for use by the vet- loan or subsequent interest rate reduc- eran, and the veteran’s guaranty enti- tion refinancing loan on the same prop- tlement shall not be charged as a re- erty meets the requirements of sult of any guaranty provided for the § 36.4203(a). refinancing portion of the loan. For the (c) Title to the security which is refi- purposes enumerated in 38 U.S.C. nanced for the purpose of an interest 3702(b) the refinancing portion of the rate reduction must be in conformity loan shall be considered to have been with § 36.4234, and/or § 36.4253, as appro- obtained with the guaranty entitle- priate. ment used to obtain the VA-guaranteed loan being refinanced. Guaranty for the (Authority: 38 U.S.C. 3712(a)(1)(F) and (4)) refinancing loan shall be computed by [46 FR 43671, Aug. 31, 1981, as amended at 48 first applying to the loan a combined FR 40229, Sept. 6, 1983; 58 FR 37860, July 14, total of the guaranty entitlement used 1993; 60 FR 38258, July 26, 1995; 61 FR 7415, to obtain the VA-guaranteed loan Feb. 28, 1996] being refinanced and second any additional guaranty entitlement available

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to the veteran for manufactured home rector, Loan Guaranty Service for re- purposes, up to a maximum of $20,000 view. or forty (40) percent of the original (2) Experience. The firm must have principal amount of the loan, which- been actively engaged in originating ever is less. manufactured home loans for at least (Authority: 38 U.S.C. 3712(a)(1)(G) and (5)) the last 2 years. Alternately, each principal officer of the firm who is actively [48 FR 40229, Sept. 6, 1983, as amended at 58 involved in managing origination func- FR 37860, July 14, 1993] tions must have a minimum of 2 recent years’ total experience in the field of § 36.4225 Authority to close manufactured home loans on the automatic VA manufactured home mortgages in basis. managerial functions in either the present company of employment or in (a) Supervised lenders of the classes companies other than that of his or her described in 38 U.S.C. 3702(d) (1) and (2) present employment. In either case, are authorized by statute to process every principal officer (president and VA guaranteed manufactured home vice presidents) must submit a resume loans on the automatic basis. This category of lenders includes any Federal of his or her experience in the mort- land bank, national bank, State bank, gage lending field. Should the sec- private bank, building and loan asso- retary and/or treasurer participate in ciation, insurance company, credit the management of origination func- union or mortgage and loan company tions, they too must submit a resume that is subject to examination and su- and meet the minimum experience re- pervision by an agency of the United quirement if the company does not States or of any State or by any State. meet the experience requirement. (b) Nonsupervised lenders of the class Should the lender or any of its direc- described in 38 U.S.C. 3702(d)(3) must tors or officers ever have been debarred apply to the Secretary for authority to or suspended by any Federal agency or process manufactured home loans on department or any of its directors or the automatic basis. The following officers have been a director or officer minimum requirements must be met: of any other lender or corporation that (1) Minimum assets. A minimum of was so suspended, or if the lender-ap- $50,000 of working capital must be plicant ever had a servicing contract maintained. Working capital is defined with an investor terminated for cause, as the excess of current assets over a statement of the facts must also be current liabilities. Current assets are submitted. Lender-applicants will sub- defined as cash or other assets that mit individual requests for each branch could readily be converted into cash office they wish to have approved. The within 1 year on the normal accounting parent organization must agree to ac- or business cycle. Current liabilities cept full responsibility for the actions are defined as obligations that would of branch offices. be paid within a year on a normal ac- (3) Underwriter. If it is proposed that counting or business cycle. The lend- all loans to be made by the lender will er’s latest financial statements (profit be submitted to its home office for ap- and loss statements and balance proval or rejection, the lender must sheets), audited and certified by a CPA have at least one full-time designated (certified public accountant), must ac- underwriter in its home office. If the company the application. If the date of loans will be approved or rejected by the financial statement precedes that branch managers, the lender must have of the application by more than 6 at least one full-time designated under- months, the lender-applicant must also writer in each branch. In either event, attach a copy of its latest internal the designated underwriters must be quarterly report. In addition, the lend- identified and a resume on each sub- er-applicant must agree that if the ap- mitted to VA. The underwriters should plication is approved, the applicant have at least three years of experience will provide within 120 days following in consumer installment finance. If the end of each of its fiscal years an changes in underwriting personnel audited financial statement to the Di- occur, the lender must notify VA.

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(4) Lines of credit. The identity of the VA guaranteed loan on an automatic source(s) of warehouse lines of credit basis must take full responsibility by must be revealed to VA and the appli- certification or corporate resolution cant must agree that VA may contact for all acts, errors and omissions of the the named source(s) for the purpose of agent and its employees. Any such verifying the information. acts, errors or omissions will be treat- (5) Secondary market. If the lender-ap- ed as those of the lender and appro- plicant customarily sells the manufac- priate sanctions may be imposed tured home loans it originates, it must against the lender and its agent. provide a listing of all permanent in- (10) Minimum use of automatic author- vestors to whom the loans are sold, in- ity. If approved, lenders must use their cluding the investor’s address, tele- automatic authority to the maximum phone number and names of persons to extent possible. Any lender with auto- contact. matic authority who submits a loan on (6) Liaison. The lender-applicant must the prior approval basis will be re- designate one employee to act as liai- quired to submit an explanation from son on its behalf with the VA. If pos- the designated underwriter as to why sible, the lender-applicant should se- the loan was not closed automatically. lect employees other than VA approved Such a statement will not be needed underwriters to act as liaison. Officers for loans that must be processed on the from branch or regional offices should prior approval basis, e.g., joint loans. also be appointed to act as liaison with (11) Probation. Lender-applicants local VA offices. The lender must no- meeting the requirements of this sec- tify VA of any changes in liaison per- tion will be approved to close loans on sonnel. an automatic basis for a 1-year proba- (7) Courtesy closing. The lender-appli- tionary period. Poor underwriting and/ cant must certify to VA that it will not or consistently careless processing by close loans on an automatic basis as a the lender during the probationary pe- courtesy or accommodation for other riod will be a basis for withdrawal of mortgage lenders whether or not such automatic authority. lenders are themselves approved to (12) Quality control system. In order to close on an automatic basis. The lender be approved as a nonsupervised lender must agree that the processing of for automatic processing authority, forms other than the initial credit ap- the lender must implement a written plication will not be delegated to the quality control system which ensures dealer or developer. compliance with VA requirements. The (8) Subsidiaries/affiliates. A lender ap- lender must agree to furnish findings proved for automatic processing may under its system to VA on demand. The not close manufactured home loans on elements of the quality control system the automatic basis involving any deal- must include the following: ership or manufacturer in which it has (i) Underwriting policies. Each office of a financial interest or which it owns, is the lender shall maintain copies of VA owned by, or with which it is affiliated. credit standards and all available VA This restriction may be eliminated for underwriting guidelines. lenders that can provide documenta- (ii) Corrective measures. The system tion which demonstrates to VA’s satis- should ensure the effective corrective faction that (i) the lender and the man- measures are taken promptly when de- ufacturer and/or dealer are separate en- ficiencies in loan originations are iden- tities that operate independently for tified by either the lender or VA. Any each other, and (ii) the percentage of cases involving major discrepancies all VA manufactured home loans origi- which are discovered under the system nated by the lender during at least a must be reported to VA. one-year period on which payments are (iii) System integrity. The quality con- past due 90 days or more is no higher trol system should be independent of than the national average for the same the loan production function. period for all mortgage loans. (iv) Scope. The review of under- (9) Lender agents. A lender using an standing decisions and certifications agent to perform a portion of the work must include compliance with VA un- involved in originating and closing a derwriting requirements, sufficiency of

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documentation and soundness of under- matic basis may be withdrawn by the writing judgments. Secretary at any time upon 30 days no- (c) A lender approved to close loans tice. The automatic processing author- on the automatic basis who subse- ity of both supervised and nonsuper- quently fails to meet the requirements vised lenders may be withdrawn for en- of this section must report the cir- gaging in practices which are impru- cumstances surrounding the deficiency dent from a lending standpoint or and the remedial action to be taken to which are prejudicial to the interests cure it to VA. of veterans or the Government but are of a lesser degree than would warrant (Authority: 38 U.S.C. 501, 1803(c)(1), and complete debarment or suspension of 1812(g)) the lender from participation in the (d) To participate in VA’s automatic program. program nonsupervised lenders of the (2) Automatic processing authority class described in paragraph 3702(d)(3) may be withdrawn for failure to meet of title 38 U.S. Code shall pay fees as basic qualifying criteria. For non-su- follows: pervised lenders, this includes lack of a (1) $500 for new applications; designated underwriter, failure to (2) $200 for reinstatement of lapsed or maintain $50,000 working capital and/or terminated automatic authority; failure to file required financial state- (3) $100 for each underwriter ap- ments. For supervised lenders this in- proval; cludes loss of status as an entity sub- (4) $100 for each agent approval; ject to examination and supervision by (5) $100 for each regional under- a Federal or State supervisory agency writing office approval; as required by 38 U.S.C. 3702(d). During (6) A minimum fee of $100 for any the 1 year probationary period for other VA administrative action per- newly approved automatic lenders, taining to a lender’s participation in automatic authority may be with- ALP; drawn based upon poor underwriting or (7) $200 annually for certification of consistently careless processing by the home offices; lender, as determined by VA. (8) $100 annually for certification of (3) Automatic processing authority regional offices; and may also be withdrawn based on any of (9) $100 annually for each agent re- the causes for debarment set forth in 2 newal. CFR parts 180 and 801. (e) Supervised lenders of the classes (b) Authority to close manufactured described in paragraphs (d)(1) and (d)(2) home loans on the automatic basis of 38 U.S. Code 3702 participating in may also be temporarily withdrawn for VA’s Loan Guaranty Program shall pay a period of time under the following fees as follows: schedule. (1) $100 fee for each agent approval; (1) Withdrawal for 60 days: and (i) Automatic loan submissions show (2) $100 annually for each agent re- deficiencies in credit underwriting, newal. such as use of unstable sources of income to qualify the borrower, ignoring (Authority: 38 U.S.C. 3712(g)) significant adverse credit items affect- (f) Lenders participating in VA’s ing the applicant’s creditworthiness, Lender Appraisal Processing Program etc., after such deficiencies have been shall pay a fee of $100 for approval of repeatedly called to the lender’s atten- each staff appraisal reviewer. tion; [56 FR 40559, Aug. 15, 1991, as amended at 57 (ii) Employment or deposit FR 828, Jan. 9, 1992; 57 FR 40616, Sept. 4, 1992] verifications are handcarried by applicants or otherwise improperly per- § 36.4226 Withdrawal of authority to mitted to pass through the hands of a close manufactured home loans on third party; the automatic basis. (iii) Automatic loan submissions are (a)(1) As provided in 38 U.S.C. 3702(e), consistently incomplete after such de- the authority of any lender to close ficiencies have been repeatedly called manufactured home loans on the auto- to the lender’s attention by VA; or

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(iv) There are continued instances of lender from processing VA guaranteed disregard of VA requirements after manufactured home loans on the prior they have been called to the lender’s approval basis. attention. (6) Action by VA to remove a lender’s (2) Withdrawal for 180 days: automatic authority does not prevent (i) Loans are closed automatically VA from also taking debarment or sus- which conflict with VA credit stand- pension action based on the same con- ards and which would not have been duct by the lender. made by a lender acting prudently; (7) VA field facilities are authorized (ii) The lender fails to disclose to VA to withdraw automatic privileges for 60 significant obligations or other infor- days, based on any of the violations set mation so material to the veteran’s forth in paragraphs (b)(1) through (b)(3) ability to repay the loan that undue of this section, for nonsupervised lend- risk to the Government results; ers without operations in other sta- (iii) Employment or deposit tions’ jurisdictions. All determinations verifications are allowed to be regarding withdrawal of automatic au- handcarried by applicant or otherwise thority for longer periods of time or mishandled, resulting in the submis- multi-jurisdictional lenders must be sion of significant misinformation to made in Central Office. VA; (c) VA will provide 30 days notice of (iv) Substantiated complaints are re- withdrawal of automatic authority in ceived that the lender misrepresented order to enable the lender to either VA requirements to veterans to the close or obtain prior approval for a detriment of their interests (e.g., vet- loan on which processing has begun. eran was dissuaded from seeking a There is no right to a formal hearing to lower interest rate based on lender’s contest the withdrawal of automatic incorrect advice that such options were processing privileges. However, if with- precluded by VA requirements); in 15 days after receiving notice the (v) Closing documentation shows in- lender requests an opportunity to con- stances of improper charges to the veteran after the impropriety of such test the withdrawal, the lender may charges has been called to the lender’s submit in person, in writing, or attention by Va, or refusal to refund through a representative, information such charges after notification by VA; and argument in opposition to the or withdrawal. (vi) There are other instances of lend- (d) If the lender’s submission in oppo- er actions which are prejudicial to the sition raises a dispute over facts mate- interests of veterans, such as delib- rial to the withdrawal of automatic au- erate delays in scheduling loan clos- thority, the lender will be afforded an ings. opportunity to appear with a rep- (3) Withdrawal for a period from one resentative, submit documentary evi- year to three years: dence, present witnesses, and confront (i) The lender fails to properly dis- any witnesses VA presents. The Under burse loans (e.g., loan disbursement Secretary for Benefits will appoint a checks returned due to insufficient hearing officer or panel to conduct the funds); or hearing. (ii) There is involvement by the lend- (e) A transcribed record of the pro- er in the improper use of a veteran’s ceedings shall be made available at entitlement (e.g., knowingly permit- cost to the lender, upon request, unless ting the veteran to violate occupancy the requirement for a transcript is requirements, lender involvement in waived by mutual agreement. sale of veteran’s entitlement). (f) In actions based upon a conviction (4) A continuation of actions that or civil judgment, or in which there is have led to previous withdrawal of no genuine dispute over material facts, automatic authority justifies with- the Under Secretary for Benefits shall drawal of automatic authority for the make a decision on the basis of all the next longer period of time. information in the administrative (5) Withdrawal of automatic proc- record, including any submissions essing authority does not prevent a made by the lender.

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(g) In actions in which additional (b) Any manufactured housing unit proceedings are necessary to determine properly displaying a certification of disputed material facts, written find- conformity to all applicable Federal ings of fact will be prepared by the manufactured home construction and hearing officer or panel. The Under safety standards pursuant to 42 U.S.C. Secretary for Benefits shall base the 5415 shall be acceptable as security for decision on the facts as found, together a VA guaranteed loan. with any information and argument submitted by the lender and any other (Authority: 38 U.S.C. 3712) information in the administrative (c) When a used manufactured home record. is purchased from a manufactured home dealer with financing guaranteed (Authority: 38 U.S.C. 501, 1803(c)(1), and under 38 U.S.C. 3712 the veteran-bor- 1812(g)). rower must be supplied with a written [56 FR 40560, Aug. 15, 1991, as amended at 61 warranty by the manufactured home FR 28058, June 4, 1996; 72 FR 30242, May 31, dealer in the form and content pre- 2007] scribed by the Secretary. Such warranty shall be in addition to, and not § 36.4227 Advertising and Solicitation in derogation of, all other rights and Requirements. privileges which such purchaser or Any advertisement or solicitation in owner may have under any other law or any form (e.g., written, electronic, instrument, and the warranty instru- oral) from a private lender concerning ment will so provide. No evidence of manufactured housing loans to be guaranty shall be issued by the Sec- guaranteed or insured by the Sec- retary unless a copy of such warranty retary: duly receipted by the purchaser is sub- (a) Must not include information mitted with the loan papers. falsely stating or implying that it was issued by or at the direction of VA or [48 FR 40229, Sept. 6, 1983, as amended at 60 FR 38259, July 26, 1995] any other department or agency of the United States, and § 36.4232 Allowable fees and charges; (b) Must not include information manufactured home unit. falsely stating or implying that the (a) Incident to the origination of a lender has an exclusive right to make guaranteed loan for the purchase or re- loans guaranteed or insured by VA. financing of a manufactured home unit only, no charge shall be made against, (Authority: 38 U.S.C. 3703, 3704) or paid by, the veteran-borrower with- [67 FR 9402, Mar. 1, 2002] out the express prior approval of the Secretary except as provided in para- FINANCING MANUFACTURED HOME UNITS graph (e) of this section and as follows: (1) Actual fees or charges for required § 36.4231 Warranty requirements. recordation of documents; (a) When a new manufactured home (2) The costs of independent fee in- purchased with financing guaranteed spections for itemized items included under 38 U.S.C. 3712 is delivered to the in the manufactured home loan, as re- veteran-borrower he or she will be sup- quired by § 36.4204(f); plied a written warranty by the manu- (3) The amount of any documentary facturer in the form and content pre- stamp taxes levied on the transaction; scribed by the Secretary. Such war- (4) The amount of State and local ranty shall be in addition to, and not taxes levied on the transaction; in derogation of, all other rights and (5) The premium for customary phys- privileges which such purchaser or ical damage insurance and vendor’s owner may have under any other law or single interest coverage on the manu- instrument, and the warranty instru- factured home for an initial policy ment will so provide. No evidence of term of not to exceed one (1) year; guaranty shall be issued by the Sec- (6) The premium for insurance retary unless a copy of such warranty against loss for items missing at time duly receipted by the purchaser is sub- of repossession and for repossession ex- mitted with the loan papers. penses, unless State law prohibits

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charging borrowers for this coverage, (d) Subject to the limitations set in which case the lender is required to forth in this section, the following may pay for the coverage without reim- be included in the loan made for the bursement from the veteran; purchase of a new (not used) manufac- (7) For the purposes of obtaining a re- tured home unit and paid out of the financing loan for interest rate reduc- proceeds of the loan: tion or a refinancing loan to simulta- (1) The actual cost of transportation neously refinance a unit and acquire a or freight; lot, the cost of a credit report and an (2) Setup charges for installing the appraisal; and manufactured home on site not to exceed $400 for a single-wide manufac- (Authority: 38 U.S.C. 3712 (a)(1)(b), (a)(4)(A) tured home or $800 for a double-wide and (g)). manufactured home.

(8) The actual amount charged for (Authority: 38 U.S.C. 3712(g)) flood zone determinations, including a charge for a life-of-the-loan flood zone If the actual costs exceed the limita- determination service purchased at the tions in this section, the veteran must time of loan origination, if made by a certify that any excess cost has been third party who guarantees the accu- paid in cash from the veteran’s own re- racy of the determination. A fee may sources without borrowing. not be charged for a flood zone deter- (e)(1) Subject to the limitations set mination made by a Department of out in paragraph (e)(5) of this section, Veterans Affairs appraiser or for the a fee must be paid to the Secretary. A lender’s own determination. fee of 1 percent of the total amount must be paid in a manner prescribed by (Authority: 38 U.S.C. 3712; 42 U.S.C. 4001 note, the Secretary before a manufactured 4012a) home unit loan will be eligible for guaranty. Provided, however, that the (b) Any charge against the borrower fee shall be 0.50 percent of the total properly made under paragraph (a) of loan amount for interest rate reduction this section may be included in the refinancing loans guaranteed under 38 loan and paid out of the proceeds of the U.S.C. 3712(a)(1)(F). All or part of the loan provided the total loan amount fee may be paid in cash at loan closing does not exceed 145 percent of the man- or all or part of the fee may be in- ufacturer’s invoice. cluded in the loan without regard to the reasonable value of the property or (Authority: 38 U.S.C. 3712(g)) the computed maximum loan amount, (c)(1) Costs of a credit report (except as appropriate. In computing the fee, for 38 U.S.C. 3712(a)(1)(F) or (G) refi- the lender shall disregard any amount nancing loans) such additional insur- included in the loan to enable the bor- ance as the veteran may desire, and rower to pay such fee. any other expenses normally charged to a manufactured home purchaser (Authority: 38 U.S.C. 3729(a)) under local customs may be paid by the (2) Subject to the limitations set out borrower other than from the loan pro- in paragraph (e)(5) of this section, a fee ceeds. of one-half of one percent of the loan (2) For the purchase of a used manu- balance must be paid to the Secretary factured home unit, the fee of a De- in a manner prescribed by the Sec- partment of Veterans Affairs appraiser retary by a person assuming a loan to and of compliance inspectors des- which section 3714 of chapter 37 of 38 ignated by the Department of Veterans U.S.C. applies. The instrument secur- Affairs, except appraisal fees incurred ing such a loan shall contain a provi- for the predetermination of reasonable sions describing the right of the holder value requested by others than veteran to collect this fee as trustee for the De- or lender, may be paid by the borrower partment of Veterans Affairs. The loan from other than the loan proceeds. holder shall list the amount of this fee in every assumption statement pro- (Authority: 38 U.S.C. 3712 (e)(4) and (g)) vided and include a notice that the fee

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must be paid to the holder imme- servist; and whether this is a subse- diately following loan settlement. The quent use of entitlement. For all trans- fee must be transmitted to the Sec- actions received prior to 8:15 p.m. on a retary within 15 days of receipt by the workday, VA will be credited with the holder of notice of the transfer. amount paid to the collection agent at the opening of business the next bank- (Authority: 38 U.S.C. 3714, 3729) ing day. (3) The lender is required to pay to the Secretary the fee described in para- (Authority: 38 U.S.C. 3729(a)) graph (e)(1) of this section within 15 (5) The fee described in paragraphs days after loan closing. Any lender (e)(1) and (e)(2) of this section shall not closing a loan, subject to the limita- be collected from a veteran who is re- tions set out in paragraph (e)(5) of this ceiving compensation (or who but for section, who fails to submit timely the receipt of retirement pay would be payment of this fee will be subject to a entitled to receive compensation) or late charge equal to 4 percent of the from a surviving spouse described in total fee due. If payment of the 1 per- section 3701(b)(2) of title 38, United cent fee is more than 30 days after loan States Code. closing, interest will be assessed at a rate set in conformity with the Depart- (Authority: 38 U.S.C. 3729(b)) ment of Treasury’s Fiscal Require- (The information collection requirements in ments Manual. This interest charge is this section have been approved by the Office in addition to the 4 percent late of Management and Budget under control charge, but the late charge is not in- numbers 2900–0474 and 2900–0516) cluded in the amount on which interest is computed. This interest charge is to [36 FR 1253, Jan. 27, 1971, as amended at 40 FR 1514, Jan. 8, 1975; 44 FR 16014, Mar. 16, be calculated on a daily basis begin- 1979; 46 FR 43671, Aug. 31, 1981; 47 FR 46700, ning on the date of closing, although Oct. 20, 1982; 49 FR 40230, Sept. 6, 1983; 50 FR the interest will be assessed only on 5754, Feb. 12, 1985; 53 FR 27047, July 18, 1988; funding fee payments received more 55 FR 37473, Sept. 12, 1990; 58 FR 37860, July than 30 days after closing. 14, 1993; 60 FR 38259, July 26, 1996; 62 FR 63278, Nov. 28, 1997] (Authority: 38 U.S.C. 501) § 36.4234 Title and lien requirements. (4) The lender is required to pay to the Secretary electronically through (a) The interest in the manufactured the Automated Clearing House (ACH) home acquired by the veteran at the system the fees described in paragraphs time of purchase shall be either: (e)(1) and (e)(2) of this section and any (1) Legal title evidenced by such doc- late fees and interest due on them. ument as is customarily issued to the This shall be paid to a collection agent purchaser of a manufactured home in by operator-assisted telephone, ter- the jurisdiction in which the manufac- minal entry, or central processing tured home is initially sited, or unit-to-central processing unit (CPU- (2) A full possessory interest convert- to-CPU) transmission. The collection ible into a legal title conforming to agent will be identified by the Sec- paragraph (a)(1) of this section upon retary. The lender shall provide the payment in full of the guaranteed loan. collection agent with the following: au- (b) The loan must be secured by a thorization for payment of the funding properly recorded financing statement fee (including late fees and interest) and security agreement or other secu- along with the following information: rity instrument that creates a first VA lender ID number; four-digit per- lien on or equivalent security interest sonal identification number; dollar in the manufactured home and all of amount of debit; VA loan number; OJ the furnishings, equipment, and acces- (office of jurisdiction) code; closing sories paid for in whole or in part out date; loan amount; information about of the loan proceeds. whether the payment includes a short- (c) It is the responsibility of the lend- age, late charge, or interest; veteran er that the veteran initially obtains an name; loan type; sale amount; down- interest in the manufactured home payment; whether the veteran is a re- meeting the requirements of paragraph

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(a) of this section and to obtain and re- § 36.4252 Loans for purchase or refi- tain a security interest meeting the re- nancing of a manufactured home. quirements of paragraph (b) of this sec- (a) A loan to purchase a manufac- tion. tured home may include funds (or be [36 FR 1253, Jan. 27, 1971, as amended at 46 augmented by a separate loan) to fi- FR 43671, Aug. 31, 1981; 58 FR 37860, July 14, nance all or part of the cost of acquisi- 1993] tion by the veteran of a lot on which to place the manufactured home and the COMBINATION AND MANUFACTURED HOME loan shall be eligible for guaranty: Pro- LOT LOANS vided, That: (1) The veteran will acquire title to § 36.4251 Loans to finance the pur- such lot that conforms to the require- chase of manufactured homes and ments of § 36.4253(a), the cost of necessary site prepara- (2) The loan is secured as required by tion. § 36.4253(d), (a) A loan to finance the purchase of (3) The lot is determined by the Sec- a manufactured home may include retary to be an acceptable manufac- funds (or be augmented by a separate tured homesite pursuant to § 36.4208, loan) to pay all or a part of the cost of (4) The portion of the loan allocated the necessary site preparation of a lot to acquisition of the lot does not ex- on which to place the manufactured ceed the reasonable value of the lot as home and the loan shall be eligible for determined by the Secretary, and guaranty: Provided, that: (5) The loan conforms otherwise to (1) The veteran has, or incident to the requirements of the § 36.4200 series. the transaction will acquire, a title to (b) Notwithstanding that the vet- the lot that conforms to § 36.4253(a). eran-borrower’s obligation for acquisi- (2) The loan is secured as required by tion of the lot be evidenced and secured § 36.4253(d). separately from the obligation for pur- (3) The lot is determined by the Sec- chase of the manufactured home, the retary to be an acceptable manufac- obligations together (including, where tured homesite pursuant to § 36.4208, appropriate, that for site preparation) (4) The cost of the necessary site shall constitute one loan for the pur- preparation is determined by the Sec- poses of the § 36.4200 series, including retary to be reasonable. computation of the Secretary’s guar- (5) The amount of the loan to pay for anty liability. necessary site preparation does not ex- (c) The cost of lot acquisition which ceed the cost thereof and also does not will not be paid from the proceeds of exceed the reasonable value of the de- the loan must be paid by the veteran in veloped lot as determined by the Sec- cash from the veteran’s own resources. retary, and (d) For the purpose of this section acquisition of a manufactured home lot (6) The loan conforms otherwise to includes: the requirements of the § 36.4200 series. (1) The refinancing of the balance (b) Notwithstanding that the vet- owed by the veteran as purchaser under eran-borrower’s obligation for such site an existing real estate installment con- preparation be evidenced and secured tract, and separately from the obligation for pur- (2) The refinancing of existing mort- chase of the manufactured home, the gage loans or other liens which are se- obligations together shall constitute cured of record on a manufactured one loan for the purposes of the § 36.4200 home lot owned by the veteran. series, including computation of the (e) A loan to acquire a lot on which Secretary’s guaranty liability. to site a manufactured home may in- (c) The cost of site preparation which clude funds to refinance an existing will not be paid from the proceeds of loan made for the purchase of and se- the loan must be paid by the veteran in cured by a manufactured home on cash from the veteran’s own resources. which lot the manufactured home is lo- [36 FR 3368, Feb. 23, 1971, as amended at 40 cated or will be placed, provided that: FR 13215, Mar. 25, 1975; 48 FR 40230, Sept. 6, (1) The veteran will acquire or retain 1983] title to such manufactured home and

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lot that conforms to the requirements jected to the lien; however, a leasehold of §§ 36.4234 and 36.4253, estate which is not freely assignable (2) The loan is secured as required by and transferable will be considered an § 36.4253(g), acceptable estate if it is determined by (3) The lot is determined by the Sec- the Under Secretary for Benefits, or retary to be an acceptable manufac- the Director, Loan Guaranty Service, tured homesite pursuant to § 36.4208, (i) that such type of leasehold is cus- (4) The portion of the loan allocated tomary in the area where the property to the acquisition and preparation of is located, (ii) that a veteran or vet- the lot does not exceed the reasonable erans will be prejudiced if the require- value of the developed lot as deter- ment for free assignability is adhered mined by the Secretary, to and, (iii) that the assignability and (5) The cost of necessary site prepara- other provisions applicable to the tion is determined by the Secretary to leasehold estate are sufficient to pro- be reasonable. tect the interests of the veteran and (6) The portion of the loan allocated to the refinancing of the manufactured the Government and are otherwise ac- home does not exceed an amount equal ceptable; or to the sum of the balance of the loan (3) A life estate, provided that the re- being refinanced; a reasonable discount mainder and reversionary interests are as authorized in § 36.4204(d)(8) with re- subjected to the lien; or spect to that portion of the loan used (4) A beneficial interest in a rev- to refinance the existing purchase ocable Family Living Trust that en- money lien on the manufactured loan, sures that the veteran, or veteran and and closing costs as authorized in spouse, have an equitable life estate, § 36.4232 or § 36.4254, as appropriate, provided the lien attaches to any re- (7) The loan conforms otherwise to mainder interest and the trust arrange- the requirements of the § 36.4200 series, ment is valid under State law. (8) The veteran-borrower’s obligation The title to such estate shall be such for acquisition of the lot and for refi- as is acceptable to informed buyers, nancing the existing loan on the manu- title companies, and attorneys, gen- factured home (including site prepara- erally, in the community in which the tion, where appropriate), shall con- property is situated, except as modified stitute one loan for the purposes of the by paragraph (b) of this section. § 36.4200 series, including computation of the Secretary’s guaranty liability. (b) Any such property or estate will not fail to comply with the require- (Authority: 38 U.S.C. 3712(a)(1)(G) or (5)) ments of paragraph (a) of this section [36 FR 3368, Feb. 23, 1971, as amended at 40 by reason of the following: FR 13215, Mar. 25, 1975; 44 FR 22725, Apr. 17, (1) Encroachments; 1979; 48 FR 40230, Sept. 6, 1983] (2) Easements; § 36.4253 Title and lien requirements. (3) Servitudes; (4) Reservations for water, timber, or (a) The interest in the realty consti- subsurface rights; tuting a manufactured home lot ac- (5) Right in any grantor or cotenant quired by the veteran wholly or in part with the proceeds of a guaranteed loan, in the chain of title, or a successor of or in the realty constituting a manu- either, to purchase for cash, which factured home lot improved wholly or right by the terms thereof is exer- in part with the proceeds of a guaran- cisable only if: teed loan, shall not be less than: (i) An owner elects to sell, (1) A fee simple estate therein, legal (ii) The option price is not less than or equitable; or the price at which the then owner is (2) A leasehold estate running or re- willing to sell to another, and newable at the option of the lessee for (iii) Exercised within 30 days after a period of not less than 14 years from notice is mailed by certified mail to the maturity of the loan, or to any ear- the address of optionee last known to lier date at which the fee simple title the then owner of the then owner’s will vest in the lessee, which is assign- election to sell, stating the price and able or transferable, if the same be sub- the identity of the proposed vendee;

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(6) State and local housing agency tions. A copy of the veteran’s consent deed restrictions provided that the vet- statement must be forwarded with the eran obtained the property under a application for manufactured home State or local political subdivision pro- loan guaranty or the report of a manu- gram designed to assist low- or mod- factured home loan processed on the erate-income purchasers, and as a con- automatic basis; dition the purchaser must agree to one or more of the following restrictions: (Authority: 38 U.S.C. 3712(g)). (i) If the property is resold within a (7) A recorded restriction on title de- time period as established by local law signed to provide housing for older per- or ordinance, after the purchaser ac- sons, provided that the restriction is quires title, the purchaser must first acceptable under the provisions of the offer the property to the government Fair Housing Act, title VIII of the Civil housing agency, or a low- or moderate- Rights Act of 1968, as amended by the income purchaser designated by such Fair Housing Amendments Act of 1988, agency, provided the option to pur- 42 U.S.C. 3601 et seq. The veteran must chase is exercised within 90 days after be fully informed and consent in writ- notice by the purchaser to the agency ing to the restrictions. A copy of the of intention to sell; veteran’s consent statement must be (ii) If the property is resold within a forwarded with the application for time period as established by local law manufactured home loan guaranty or or ordinance, after the purchaser ac- the report of a manufactured home quires title, a governmental agency loan processed on the automatic basis; may specify a maximum price for the property upon resale; or (Authority: 38 U.S.C. 501, 3703(c)(1), 3712(g)) (iii) Such other restriction approved (8) Building and use restrictions by the Secretary designed to insure ei- whether or not enforceable by a re- ther that a property acquired under verter clause if there has been no such program again be made available breach of the conditions affording a to low- or moderate-income purchasers, right to an exercise of the reverter; or to prevent a private purchaser from (9) Violation of a restriction based on obtaining a windfall profit on the re- race, color, religion, sex, handicap, fa- sale of such property, while assuring milial status, or national origin, that the purchaser has a reasonable op- whether or not such restriction pro- portunity to dispose of the property vides for reversion or forfeiture of title without undue difficulty at a reason- or a lien for liquidated damages in the able price. event of a breach; The sale price of a property under any (10) Any other covenant, condition, of the restrictions of paragraph (b)(6) of restriction, or limitation approved by this section shall not be less than the the Secretary in the particular case. lowest of the following: The price des- Such approval shall be a condition ignated by the owner as the asking precedent to the guaranty of the loan; price; the appraised value of the prop- (c) The following limitations on the erty; or the original purchase price of quantum or quality of the estate or the property, increased by a factor re- property shall be deemed for the pur- flecting all or a reasonable portion of poses of paragraph (b) of this section to the increased costs of housing or the have been taken into account in the percentage increase in median income appraisal of the manufactured home lot in the area between the date of original and determined by the Secretary as not purchase and resale, plus the reason- materially affecting the reasonable able value or actual costs of any cap- value of such property: ital improvements made by the owner, (1) Building or use restrictions. Pro- plus a reasonable real estate commis- vided, (i) no violation exists, (ii) the sion less the cost of necessary repairs proposed use by a veteran does not required to place the property in sale- presage a violation of a condition af- able condition; or other reasonable for- fording a right of reverter, and (iii) any mula approved by the Secretary. The right of future modification contained veteran must be fully informed and in the building or use restrictions is consent in writing to the deed restric- not exercisable, by its own terms, until

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at least 10 years following the date of erty lines as shown on the plot plan or the loan. other exhibits submitted to the Depart- (2) Violations of equal opportunity re- ment of Veterans Affairs and as shown strictions. Violations of a restriction by the record or possession lines, pro- based on race, color, religion, sex, vided such variations do not interfere handicap, familial status, or national with the current use of any of the im- origin, whether or not such restriction provements on the subject property in- provides for reversion or forfeiture of cluding the manufactured home and do title or a lien for liquidated damages in not involve a deficiency of more than 2 the event of a breach. percent with respect to the length of (3) Violations of building or use restric- the front line or more than 5 percent tions of record. Violations of building or with respect to the length of any other use restrictions of record which have line. existed for more than 1 year, are not (d) In a combination loan (loan to fi- the subject of pending or threatened nance the purchase of a manufactured litigation, and which do not provide for a reversion or termination of title or home and to finance the purchase of a condemnation by municipal authori- lot and/or necessary site preparation) ties or a lien for liquidated damages the total indebtedness of the veteran which may be superior to the lien se- arising from such combination loan curing the guaranteed loan. transaction must be secured by a first (4) Easements. (i) Easements for pub- lien or the equivalent thereof on the lic utilities along one or more of the estate of the veteran in the manufac- property lines and easements for drain- tured home lot, which real estate secu- age or irrigation ditches, provided the rity interest shall be in addition to the exercise of the rights thereof do not manufactured home security interest interfere with the use of the manufac- required by § 36.4234. tured home or improvements located (e) Tax liens special assessment liens, on the subject property. and ground rents shall be disregarded (ii) Mutual easements for joint drive- with respect to any requirement that ways located partly on the subject loans shall be secured by a lien of spec- property and partly on adjoining prop- ified dignity. With the prior approval erty, provided the agreement is re- of the Secretary, Under Secretary for corded in the public records. Benefits, or Director, Loan Guaranty (iii) Easements for underground con- Service, liens retained by nongovern- duits which are in place and which do mental entities to secure assessments not extend under any buildings in the or charges for municipal type services subject property. and facilities clearly within the public (5) Encroachments. (i) On the subject purpose doctrine may be disregarded. property by improvements on the ad- In determining whether a loan for the joining property where such encroach- purchase or improvement of a manu- ments do not exceed 1 foot within the factured home lot is secured by a first subjects boundaries, provided such en- lien the Secretary may also disregard a croachments do not touch any build- superior lien created by a duly re- ings or interfere with the use or enjoyment of any building or improvement corded covenant running with the real- on the subject property. ty in favor of a private entity to secure (ii) By hedges or removable fences be- an obligation to such entity for the longing to subject or adjoining prop- homeowner’s share of the costs of the erty. management, operation, or mainte- (iii) Not exceeding 1 foot on adjoining nance of property, services or programs property by driveways belonging to within and for the benefit of the devel- subject property, provided there exists opment or community in which the a clearance of at least 8 feet between veteran’s realty is located, if the Sec- the buildings on the subject propert retary determines that the interests of and the property line affected by the the veteran-borrower and of the Gov- encroachment. ernment will not be prejudiced by the (6) Variations of lot lines. Variations operation of such covenant. In respect between the length of the subject prop- to any such superior lien created after

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June 6, 1969, the Secretary’s determina- quested by others than veteran or lend- tion must have been made prior to the er, recordation of the covenant. (2) Recording fees and recording (f) In the case of a combination loan taxes or other charges incident to rec- or a loan to purchase a lot upon which ordation, a manufactured home owned by the (3) Credit report, veteran will be placed it shall be the (4) That portion of taxes, assess- responsibility of the lender that the ments, and other similar items for the veteran initially obtains or has an es- current year chargeable to the bor- tate in the land constituting the manu- rower and an initial deposit (lump-sum factured home lot meeting the require- payment) for any tax and insurance ac- ments of paragraph (a) of this section count, and to obtain and retain a security in- (5) Survey, if required by lender or terest thereon meeting the require- veteran, ments of paragraph (d) of this section. (6) Title examination and title insurance, if any, (g) In the case of a combination loan (7) The actual amount charged for to purchase a manufactured home lot flood zone determinations, including a and to refinance an existing purchase charge for a life-of-the-loan flood zone money loan on a manufactured home determination service purchased at the unit which is or will be located on the time of loan origination, if made by a lot to be purchased, it shall be the re- third party who guarantees the accu- sponsibility of the lender to assure racy of the determination. A fee may that the veteran obtains or retains an not be charged for a flood zone deter- estate in the manufactured home and mination made by a Department of in the land meeting the requirements Veterans Affairs appraiser or for the of paragraph (a) of this section and lender’s own determination, and § 36.4234. The lender must also obtain (8) Such other items as may be au- and retain a first lien or the equivalent thorized in advance by the Under Sec- thereof on the estate of the veteran in retary for Benefits as appropriate for both the manufactured home and in inclusion under this paragraph as prop- the lot on which the manufactured er local variances. home is located. (Authority: 38 U.S.C. 3712; 42 U.S.C. 4001 note, (Authority: 38 U.S.C. 501, 3703(c), and 3712 4012a) (a)(1)(G), (e)(3) and (g)) (b) A lender may charge and the vet- [36 FR 3368, Feb. 23, 1971, as amended at 45 eran may pay a flat charge not exceed- FR 55720, Aug. 21, 1980; 47 FR 49393, Nov. 1, ing one (1) percent of the amount of the 1982; 48 FR 40231, Sept. 9, 1983; 49 FR 22081, loan less the portion thereof allocated May 25, 1984; 55 FR 25976, June 26, 1990; 58 FR to the manufactured home: Provided, 37860, July 14, 1993; 61 FR 28058, June 4, 1996] That such flat charge shall be in lieu of § 36.4254 Fees and charges. all other charges relating to costs of origination not expressly specified and (a) Except as provided in § 36.4232 fees allowed in this schedule. and charges incident to origination of a (c) Except for a refinancing loan pur- combination loan or a loan to purchase suant to 38 U.S.C. 3712(a)(1)(F) or (G) a lot upon which a manufactured home fees and charges specified in this sec- owned by the veteran will be placed tion may not be included in the loan. which may be paid by the veteran shall (d)(1) Notwithstanding the provisions be limited, with respect to the real es- of paragraph (c) of this section and sub- tate portion of the loan, to reasonable ject to the limitations set out in para- and customary amounts for any of the graphs (d)(4) and (d)(5) of this section, a following: fee must be paid to the Secretary. A fee (1) Fees of the Department of Vet- of 1 percent of the total loan amount erans Affairs appraiser and of compli- must be paid to the Secretary before a ance inspectors designated by the De- combination manufactured home and partment of Veterans Affairs, except lot loan (or a loan to purchase a lot appraisal fees incurred for the pre- upon which a manufactured home determination of reasonable value re- owned by the veteran will be placed)

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will be eligible for guaranty. Provided, basis beginning on the date of closing, however, that the fee shall be 0.50 per- although the interest will be assessed cent of the total loan amount for inter- only on funding fee payments received est rate reduction refinancing loans more than 30 days after closing. guaranteed under 38 U.S.C. 3712(a)(1)(F). All or part of such fee (Authority: 38 U.S.C. 501) may be paid in cash at loan closing or all or part of the fee may be included in (4) The lender is required to pay to the loan without regard to the reason- the Secretary electronically through able value of the property or the com- the Automated Clearing House (ACH) puted maximum loan amount, as ap- system the fees described in paragraphs propriate. In computing the fee, the (d)(1) and (d)(2) of this section and any lender will disregard any amount in- late fees and interest due on them. cluded in the loan to enable the bor- This shall be paid to a collection agent rower to pay such fee. by operator-assisted telephone, ter- minal entry, or CPU-to-CPU trans- (Authority: 38 U.S.C. 3729(a)) mission. The collection agent will be (2) Subject to the limitations set out identified by the Secretary. The lender in paragraphs (d)(3) and (d)(4) of this shall provide the collection agent with section, a fee of one-half of one percent the following: authorization for pay- of the loan balance must be paid to the ment of the funding fee (including late Secretary in a manner prescribed by fees and interest) along with the fol- the Secretary by a person assuming a lowing information: VA lender ID num- loan to which section 3714 of chapter 37 ber; four-digit personal identification of 38 U.S.C. applies. The instrument se- number; dollar amount of debit; VA curing such a loan shall contain a pro- loan number; OJ (office of jurisdiction) vision describing the right of the hold- code; closing date; loan amount; infor- er to collect this fee as trustee for the mation about whether the payment in- Department of Veterans Affairs. The loan holder shall list the amount of cludes a shortage, late charge, or inter- this fee in every assumption statement est; veteran name; loan type; sale provided and include a notice that the amount; downpayment; whether the fee must be paid to the holder imme- veteran is a reservist; and whether this diately following loan settlement. The is a subsequent use of entitlement. For fee must be transmitted to the Sec- all transactions received prior to 8:15 retary within 15 days of receipt by the p.m. on a workday, VA will be credited holder of notice of the transfer. with the amount paid to the collection agent at the opening of business the (Authority: 38 U.S.C. 3714, 3729) next banking day. (3) The lender is rquired to pay to the Secretary the fee described in para- (Authority: 38 U.S.C. 3729(a)) graph (d)(1) of this section within 15 (5) The fee described in paragraphs days after loan closing. Any lender (d)(1) and (d)(2) of this section shall not closing a loan, subject to the limita- be collected from a veteran who is re- tions set out in paragraphs (d)(4) and ceiving compensation or who but for (d)(5) of this section, who fails to sub- the receipt of retirement pay would be mit timely payment of this fee will be subject to a late charge equal to 4 per- entitled to receive compensation) or cent of the total fee due. If payment of from a surviving spouse described in the 1 percent fee is made more than 30 section 3701(b)(2) of title 38 U.S.C. days after loan closing, interest will be assessed at a rate set in conformity (Authority: 38 U.S.C. 3729(b)) with the Department of Treasury’s Fis- (6) Collection of the loan fee in this cal Requirements Manual. This inter- paragraph does not apply to loans est charge is in addition to the 4 per- closed prior to August 17, 1984, between cent late charge, but the late charge is not included in the amout on which interest is computed. This interest charge is to be calculated on a daily

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October 1, and October 15, 1987, inclu- SERVICING, LIQUIDATION OF SECURITY sive, between November 16 and Decem- AND CLAIM ber 20, 1987, inclusive, nor to loans closed after September 30, 1989. § 36.4275 Events constituting default and acceptability of partial pay- (Authority: 38 U.S.C. 3729(c)) ments. (The information collection requirements in (a) Except as provided in paragraphs this section have been approved by the Office (a)(1), (a)(2) and (a)(3) of this section, of Management and Budget under control the conveyance of or other transfer of number 2900–0474) title to property by operation of law or [36 FR 3369, Feb. 23, 1971, as amended at 46 otherwise, after the creation of a lien FR 43671, Aug. 31, 1981; 47 FR 46700, Oct. 20, thereon to secure a loan which is guar- 1982; 48 FR 40231, Sept. 6, 1983; 50 FR 5754, anteed in whole or in part by the Sec- Feb. 12, 1985; 53 FR 27048, July 18, 1988; 55 FR retary, shall not constitute an event of 37473, Sept. 12, 1990; 60 FR 38259, July 26, 1995; default, or acceleration of maturity, 61 FR 28058, June 4, 1996; 62 FR 63278, Nov. 28, 1997] elective or otherwise, and shall not of itself terminate or otherwise affect the § 36.4255 Loans for the acquisition of a guaranty. lot. (1) The Secretary may issue guaranty (a) A loan to finance all or part of the on loans in which a State, Territorial, cost of acquisition by the veteran of a or local governmental agency provides lot on which to place a manufactured assistance to a veteran for the acquisi- home owned by the veteran shall be eli- tion of a mobile home or lot. Such gible for guaranty, Provided, That: loans will not be considered ineligible (1) The veteran will acquire title to for guaranty if the State, Territorial, such lot that conforms to the require- or local authority, by virtue of its laws ments of § 36.4253(a), or regulations or by virtue of Federal (2) The loan is secured as required by law, requires the acceleration of matu- § 36.4253(d), rity of the loan upon the sale or con- (3) The lot is determined by the Sec- veyance of the security property to a retary to be an acceptable manufac- person ineligible for assistance from tured homesite pursuant to § 36.4208, such authority. (4) The portion of the loan allocated (2) At the time of application for a to acquisition of the lot does not ex- loan assisted by a State, Territorial, or ceed the reasonable value of the lot as local governmental agency, the vet- determined by the Secretary, eran-applicant must be fully informed (5) The loan conforms otherwise to and consent in writing to the housing the requirements of the § 36.4200 series. authority restrictions. A copy of the (b) The cost of lot acquisition which veteran’s consent statement must be will not be paid from the proceeds of forwarded with the loan application or the loan must be paid by the veteran in the report of a loan processed on the cash from his or her own resources. automatic basis. (c) For the purpose of this section, (3) Any housing loan which is fi- acquisition of a manufactured home lot nanced under 38 U.S.C. chapter 37 and includes: to which section 3714 of that chapter (1) The refinancing of the balance applies, shall include a provision in the owed by the veteran as purchaser under security instrument that the holder an existing real estate installment con- may declare the loan immediately due tract, and and payable upon transfer of the prop- (2) The refinancing of existing mort- erty securing such loan to any trans- gage loans or other liens which are se- feree unless the acceptability of the as- cured of record on a manufactured sumption of the loan is established pur- home lot owned by the veteran. suant to section 3714. (i) A holder may not exercise its op- (Authority: 38 U.S.C. 501, and 3712(g)) tion to accelerate a loan upon: [40 FR 13215, Mar. 25, 1975, as amended at 48 (A) The creation of a lien or other en- FR 40231, Sept. 6, 1983] cumbrance subordinate to the lender’s

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security instrument which does not re- (iii) On any loan to which 38 U.S.C. late to a transfer of rights of occu- 3714 applies, the holder may charge a pancy in the property; reasonable fee, not to exceed the lesser (B) The creation of a purchase money of (A) $300 and the actual cost of any security interest for household appli- credit report required, or (B) any max- ances; imum prescribed by applicable state (C) A transfer by devise, descent, or law, for processing an application for operation of law on the death of a joint assumption and changing its records. A tenant or tenant by the entirety; provision authorizing the collection by (D) The granting of a leasehold inter- the holder of this fee shall be contained est of three years or less not con- in the instrument securing the loan. taining an option to purchase; (E) A transfer to a relative resulting (Authority: 38 U.S.C. 3704 and 3714) from the death of a borrower; (b) The inclusion in the guaranteed (F) A transfer where the spouse or obligation of a provision contrary to children of the borrower become joint the provisions of this section or owners of the property with the bor- § 36.4211 shall not impair the right of rower; the holder to payment of the guaranty (G) A transfer resulting from a decree provided that: of a dissolution of marriage, legal sepa- (1) Default was declared or maturity ration agreement, or from an inci- was accelerated under some other pro- dental property settlement agreement vision of the note, mortgage, or other by which the spouse of the borrower be- loan instrument, or comes the sole owner of the property. (2) Activation or enforcement of such In such a case the borrower shall have provision is warranted under § 36.4280, the option of applying directly to the or Department of Veterans Affairs re- (3) The prior approval of the Sec- gional office of jurisdiction for a re- retary was obtained. lease of liability in accordance with (c) If the title to real property or a § 36.4285 of this part; or leasehold interest therein which se- (H) A transfer into an inter vivos cures a manufactured home loan guar- trust in which the borrower is and re- anteed after December 22, 1970, is remains a beneficiary and which does not stricted against sale or occupancy on relate to a transfer of rights of occu- the ground of race, color, religion, or pancy in the property. national origin, by restrictions created (ii) Any instrument evidencing the and filed of record by the borrower sub- loan (i.e., the retail installment consequent to that date, such action, at tract, promissory note and/or mortgage the election of the holder, shall con- or deed of trust) shall bear in a constitute an event of default entitling the spicuous position in capital letters on holder to declare the unpaid balance of the first page of the document in type the loan immediately due and payable. at least 21⁄2 times larger in height than (d) The holder of any guaranteed ob- the regular type on such page the fol- ligation shall have the right, notwith- lowing warning: ‘‘THIS LOAN IS NOT standing the absence of express provi- ASSUMABLE WITHOUT THE AP- sion therefor in the instruments evi- PROVAL OF THE DEPARTMENT OF dencing the indebtedness, to accelerate VETERANS AFFAIRS OR ITS AU- the maturity of such obligation at any THORIZED AGENT.’’ Due to the dif- time after the continuance of any de- ficulty in obtaining some commercial fault for the period specified in type sizes which are exactly 21⁄2 times § 36.4280. larger in height than other sizes, minor (e) If sufficient funds are tendered to deviations will be permitted based on bring a delinquency current at any commercially available type sizes near- time prior to repossession or fore- est to 21⁄2 times the size of the print on closure of the manufactured home the the document. A similar warning in holder shall be obligated to accept the regular size type must appear on every funds in payment of the delinquency, assumption statement provided on a unless the prior approval of the Sec- loan to which this paragraph applies. retary is obtained to do otherwise.

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(f) A partial payment is a remittance (viii) The holder’s lien position would on a loan in default (as defined in be jeopardized by acceptance of the § 36.4202(c)) of any amount less than the partial payment. full amount due under the terms of the (3) A failure by the holder to comply loan and security instruments at the with the provisions of this paragraph time the remittance is tendered. may result in a partial or total loss of (1) Except as provided in paragraph guaranty or insurance pursuant to (f)(2) of this section, or upon the ex- § 36.4286(b), but such failure shall not press waiver of the Secretary, the hold- constitute a defense to any legal action er shall accept any partial payment to terminate the loan. and either apply it to the obligor’s account or identify it with the obligor’s (Authority: 38 U.S.C. 501, 3703(c), 3712(g)) account and hold it in a special ac- (Approved by the Office of Management and count pending disposition. When par- Budget under control number 2900–0516) tial payments held for disposition ag- [45 FR 31064, May 12, 1980, as amended at 46 gregate a full monthly installment, in- FR 51386, Oct. 20, 1981; 55 FR 37474, Sept. 12, cluding escrow, they shall be applied to 1990] the obligor’s account. § 36.4276 Advances and other charges. (2) A partial payment may be returned to the obligor within 10 cal- (a) A holder may advance any reason- endar days from date of receipt of such able amount necessary and proper for payment, with a letter of explanation the maintenance or repair of the secu- only if one or more of the following rity, or for the payment of accrued conditions exist: taxes, special assessments or other (i) The property is wholly or par- charges which constitute prior liens, or tially tenant-occupied and rental pay- premiums on fire or other hazard insur- ments are not being remitted to the ance against loss of or damage to such holder for application to the loan ac- property and any such advance so made may be added to the guaranteed indebt- count; edness. A holder may also advance the (ii) The payment is less than one full one-half of one percent funding fee due monthly installment, including es- on a transfer under 38 U.S.C. 3714 when crows and late charge, if applicable, this is not paid at the time of transfer. unless the lesser payment amount has All security instruments for loans to been agreed to under a written repay- which 38 U.S.C. 3714 applies must in- ment plan; clude a clause authorizing an advance (iii) The payment is less than 50 per- for this purpose if it is not paid at the cent of the total amount then due, un- time of transfer. less the lesser payment amount has been agreed to under a written repay- (Authority: 38 U.S.C. 3714) ment plan; (b) In addition to advances allowable (iv) The payment is less than the under paragraph (a) of this section, the amount agreed to in a written repay- holder may charge against the proceeds ment plan; of the sale of the security; against (v) The amount tendered is in the gross amounts collected; or, in the form of a personal check and the holder computation of a claim under the guar- has previously notified the obligor in anty, if lawfully authorized by the loan writing that only cash or certified re- agreement and subject to § 36.4284, any mittances are acceptable; of the following items actually paid: (vi) A delinquency of any amount has (1) Any expense which is reasonably continued for at least 6 months since necessary for preservation of the secu- the account first became delinquent rity, and no written repayment plan has (2) Court costs in a foreclosure or been arranged; other proper judicial proceeding in- (vii) Foreclosure and/or repossession volving the security, has been commenced by the taking of (3) Other expenses reasonably nec- the first action required for fore- essary for collecting the debt, or repos- closure/repossession under local law; session or liquidation of the security,

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including a reasonable sales commis- (vi) Any other expense or fee that is sion to the dealer or sales broker for approved in advance by the Secretary. resale of the security, [36 FR 1253, Jan. 27, 1971, as amended at 45 (4) Reasonable trustee’s fees or com- FR 38056, June 6, 1980; 53 FR 27049, July 18, missions paid incident to the sale of 1988; 53 FR 34295, Sept. 6, 1988; 55 FR 37474, real property, Sept. 12, 1990; 58 FR 29114, May 19, 1993; 58 FR (5) Reasonable amount for legal serv- 37860, July 14, 1993; 59 FR 48565, Sept. 22, 1994] ices actually performed not to exceed 10 percent of the unpaid indebtedness § 36.4277 Release of security. as of the date of the first uncured de- (a) Except upon full payment of the fault, or $850 whichever is less. In no indebtedness the holder shall not re- event may the combined total of the lease a lien or other right in or to prop- amounts claimed for trustee’s fees and erty held as security for a guaranteed legal services (paragraphs (b)(4) and (5) loan, or grant a fee or other interest in of this section) exceed $850. such property, without the prior ap- (6) The cost of a credit report(s) on proval of the Secretary, unless in the the debtor(s), which is (are) to be for- opinion of the holder such release does warded to the Secretary in connection not involve a decrease in the value of with the claim, the security in excess of $500: Provided, (7) Reasonable and customary costs That the aggregate of the reduction in of property inspections, the original value of the security re- (8) Any other expense or fee that is sultant from such releases without the approved in advance by the Secretary. Secretary’s prior approval does not exceed $500. (Authority: 38 U.S.C. 3720(g)) (b) Except upon full payment of the indebtedness or upon the prior ap- (c) In claims filed under § 36.4283(f)(4) proval of the Secretary, the holder of this part, the following costs and ex- shall not release a lien under para- penditures actually incurred and paid graph (a) of this section unless the con- may be included in the computation of sideration received for the release is the indebtedness: commensurate with the fair market (1) Property preservation or repair value of the property released and the costs incurred prior to the date of the entire consideration is applied to the liquidation appraisal, to the extent indebtedness, or if encumbrance on that they contributed to the minimum other property is accepted in lieu of selling price of the property as deter- that released it shall be the holder’s mined by the Secretary, and subject to duty to acquire such lien on property the limitation that they do not exceed of substantially equal value which is the actual cost incurred by the holder, reasonably capable of serving the pur- and, pose for which the property released (2) Costs of loan termination, includ- was utilized. ing, but not limited to: (c) Failure of the holder to comply (i) The reasonable and customary ex- with the provisions of this section shall pense of transporting the home to the not in itself affect the validity of the site where it will be repaired and/or re- title of a purchaser to the property resold; leased. (ii) The cost of the liquidation ap- (d) The holder shall notify the Sec- praisal; retary of any such release or substi- (iii) A reasonable amount for legal tution of security within 30 days after services actually performed and trustee completion of such transaction. fees, not to exceed a total of $700; (e) The release of the personal liabil- (iv) Court costs in a foreclosure or ity of any obligor on a guaranteed obli- other judicial proceeding involving the gation resultant from the act or omis- security; sion of any holder without the prior ap- (v) Any other expenses reasonably proval of the Secretary shall release necessary for repossession of the secu- the obligation of the Secretary as guar- rity or other termination of the loan; antor, except when such act or omis- and, sion consists of

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(1) Failure to establish the debt as a sions specified in paragraphs (b) valid claim against the assets of the es- through (l) of this section. tate of any deceased obligor, provided (b) Procedures for providing informa- no lien for the guaranteed debt is tion. (1) Loan holders shall establish thereby impaired or destroyed; or procedures to provide loan information (2) An election and appropriate pros- to borrowers, arrange for individual ecution of legally available effective loan consultations upon request and remedies with respect to the reposses- maintain controls to assure prompt re- sion or the liquidation of the security sponses to inquiries. One or more of the in any case, irrespective of the identity following means of making informa- or the survival of the original or of any tion readily available to borrowers is subsequent debtor, if holder shall have required: given such notice as required by (i) An office staffed with trained § 36.4280 and if, after receiving such no- servicing personnel with access to loan tice, the Secretary shall have failed to account information located within 200 notify the holder within 15 days to pro- miles of the property. ceed in such manner as to effectively (ii) Toll-free telephone service or ac- preserve the personal liability of the ceptance of collect telephone calls at parties liable, or such of them as the an office capable of providing needed Secretary indicates is such notice to information. the holder; or (2) All borrowers must be informed of (3) The release of an obligor, or obli- the system available for obtaining an- gors, from liability on an obligation se- swers to loan inquiries, the office from cured by a lien on property, which re- which the needed information may be lease is an incident of and contempora- obtained, and reminded of the system neous with the sale of such property to at least annually. (c) an eligible veteran who assumed such Statement for income tax purposes. Within 60 days after the end of each obligation, which assumed obligation calendar year, the holder shall furnish is guaranteed on his or her account to the borrower a statement of the in- pursuant to 38 U.S.C. 3712; or terest paid and, if applicable, a state- (4) The release of an obligor or obli- ment of the taxes disbursed from the gors as provided in § 36.4279. escrow account during the preceding (5) The release of an obligor, or obli- year. At the borrower’s request, the gors, incident to the sale of property holder shall furnish a statement of the which the holder is authorized to ap- escrow account sufficient to enable the prove under the provisions of 38 U.S.C. borrower to reconcile the account. 3714. (d) Change of servicing. Whenever servicing of a loan guaranteed or in- (Authority: 38 U.S.C. 3714) sured by the Secretary is transferred [36 FR 1253, Jan. 27, 1971, as amended at 53 from one holder to another, notice of FR 34295, Sept. 6, 1988; 55 FR 37474, Sept. 12, such transfer by both the transferor 1990] and transferee, the form and content of such notice, the timing of such notice, § 36.4278 Servicing procedures for the treatment of payments during the holders. period of such transfer, and damages (a) Establishment of loan servicing pro- and costs for failure to comply with gram. The holder of a loan guaranteed these requirements shall be governed or insured by the Secretary shall de- by the pertinent provisions of the Real velop and maintain a loan servicing Estate Settlement Procedures Act as program which follows accepted indus- administered by the Department of try standards for servicing of similar Housing and Urban Development. type conventional loans. The loan serv- (e) Escrow accounts. A holder of a loan icing program established pursuant to guaranteed or insured by the Secretary this section may employ different serv- may collect periodic deposits from the icing approaches to fit individual bor- borrower for taxes and/or insurance on rower circumstances and avoid estab- the security and maintain a tax and in- lishing a fixed routine. However, it surance escrow account provided such must incorporate each of the provi- a requirement is authorized under the

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terms of the security instruments. In the individual needs and circumstances maintaining such accounts, the holder of each borrower. A variety of collec- shall comply with the pertinent provi- tion techniques may be used based on sions of the Real Estate Settlement the holder’s determination of the most Procedures Act. effective means of contact with bor- (f) System for servicing delinquent rowers during various stages of delin- loans. In addition to the requirements quency. However, at a minimum, the of the Real Estate Settlement Proce- holder’s collection procedures must in- dures Act concerning the duties of the clude the following actions: loan servicer to respond to borrower in- (i) A written delinquency notice to quiries, to protect the borrower’s cred- the borrower(s) requesting immediate it rating during a payment dispute pe- payment if a loan installment has not riod, and to pay damages and costs for been received within 17 days after the noncompliance, holders shall establish due date. This notice must be mailed a system for servicing delinquent loans no later than the 20th day of the delin- which ensures that prompt action is quency and state the amount of the taken to collect amounts due from bor- payment and of any late charges that rowers and minimize the number of are due. loans in a default status. The holder’s (ii) An effort, concurrent with the servicing system must include the fol- written delinquency notice, to estab- lowing: lish contact with the borrower(s) by (1) An accounting system which telephone. When talking with the bor- promptly alerts servicing personnel rower(s), the holder should attempt to when a loan becomes delinquent; determine why payment was not made (2) A collection staff which is trained and emphasize the importance of rein techniques of loan servicing and mitting loan installments as they come counseling delinquent borrowers to ad- due. vise borrowers how to cure delin- (iii) A letter to the borrower(s) if quencies, protect their equity and cred- payment has not been received within it rating and, if the default is insol- 30 days after it is due and telephone uble, pursue alternatives to fore- contact could not be made. This letter closure; should emphasize the seriousness of the (3) Procedural guidelines for indi- delinquency and the importance of tak- vidual analysis of each delinquency; ing prompt action to resolve the de- (4) Instructions and appropriate con- fault. It should also notify the bor- trols for sending delinquent notices, as- rower(s) that the loan is in default, sessing late charges, handling partial state the total amount due and advise payments, maintaining servicing his- the borrower(s) how to contact the tories and evaluating repayment pro- holder to make arrangements for cur- posals; ing the default. (5) Management review procedures (iv) In the event the holder has not for evaluating efforts made to collect established contact with the bor- the delinquency and the response from rower(s) and has not determined the fi- the borrower before a decision is made nancial circumstances of the bor- to initiate action to liquidate a loan; rower(s) or established a reason for the (6) Procedures for reporting delin- default or obtained agreement to a re- quencies of 90 days or more and loan payment plan from the borrower(s), terminations to major consumer credit then a face-to-face interview with the bureaus as specified by the Secretary borrower(s) or a reasonable effort to ar- and for informing borrowers that such range such a meeting is required. action will be taken; and, (2) The holder must provide a valid (7) Controls to ensure that all notices explanation of any failure to perform required to be given to the Secretary these collection actions when reporting on delinquent loans are provided time- loan defaults to the Secretary. A pat- ly and in such form as the Secretary tern of such failure may be a basis for shall require. sanctions under 38 CFR 36.4216. (g) Collection actions. (1) Holders (h) Conducting interviews with delin- should employ collection techniques quent borrowers. When personal contact which provide flexibility to adapt to with the borrower(s) is established, the

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holder shall solicit sufficient informa- Secretary for inspection on request. tion to properly evaluate the prospects Such collection records shall show: for curing the default and whether the (1) The dates and content of letters granting of forbearance or other relief and notices which were mailed to the assistance would be appropriate. At a borrower(s); minimum, the holder must make a rea- (2) Dated summaries of each personal sonable effort to establish the fol- servicing contact and the result of lowing facts: same; (1) The reason for the default and (3) The indicated reason(s) for de- whether the reason is a temporary or fault; and permanent condition; (4) The date and result of each prop- (2) The present income and employ- erty inspection. (k) Reporting to the Secretary. A sum- ment of the borrower(s); mary of collection efforts, the informa- (3) The current monthly expenses of tion obtained through such efforts and the borrower(s) including household the holder’s evaluation of the reason and debt obligations; for the default and prospects for resolu- (4) The current mailing address and tion of the default must be included in telephone number of the borrower(s); any notice provided to the Secretary and, pursuant to § 36.4280. (5) A realistic and mutually satisfac- (l) Quality control procedures. No later tory arrangement for curing the de- than 180 days after the effective date of fault. this regulation, each loan holder shall (i) Property inspection. (1) The holder establish internal controls to periodi- shall make an inspection of the prop- cally assess the quality of the servicing erty securing the loan whenever it be- performed on loans guaranteed by the comes aware that the physical condi- Secretary and assure that all require- tion of the security may be in jeop- ments of this section are being met. ardy. Unless a repayment agreement is Those procedures must provide for a rein effect, a property inspection shall view of the holder’s servicing activities also be made: at least annually and include an eval- (i) Before the 60th day of delinquency uation of delinquency and foreclosure or before initiating action to liquidate rates on loans in its portfolio which are a loan, whichever is earlier; and guaranteed by the Secretary. As part (ii) At least once each month after of its evaluation of delinquency and liquidation proceedings have been foreclosure rates, the holder shall: started unless servicing information (1) Collect and maintain appropriate shows the property remains owner-oc- data on delinquency and foreclosure cupied. rates to enable the holder to evaluate (2) Whenever a holder obtains infor- the effectiveness of its collection ef- mation which indicates that a property forts; (2) Determine how its VA delin- securing a loan is abandoned, it shall quency and foreclosure rates compare make appropriate arrangements to pro- with rates in various reports published tect the property from vandalism and by the industry, investors and others; the elements. Thereafter, the holder and shall schedule inspections at least (3) Analyze significant variances be- monthly to prevent unnecessary dete- tween its foreclosure and delinquency rioration due to vandalism, or neglect. rates and those found in available re- With respect to any loan more than 30 ports and publications and take appro- days delinquent, a property abandon- priate corrective action. ment must be reported to the Sec- (m) Holders shall provide available retary and appropriate action initiated statistical data on delinquency and under 36.4280(e) within 15 days after the foreclosure rates and their analysis of holder confirms the property is aban- such data to the Secretary upon re- doned. quest. (j) Collection records. The holder shall maintain individual file records of col- (Approved by the Office of Management and lection action on delinquent loans and Budget under Control Number 2900–0530) make such records available to the [58 FR 29114, May 19, 1993]

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§ 36.4279 Extensions and reamortiza- of any agreement effecting a re- tions. amortization or extension of a guaran- (a) Provided the debtor(s) is (are) a teed loan, together with cop(y)(ies) of reasonable credit risk(s), as determined the credit report(s) obtained on the by the holder based upon review of the debtor(s). debtor’s (s’) creditworthiness, includ- (Authority: 38 U.S.C. 3712) ing a review of a current credit report(s) on the debtor(s), the terms of [36 FR 1253, Jan. 27, 1971, as amended at 53 repayment of any loan may, by written FR 34295, Sept. 6, 1988] agreement between the holder and debtor(s), be extended in the event of § 36.4280 Reporting of defaults. default, to avoid imminent default, or The holder of any guaranteed loan in any other case where the prior ap- shall give notice to the Secretary with- proval of the Secretary is obtained. Ex- in 15 days after any debtor: cept with the prior approval of the Sec- (a) Is in default by reason of non- retary, no such extension shall set a payment of two full installments; or rate of amortization less than that suf- (b) Is in default by failing to comply ficient to fully amortize at least 80 per- with any other covenant or obligation cent of the loan balance so extended of such guaranteed loan which failure within the maximum maturity pre- persists for a continuing period of 60 scribed for loans of its class. days after demand for compliance (b) In the event of a partial prepay- therewith has been made, except that if ment pursuant to § 36.4211, the balance the default is due to nonpayment of of the indebtedness may, by written real estate taxes, the notice shall not agreement between the holder and the be required until the failure to pay debtor(s), be reamortized, provided the when due has persisted for a continuing reamortization schedule will result in period of 120 days. full repayment of the loan within the original maturity, and provided the (c) In the event any failure of the debtor(s) is (are) a reasonable credit months or for more than 1 month on an risk(s), as determined by the holder extended loan, the holder may then or based upon review of the debtor’s (s’) thereafter give the notice in the man- creditworthiness, including a review of ner described in paragraph (e) of this a current credit report(s) on the debt- section. or(s). (d) The notice prescribed in para- (c) Unless the prior approval of the graph (e) of this section may be sub- Secretary has been obtained, any ex- mitted prior to the time prescribed in tension or reamortization agreed to by paragraph (c) of this section in any a holder which relieves any obligor case where any material prejudice to from liability will release the liability the rights of the holder or to the Sec- of the Secretary under the guaranty on retary or hazard to the security war- the entire loan. However, if such re- rants more prompt action. lease of liability of an obligor results (e) Except upon the express waiver of through operation of law by reason of the Secretary, a holder shall not begin an extension or other act of forbear- proceedings in court or give notice of ance, the liability of the Secretary as sale under power of sale, repossess the guarantor will not be affected thereby, security, or accelerate the loan, or oth- Provided, The required lien is main- erwise take steps to terminate the tained and the title holder is and will debtor’s rights in the security until the remain liable for the payment of the expiration of 30 days after delivery by indebtedness: And further provided, certified mail to the Secretary of a no- That if such extension or act of for- tice of intention to take such action; bearance will result in the release of provided, that immediate action as re- the veteran, all delinquent install- quired under 38 CFR 36.4278(i) may be ments, plus any foreclosure expenses taken if the property to be affected which may have been incurred, shall thereby has been abandoned by the have been fully paid. debtor, or has been or may be other- (d) The holder shall promptly forward wise subjected to extraordinary waste to the Secretary an advice of the terms or hazard.

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(f) The notice required under sub- thereby be relieved from the provisions paragraph (e) of this paragraph shall of § 36.4286. also be provided to the original vet- [36 FR 1253, Jan. 27, 1971, as amended at 55 eran-borrower and any other liable ob- FR 37474, Sept. 12, 1990] ligors by certified mail within 30 days after such notice is provided to the § 36.4282 Legal proceedings (notice of Secretary in all cases in which the cur- repossession). rent owner of the property is not the (a) When the holder institutes suit or original veteran-borrower. A failure by otherwise becomes a party in any legal the holder to make a good faith effort or equitable proceeding brought on or to comply with the provisions of this in connection with the guaranteed in- subparagraph may result in a partial or debtedness, or involving title to, or total loss of guaranty pursuant to VA other lien on, the security, such holder, Regulation 36.4286(b), but such failure within the time that would be required if the Secretary were a party to the shall not constitute a defense to any proceeding, shall deliver to the Sec- legal action to terminate the loan. A retary, by mail or otherwise, by mak- good faith effort will include: ing such delivery to the loan guaranty (1) A search of the holder’s auto- officer at the office which granted the mated and physical loan record sys- guaranty, or other office to which the tems to identify the name and current holder has been notified the file is or last address of the original veteran transferred, a copy of every procedural and any other liable obligors; paper filed on behalf of holder, and (2) A search of the holder’s auto- shall also so deliver, as promptly as mated and physical loan record sys- possible, a copy of each similar plead- tems to identify sufficient information ing served on holder or filed in the (e.g., Social Security Number) to per- cause by any other party thereto. No- form a routine trace inquiry through a tice of, or motion for, continuance and major consumer credit bureau; orders thereon are excepted from the (3) Conducting the trace inquiry foregoing. using an in-house credit reporting ter- (b) A copy of a notice of sale under minal; power by a holder or one acting at his or her behest (e.g., trustee or public of- (4) Obtaining the results of the in- ficial) shall be similarly delivered to quiry; the Secretary at or before the date of (5) Mailing the required notices and first publication, posting, or other no- concurrently providing the Secretary tice, but in any event, except in emer- with the names and addresses of all ob- gency or when waived by the Sec- ligors identified and sent notice; and retary, not less than 10 days prior to (6) Documentation of the holder’s date of sale. Copy of any other notice records. of sale served on the holder or of which [36 FR 1253, Jan. 27, 1971, as amended at 58 he or she has knowledge shall be simi- FR 29116, May 19, 1993] larly delivered to the Secretary, including any such notice of sale under § 36.4281 Refunding of loans in default. tax or other superior lien or any judicial sale. Upon receiving a notice of default the (c) The procedure prescribed in para- Secretary may at any time prior to the graphs (a) and (b) of this section shall termination of the borrower’s interest not be applicable in any proceeding to in the property require the holder upon which the Secretary is a party, after penalty of otherwise losing the guar- the Secretary’s appearance shall have anty to transfer and assign the loan been entered therein by a duly author- and the security therefor to the Sec- ized attorney. retary or to another designated by him (d) In any legal or equitable pro- or her upon receipt of payment of the ceeding (including probate and bank- balance of the indebtedness remaining ruptcy proceedings) to which the Sec- unpaid to the date of such assignment. retary is a party, original process and Such assignment may be made without any other process prior to appearance, recourse but the transferor shall not proper to be served on the Secretary,

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shall be delivered to the loan guaranty a legal requirement or if the Secretary officer of the office of the Department requires that the debtors’ rights be ter- of Veterans Affairs having jurisdiction minated by public sale, the holder shall of the area in which the court is situ- follow the procedures set forth in para- ated. Within the time required by ap- graph (b) of this section. Otherwise, the plicable law, or rule of court, the Sec- holder shall proceed in the manner set retary will cause appropriate special or forth in § 36.4283(f). general appearance to be entered in the cause by the Secretary’s authorized at- [36 FR 1253, Jan. 27, 1971, as amended at 47 torney. FR 12965, Mar. 26, 1982; 53 FR 34296, Sept. 6, (e) After appearance of the Secretary 1988] by attorney, all process and notice otherwise proper to serve on the Secretary § 36.4283 Foreclosure or repossession. before or after judgment, if served on (a) Upon receipt by the Secretary of the Secretary’s attorney of record shall notice of a judicial or statutory sale, or have the same effect as if the Sec- other public sale under power of sale retary were personally served within contained in the loan instruments, to the jurisdiction of the court. liquidate any security for a guaranteed (f) If following a default the holder loan, the Secretary may specify in ad- does not begin appropriate action with- vance of such sale the minimum in 30 days after requested in writing by amount which shall be credited to the the Secretary to do so, or does not indebtedness of the borrower on ac- prosecute such action with reasonable count of the value of the security to be diligence, the Secretary shall have the sold, subject to the provisions of para- option to intervene in, or begin and graphs (a)(1), (2), (3), and (4) of this sec- prosecute to completion any action or tion: proceeding, in the Secretary’s name or in the name of the holder, which the (1) If a minimum amount has been Secretary deems necessary or appro- specified in relation to a sale of the priate, and may fix a date beyond property and the holder is the success- which no further charges may be in- ful bidder at the sale for an amount not cluded in the computation of the guar- in excess of such specified amount the anty claim. The Secretary shall pay, in holder shall dispose of the property in advance if necessary, any court costs the manner set forth in paragraph (f) or other expenses incurred by the Sec- and the amount realized from the re- retary, or properly taxed against the sale of the property shall govern in the Secretary, in any such action to which final accounting for determining the the Secretary is a party, but may rights and liabilities of the holder and charge the same, and also a reasonable the Secretary. amount for legal services, against the (2) If a minimum amount has been guaranteed indebtedness, or the pro- specified by the Secretary and: ceeds of the sale of the security to the (i) A third party is the successful bid- same extent as the holder (see § 36.4276), der at the sale for an amount equal to or otherwise collect from the holder or in excess of that specified, the hold- any such expenses incurred by the Sec- er shall credit to the indebtedness the retary because of the neglect or failure net proceeds of the sale. of the holder to take or complete prop- (ii) A third party is the successful er action. The rights and remedies herein reserved are without prejudice bidder at the sale for an amount less to any other rights, remedies, or de- than that specified, the holder shall fenses, in law or in equity, available to credit to the indebtedness the amount the Secretary. specified less expenses allowable under (g) The holder, no later than 10 days § 36.4276. after it has repossessed a property, (iii) The holder is the successful bid- must advise the Secretary of such re- der at the sale for an amount in excess possession. The holder shall proceed of the specified amount the indebted- thereafter, within a reasonable time ness shall be credited with the net pro- after repossession, to terminate the ceeds of the sale or an amount estab- debtors’ rights in the property. If it is lished in accordance with paragraph (f)

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of this section, whichever is the great- the holder is the successful bidder for er, unless the bid in excess of the speci- an amount not exceeding the amount fied amount was made pursuant to legally required, such specified amount paragraph (d) of this section. shall govern for the purpose of this sec- (3) If a minimum amount has not tion. been specified by the Secretary under (e) If the Secretary has specified an paragraph (a)(1) or (2) of this section, amount as provided in this section, and and the Secretary advised the holder the holder learns of any material dam- that it did not intend to specify an age to the property occurring prior to amount, and the property is purchased the foreclosure sale or to the accept- at the sale by a third party, the holder ance of a deed in lieu of foreclosure or shall credit against the indebtedness prior to any other event to which such the net proceeds of the sale except as specified amount is applicable, the provided in paragraph (d) of this sec- holder shall promptly advise the Sec- tion. However, if the property is pur- retary of such damage. Also, if the chased at the sale by the holder, the in- holder acquires or repossesses the prop- debtedness will be credited with the erty and the holder learns of any mate- net proceeds of the sale or an amount rial damage to it, the holder shall established in accordance with para- promptly advise the Secretary of such graph (f) of this section, whichever is damage. greater. (f) When the security for a guaran- (4) The holder shall notify the Sec- teed loan is acquired by the holder retary of the results of the sale within through foreclosure or otherwise, the 10 days after the sale is completed. holder shall resell the property within (b) In the event that any real prop- a reasonable time and may thereafter erty which is security for a guaranteed submit its claim under the guaranty. loan is to be acquired by a holder in a The Secretary, upon receipt of a notice manner other than as provided in para- of acquisition, shall determine the cur- graph (a) or (c) of this section (e.g., by rent reasonable value of the property strict foreclosure or by the termi- and advise the holder of the minimum nation without a public sale of the pur- selling price that will be acceptable in chaser’s interest in a land sale con- any accounting with the Secretary tract), the holder shall notify the Sec- upon liquidation of the security. retary of the acquisition within 15 days thereafter and account to the Sec- (1) If the holder resells the property retary for the proceeds of the liquida- for an amount at least equal to the tion of the security in accordance with minimum selling price, it shall credit paragraph (f) of this section. the indebtedness with the proceeds of (c) When a debtor proposes to convey the sale. or transfer any property to a holder to (2) If the holder is unable to resell avoid foreclosure or other judicial, con- the property for an amount at least tractual, or statutory disposition of equal to the minimum selling price the obligation or of the security, the after exposure to the market for a rea- consent of the Secretary to the terms sonable period of time, the holder may of such proposal shall be obtained in submit to the Secretary a written ad- advance of such conveyance or trans- vice setting forth the price, terms, con- fer. If the Secretary consents thereto, ditions and expenses of any offer re- the holder may acquire the property ceived. The Secretary shall thereupon: and account to the Secretary for the (i) Assent to the resale of the prop- proceeds of the liquidation of the secu- erty upon the terms of such offer, in rity in accordance with paragraph (f) of which event the holder will credit the this section. indebtedness with the proceeds of the (d) If a minimum bid is required sale, or under applicable State law, or decree of (ii) Review the minimum selling foreclosure or order of sale, or other price previously established and, if ap- lawful order or decree, the holder may propriate, provide the holder with a re- bid an amount not exceeding such duced minimum selling price at which amount legally required. If an amount the property shall be further exposed has been specified by the Secretary and to the market.

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(3) If the holder resells the property (E) The interest rate charged the bor- and finances the sale under the terms rower does not exceed the maximum of a new security agreement and note, rate allowable under § 36.4212 as of the the Secretary may, pursuant to para- date of closing pursuant to the indem- graph (f)(3)(iv) of this section, agree to nity agreement; indemnify the holder against loss on (F) The holder agrees to comply with the new loan. VA manufactured home regulations as (i) The Secretary’s maximum liabil- if the original loan had not been termi- ity under the indemnity agreement nated. shall be the percentage of the loan originally guaranteed applied to the in- (Authority: 38 U.S.C. 3712(g)) debtedness as of the date of claim computation as set forth in § 36.4284(a), or (4) If the holder has not resold the the amount originally guaranteed, or property, it may elect to submit its the amount of the Secretary’s liability claim under Loan Guaranty within 60 under a preexisting indemnity agree- days of the date of the Secretary’s ment, whichever is less. written advice of the minimum selling (ii) In the event the proceeds of sale price. are less than the total indebtedness, (i) For purposes of computation of a the Secretary may pay a partial claim claim submitted pursuant to this para- for the difference between the indebt- graph, and subject to the limitation edness and the proceeds of sale and that the maximum amount of claim thereafter agree to indemnify the hold- payable shall in no event exceed the er for the amount of the maximum li- amount originally guaranteed, the ability as of the date of claim com- amount payable on a claim for the putation, less the amount of claim guaranty shall be the percentage of the paid. loan originally guaranteed applied to (iii) Subject to the limitation that the indebtedness computed as of the the total amount payable under an in- date the holder acquired the security. demnity agreement shall in no event Further: exceed the Secretary’s maximum li- (A) The minimum selling price deter- ability, the remaining liability will be mined by the Secretary and provided to continued as a percentage of the new the holder shall be credited to the in- loan amount increasing or decreasing debtedness as proceeds of sale; or pro rata with any increase or decrease (B) If no minimum selling price is in the balance of the loan obligation. provided then the current reasonable (iv) The Secretary shall execute an value of the property as determined by indemnity agreement evidencing the the Secretary and provided to the hold- amount and terms of the indemnity lier shall be credited to the indebtedness ability, provided: as proceeds of sale; and (A) The Secretary has determined that resale of the security under an in- The amount payable on the claim demnity agreement is in the best inter- shall in no event exceed the remaining est of the Government, and the holder balance of the indebtedness. has obtained the prior approval of the (ii) Allowable post-acquisition ex- Secretary; penditures or costs paid by the holder (B) The terms of repayment of the which may be included in the account- proposed loan bear a proper relation- ing with the Secretary are limited to ship to the borrower’s present and an- those specified in § 36.4276(c). ticipated income and expenses, and the (g) If at the end of 6 months from the borrower is a satisfactory credit risk; date of acquisition the holder has been (C) The borrower executes an agree- unable to resell the property and no ment establishing liability to the Sec- claim has been filed pursuant to para- retary for the amount of any claim graph (f)(4) of this section, a claim may paid under the indemnity agreement; be submitted under the guaranty and (D) The term of the proposed loan the Secretary will pay to the holder does not exceed the maximum term al- upon submission of such claim: lowable under § 36.4204(c)(4);

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(1) The difference between the ap- tures in excess of $400 shall not be praised value of the property as deter- made without the prior approval of the mined by the Secretary and the indebt- Secretary. edness including those costs allowable (4) As between the holder and the under § 36.4276 and the costs of repos- Secretary, the holder shall be respon- sessing the manufactured home not to sible for any loss due to damage to or exceed $100, plus any accrued and un- destruction of the property, ordinary paid interest to the applicable cutoff wear and tear excepted, from the date date as set forth in § 36.4284(a) at the of repossession or acquisition by the maximum rate allowable. For loans holder to the date the property has guaranteed prior to May 8, 1984, the been liquidated. Secretary will also pay accrued inter- (5) The holder shall include as credits est at a rate of 6 percent from such cut- in its accounting with the Secretary off date to the date of claim but not to all rentals and other income collected exceed 60 days. For loans guaranteed from the property and insurance pro- on or after May 8, 1984, the Secretary ceeds or refunds subsequent to the date will pay accrued interest at a rate 4.75 of acquisition by the holder. percent below the contract interest (i) Definitions: (1) The terms date of rate from such cutoff date to the date sale or date of acquisition as used in this of claim but not to exceed 90 days. section are defined as the date of the event (e.g., date of repossession, date of (Authority: 38 U.S.C. 3712(g)) sale confirmation when required under (2) The amount of the guaranty pay- local practice, date of acceptance of able on the total outstanding indebted- deed in case of voluntary conveyance, ness as of the applicable cutoff date set etc.) which fixes the rights of the par- forth in § 36.4284(a), whichever is less. ties in the property. (h) If the property securing the guar- (2) The term property or real property anteed loan is acquired by a holder pur- as used in this section shall include: suant to paragraph (a), (b) or (c) of this (i) A leasehold estate therein which section, or § 36.4282(g), the following at the time of closing the loan was of provisions shall apply: not less duration than that prescribed (1) The holder’s notice to the Sec- by § 36.4253, and retary after acquisition shall state the (ii) The rights derived by the holder amount of the successful bid at public through a foreclosure sale of real es- sale, or in the event of a repossession tate whether or not such rights con- or a voluntary conveyance, the date of stitute an estate in real property under acquisition. local law. (2) The holder’s notice after acquisi- (j) A claim for the guaranty must in- tion shall also provide complete occu- clude a cop(y)(ies) of a current credit pancy data. Except with the prior ap- report(s) on the debtor(s). proval of the Secretary the holder shall not rent the property to a new tenant (Authority: 38 U.S.C. 3712) nor extend the terms of an existing (k) The provisions of this section tenancy on other than a month-to- shall not be in derogation of any rights month basis. which the Secretary may have under (3) Except with the prior approval of § 36.4286. The Under Secretary for Bene- the Secretary, any taxes or special as- fits, or the Director, Loan Guaranty sessments which constitute prior liens Service, may authorize any deviation due and payable after acquisition of from the provisions of this section, the property by the holder shall be paid within the limitations prescribed in 38 by the holder sufficiently in advance of U.S.C. chapter 37, which may be nec- the payment due dates to avoid pen- essary or desirable to accomplish the alties and to take advantage of any dis- objectives of this section if such devi- counts. The holder also may include in ation is made necessary by reason of its accounting with the Secretary any any laws or practice in any State, Ter- expenditures for repairs made that ritory, or the District of Columbia: were reasonably necessary to properly Provided, That no such deviation shall maintain or refurbish the security impair the rights of any holder not property, not to exceed $400. Expendi- consenting thereto with respect to

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loans made or approved prior to the rate of 6 percent from such cutoff date date the holder is notified of such ac- to the date of resale or other liquidation. tion but not to exceed 60 days. For loans guaranteed on or after May 8, (Information collection requirements con- 1984, the holder may also either deduct tained in paragraph (j) were approved by the from sales proceeds, or include in the Office of Management and Budget under con- accounting, accrued interest at a rate trol number 2900–0480) 4.75 percent below the contract interest [36 FR 1253, Jan. 27, 1971, as amended at 47 rate from such cutoff date to the date FR 12965, Mar. 26, 1982; 49 FR 22081, May 25, of resale or other liquidation but not to 1984; 53 FR 34296, Sept. 6, 1988; 58 FR 37860, exceed 90 days. July 14, 1993; 61 FR 28058, June 4, 1996]

§ 36.4284 Computation of guaranty (Authority: 38 U.S.C. 3712(g)) claims. (d) In computing the indebtedness for (a) Subject to the limitation that the the purpose of filing a claim for pay- maximum amount payable shall in no ment of a guaranty, or in the event of event exceed the amount originally a transfer of the loan under § 36.4281, or guaranteed, the amount payable on a other accounting to the Secretary, the claim for the guaranty shall be the per- holder shall not be entitled to treat re- centage of the loan originally guaran- payments theretofore made, as liq- teed applied to the indebtedness com- uidated damages, or rentals, or other- puted as of the date of claim but not wise than as payments on the indebted- later than (1) the date of judgment or ness, notwithstanding any provision in of decree of foreclosure; or (2) in non- the note, or mortgage, or otherwise, to judicial foreclosures, the date of publi- the contrary. cation of the first notice of sale; or (3) (e) Appropriate computation of the in cases in which the security is repos- guaranty, proceeds of liquidation, and sessed without a judgment, decree, or allowable costs for claims filed under foreclosure, the date the holder repos- § 36.4283(f)(4) are specified in § 36.4276(c). sesses the security; or (4) if no security [36 FR 1253, Jan. 27, 1971, as amended at 49 is available, the date of claim but not FR 22082, May 25, 1984; 58 FR 37861, July 14, more than 6 months after the first 1993] uncured default. Deposits or other credits or setoffs including any § 36.4285 Subrogation and indemnity. escrowed or earmarked funds legally (a) The Secretary shall be subrogated applicable to the indebtedness on the to the contract and the lien or other date of the claim computation shall be rights of the holder to the extent of applied in reduction of the indebted- any sum paid on a guaranty, which ness upon which the claim is based. right shall be junior to the holder’s (b) Credits accruing from the pro- rights as against the debtor or the en- ceeds of a sale or other disposition of cumbered property until the holder the security shall be reported to the shall have received the full amount Secretary incident to such submission, payable under the contract with the and the amount payable on the claim debtor except that where the holder shall in no event exceed the remaining has entered into a recourse and/or re- balance of the indebtedness. purchase or indemnity agreement with (c) Any allowable expenditures or a dealer or servicer or other entity and costs, paid by the holder, and any ac- the Department of Veterans Affairs crued and unpaid interest to the appli- pays a claim under guaranty to the cable cutoff date as set forth in para- holder the Department of Veterans Af- graph (a) of this section at the max- fairs will not be subrogated to any imum rate allowable, may be deducted rights the holder may have under the from the proceeds of the sale of the recourse and/or repurchase or indem- property, or may be included in the ac- nity agreement. No partial or complete counting to the Secretary on such release by a creditor shall impair the loan. For loans guaranteed prior to rights of the Secretary with respect to May 8, 1984, the holder may also either the debtor’s obligation. deduct from sales proceeds, or include (b) The holder, upon request, shall in the accounting, accrued interest at a execute, acknowledge, and deliver an

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appropriate instrument tendered the (f) If, on or after July 1, 1972, any vet- holder for that purpose, evidencing any eran disposes of residential property payment received from the Secretary securing a guaranteed loan obtained by and the Secretary’s resulting right of him or her under 38 U.S.C. 3712, with- subrogation. out securing a release from liability (c) The Secretary may cause the in- with respect to such loan under 38 strument required by paragraph (b) of U.S.C. 3713(a) and a default subse- this section to be filed for record in the quently occurs which results in liabil- Office of the Recorder of Deeds, or ity of the veteran to the Secretary on other appropriate office of the proper account of the loan, the Secretary may county, town, or State, in accordance relieve the veteran of such liability if with the applicable State law. the Secretary determines that: (d) Any amounts paid by the Sec- (1) A transferee either immediate or retary on account of the liabilities of remote is legally liable to the Sec- any veteran guaranteed under the pro- retary for the debt of the original vet- visions of 38 U.S.C. 3712 shall con- eran-borrower established after the ter- stitute a debt owing to the United mination of the loan, and States by such veteran. (2) The original loan was current at (e) Whenever any veteran disposes of the time such transferee acquired the residential property securing a guaran- property, and teed loan obtained under 38 U.S.C. 3712, (3) The transferee who is liable to the and for which the commitment to Secretary is found to have been a satis- make the loan was made prior to factory credit risk at the time he or March 1, 1988, the Secretary, upon ap- she acquired the property. plication made by such veteran, shall issue to the veteran a release relieving (Authority: 38 U.S.C. 3713(b)) him or her of all further liability to the (g) If a veteran or any other person Secretary on account of such loan (in- disposes of residential property secur- cluding liability for any loss resulting ing a guaranteed or insured loan for from any default of the transferee or which a commitment was made on or any subsequent purchaser of such prop- after March 1, 1988, and the veteran or erty) if the Secretary has determined, other person notifies the loan holder in after such investigation as the Sec- writing before disposing of the prop- retary may deem appropriate, that erty, the veteran or other person shall there has been compliance with the be relieved of all further liability to conditions prescribed in 38 U.S.C. the Secretary with respect to the loan 3713(a). The assumption of full liability (including liability for any loss result- for repayment of the loan by the trans- ing from any default of the purchaser feree of the property must be evidenced or any subsequent owner of the prop- by an agreement in writing in such erty) and the application for assump- form as the Secretary may require. Re- tion shall be approved if the holder de- lease of the veteran from liability to termines that: the Secretary will not impair or other- (1) The proposed purchaser is credit- wise affect the Secretary’s guaranty on worthy; the loan, or the liability of the veteran to the holder. Any release of liability (2) The proposed purchaser is con- granted to a veteran by the Secretary tractually obligated to assume the loan shall inure to the spouse of such vet- and the liability to indemnify the De- eran. The release of the veteran from partment of Veterans Affairs for the liability to the Secretary will con- amount of any claim paid under the stitute the Secretary’s prior approval guaranty as a result of a default on the to a release of the veteran from liabil- loan, or has already done so; and, ity on the loan by the holder thereof. (3) The payments on the loan are cur- This release will not result in the vet- rent. eran being entitled to further loan ben- Should these requirements be satisfied, efits unless the requirements of the holder may also release the selling § 36.4203 are met. veteran or other person from liability on the loan. This does not apply if the (Authority: 38 U.S.C. 3713, 3714) approval for the assumption is granted

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upon special appeal to avoid immediate (4) Advice to Secretary as to default, foreclosure. (5) Notice of intention to begin action, (Authority: 38 U.S.C. 3713, 3714) (6) Notice to the Secretary in any [36 FR 1253, Jan. 27, 1971, as amended at 36 suit or action, or notice of sale, FR 13032, July 13, 1971; 44 FR 16015, Mar. 16, (7) The release, conveyance, substi- 1979; 55 FR 37474, Sept. 12, 1990] tution, or exchange of security, (8) Lack of legal capacity of a party § 36.4286 Partial or total loss of guar- to the transaction incident to which anty. the guaranty is granted, (a) There shall be no guaranty liabil- (9) Failure of the lender to see that ity on the part of the Secretary in re- any escrowed or earmarked account is spect to any loan as to which a signa- expended in accordance with the agree- ture to the note, the mortgage or other ment, security instrument is a forgery. Ex- (10) The taking into consideration of cept as to a holder who acquired the limitations upon the quantum or qual- loan instrument before maturity, for ity of the estate or property, value, and without notice, and who has (11) Any other requirement of 38 not directly or by agent participated in U.S.C. 3712 or the § 36.4200 series which the fraud, or in the misrepresentation does not by the terms of said section or hereinafter specified, any willful and regulations result in relieving the Sec- material misrepresentation or fraud by retary of all liability with respect to the lender, or by a holder, or the agent the loan, of either, in procuring the guaranty no claim on the guaranty shall be paid shall relieve the Secretary of liability, on account of the loan with respect to or shall constitute a defense against li- which such failure occurred, or in re- ability on account of the guaranty of spect to which an unwillful misrepre- the loan in respect to which the willful sentation occurred, until the amount misrepresentation, or the fraud, is by which the ultimate liability of the practiced: Provided, That if a misrepre- Secretary would thereby be increased sentation, although material, is not has been ascertained. The burden of made willfully, or with fraudulent in- proof shall be upon the holder to estab- tent, it shall have only the con- lish that no increase of ultimate liabil- sequences prescribed in paragraphs (b) ity is attributable to such failure or and (c) of this section. misrepresentation. The amount of in- (b) In taking security required by 38 creased liability of the Secretary shall U.S.C. 3712 and the § 36.4200 series, a be offset by deduction from the amount holder shall obtain the required lien on of the guaranty otherwise payable, or real property the title to which is such if consequent upon loss of security as to be acceptable to prudent lending shall be offset by crediting to the in- institutions, informed buyers, title debtedness the amount of the impair- companies, and attorneys, generally in ment as proceeds of the sale of security the community in which the property in the final accounting to the Sec- is situated: Provided, That a title will retary. To the extent the loss resultant not be unacceptable by reason of any of from the failure of misrepresentation the limitations on the quantum or prejudices the Secretary’s right of sub- quality of the property or title stated rogation acceptance by the holder of in § 36.4253. If such holder fails in this the guaranty payment shall subordi- respect or fails to comply with any of nate the holder’s right to those of the the requirements of 38 U.S.C. 3712 and Secretary. the § 36.4200 series with respect to: (c) If after the payment of a guar- (1) Obtaining and retaining a lien of anty, or after a loan is transferred pur- the dignity prescribed on all property suant to § 36.4281, the fraud, misrepre- upon which a lien is required by 38 sentation, or failure to comply with U.S.C. 3712 or the § 36.4200 series, the regulations concerning guaranty of (2) Inclusion of power to substitute loans to veterans as provided in this trustees, section is discovered and the Secretary (3) The procurement and mainte- determines that an increased loss to nance of insurance coverage, the Government resulted therefrom,

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the transferee or person to whom such sive, and §§ 36.4390 through 36.4393 of payment was made shall be liable to this part, unless the context otherwise the Secretary for the amount of the requires, the terms defined in this sec- loss caused by such misrepresentation tion shall have the following meaning: or failure. A period of more than 180 days. For the purposes of sections 3707 and § 36.4287 Substitution of trustees. 3702(a)(2)(C) of title 38 U.S.C., the term In jurisdictions in which valid, any a period of more than 180 days shall deed of trust or mortgage securing a mean 181 or more calendar days of con- guaranteed loan, if it names trustees or tinuous active duty. confers a power of sale otherwise, shall Acquisition and improvement loan. A contain a provision empowering any loan to purchase an existing property holder of the indebtedness to appoint which includes additional funds for the substitute trustees or other person purpose of installing energy conserva- with such power to sell, who shall suc- tion improvements or making other al- ceed to all the rights, powers, and du- terations, improvements, or repairs. ties of the trustees, or other person, originally designated. (Authority: 38 U.S.C. 3703(c)(1), 3710(a) (1), (4), and (7)) Subpart B—Guaranty or Insurance of Loans to Veterans Alterations. Any structural changes or additions to existing improved real- NOTE: Those requirements, conditions, or ty. limitations which are expressly set forth in Automatic lender. A lender that may 38 U.S.C. chapter 37 are not restated in these process a loan or assumption 1⁄4without regulations and must be taken into consider- submitting the credit package to the ation in conjunction with §§ 36.4300 to 36.4393 Department of Veterans Affairs for un- of this part, inclusive. derwriting review. Pursuant to 38 [53 FR 1350, Jan. 19, 1988] U.S.C. 3702(d) there are two categories of lenders who may process loans auto- § 36.4300 Applicability of §§ 36.4300 to matically: (1) Entities such as banks, 36.4393, inclusive. savings and loan associations, and (a) Sections 36.4300 to 36.4393 of this mortgage and loan companies that are part, inclusive, shall be applicable to subject to examination by an agency of each loan entitled to an automatic the United States or any State and (2) guaranty, or otherwise guaranteed or lenders approved by the Department of insured, on or after the date of publica- Veterans Affairs pursuant to standards tion in the FEDERAL REGISTER, and established by the Department of Vet- shall be applicable to such loans pre- erans Affairs. viously guaranteed or insured to the extent that no legal rights vested (Authority: 38 U.S.C. 3702(d)) under the regulations are impaired. (b) Title 38 U.S.C., chapter 37, is a Condominium. Unless otherwise pro- continuation and restatement of the vided by State law, a condominium is a provisions of Title III of the Service- form of ownership where the buyer re- men’s Readjustment Act of 1944, and ceives title to a three dimensional air may be considered an amendment to space containing the individual living such Title III. References to the sec- unit together with an undivided inter- tions or chapters of title 38 U.S.C., est or share in the ownership of com- shall, where applicable, be deemed to mon elements. refer to the prior corresponding provi- Cost means the entire consideration sions of the law. paid or payable for or on account of the application of materials and labor to (Authority: 38 U.S.C. 501, 3703(c), 3712(g)) tangible property. [53 FR 1350, Jan. 19, 1988] Credit package. Any information, reports or verifications used by a lender, § 36.4301 Definitions. holder or authorized servicing agent to Whenever used in 38 U.S.C. chapter 37 determine the creditworthiness of an or §§ 36.4300 to 36.4375 of this part, inclu- applicant for a Department of Veterans

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Affairs guaranteed loan or the assumer real property under the laws of the of such a loan. State where it is located.

(Authority: 38 U.S.C. 3710 and 3714) (Authority: 38 U.S.C. 3710(a)(9) and (f)) Date of first uncured default means the Economic readjustment means rear- due date of the earliest payment not rangement of an eligible veteran’s in- fully satisfied by the proper applica- debtedness in a manner calculated to tion of available credits or deposits. enable the veteran to meet obligations Default means failure of a borrower and thereby avoid imminent loss of the to comply with the terms of a loan property which secures the delinquent agreement. obligation. Designated appraiser means a person Energy conservation improvement. An requested by the Secretary to render improvement to an existing dwelling or an estimate of the reasonable value of farm residence through the installation a property, or of a specified type of of a solar heating system, a solar heat- property, within a stated area for the ing and cooling system, or a combined purpose of justifying the extension of solar heating and cooling system or credit to an eligible veteran for any of through application of a residential en- the purposes stated in 38 U.S.C. Chap- ergy conservation measure as pre- ter 37. An appraiser on a fee basis is not scribed in 38 U.S.C. 3710(d) or by the an agent of the Secretary. Secretary. Discharge or release. For purposes of basic eligibility a person will be con- (Authority: 38 U.S.C. 3710(a)(7)) sidered discharged or released if the Full disbursement. Payment by a lend- veteran was issued a discharge certifi- er of the entire proceeds of a loan or cate under conditions other than dis- the purposes described in the report of honorable (38 U.S.C. 3702(c)). The term the lender in respect of such loan to discharge or release includes (1) retire- the Secretary either: ment from the active military, naval, (1) By payment to those contracting or air service, and (2) the satisfactory with the borrower for such purposes, or completion of the period of active mili- (2) By payment to the borrower, or tary, naval, or air service for which a (3) By transfer to an account against person was obligated at the time of which the borrower can draw at will, or entry into such service in the case of a (4) By transfer to an escrow account, person who, due to enlistment or reen- or listment, was not awarded a discharge (5) By transfer to an earmarked ac- or release from such period of service count if at the time of such completion thereof (i) The amount is not in excess of 10 and who, at such time, would otherwise percent of the loan, or have been eligible for the award of a (ii) The loan is an Acquisition and discharge or release under conditions Improvement loan pursuant to § 36.4301, other than dishonorable. or (iii) The loan is one submitted by a (Authority: 38 U.S.C. 101(18)) lender of the class specified in 38 U.S.C. Dwelling. Any building designed pri- 3702(d) or 3703(a)(2). marily for use as a home consisting of not more than four family units plus (Authority: 38 U.S.C. 3703(c)(1)) an added unit for each veteran if more Graduated payment mortgage loan. A than one eligible veteran participates loan for the purpose of acquiring a sin- in the ownership, except that in the gle-family dwelling unit involving a case of a condominium housing devel- plan for repayment in which a portion opment or project within the purview of the interest due is deferred for a pe- of 38 U.S.C. 3710(a)(6) and §§ 36.4356 riod of time. The interest so deferred is through 36.4360(a) of this part the term added to the principal balance thus re- is limited to a one single-family resi- sulting in a principal amount greater dential unit. Also, a manufactured than at loan origination (negative am- home, permanently affixed to a lot ortization). The monthly payments in- owned by a veteran and classified as crease on an annual basis (graduate)

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for a predetermined period of time Lien means any interest in, or power until the payments reach a level which over, real or personal property, re- will fully amortize the loan during the served by the vendor, or created by the remaining loan term. parties or by operation of law, chiefly or solely for the purpose of assuring (Authority: 38 U.S.C. 3703 (c) and (d)) the payment of the purchase price, or a Guaranty means the obligation of the debt, and irrespective of the identity of United States, assumed by virtue of 38 the party in whom title to the property U.S.C. Chapter 37, to repay a specified is vested, including but not limited to percentage of a loan upon the default mortgages, deeds with a defeasance of the primary debtor. therein or collaterally, deeds of trust, Holder. The lender or any subsequent security deeds, mechanics’ liens, lease- assignee or transferee of the guaran- purchase contracts, conditional sales teed obligation or the authorized serv- contracts, consignments. icing agent of the lender or of the as- Liquidation sale. Any judicial, signee or transferee if the obligation contractural or statutory disposition has been assigned or transferred. of real property, under the terms of the loan instruments and applicable law, to (Authority: 38 U.S.C. 3714) liquidate a defaulted loan that is se- Home means place of residence. cured by such property. This includes a Improvements. Any alteration that voluntary conveyance made to avoid improves the property for the purpose such disposition of the obligation or of for which it is occupied. the security. Indebtedness. The unpaid principal and interest plus any other amounts (Authority: 38 U.S.C. 3732) allowable under the terms of a loan including those authorized by statute Lot. A parcel of land acceptable to and consistent with §§ 36.4300 to 36.4393 the Secretary as a manufactured home of this part, inclusive, which have been site. paid and debited to the loan account as of the applicable date established pur- (Authority: 38 U.S.C. 3710(a)(9)) suant to paragraph (f) of § 36.4319 or Manufactured home. A moveable § 36.4321 of this part. dwelling unit designed and constructed for year-round occupancy by a single (Authority: 38 U.S.C. 3732) family, on land, containing permanent Insurance means the obligation as- eating, cooking, sleeping and sanitary sumed by the United States to indem- facilities. A double-wide manufactured nify a lender to the extent specified in home is a moveable dwelling designed §§ 36.4300 to 36.4393, inclusive, for any for occupancy by one family and con- loss incurred upon any loan insured sisting of: (1) Two or more units in- under 38 U.S.C. 3703(a)(2). tended to be joined together hori- Insurance account means the record of zontally when located on a site, but ca- the amount available to a lender or pable of independent movement or (2) a purchaser for losses incurred on loans unit having a section or sections which insured under 38 U.S.C. 3703(a). Lender. The payee or assignee or unfold along the entire length of the transferee of an obligation at the time unit. For the purposes of this section of it is guaranteed or insured. This term VA regulations, manufactured home/ also includes any sole proprietorship, lot loans guaranteed under the purview partnership, or corporation and the of §§ 36.4300 to 36.4393, inclusive, must owners, officers and employees of a sole be for units permanently affixed to a proprietorship, partnership, or corpora- lot and considered to be real property tion engaged in the origination, pro- under the laws of the State where it is curement, transfer, servicing, or fund- located. If the loan is for the purchase ing of a loan which is guaranteed or in- of a manufactured home and lot it sured by VA. must be considered as one loan.

(Authority: 38 U.S.C. 3704(d), 3712(g)) (Authority: 38 U.S.C. 3710(a)(9))

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Net loss. (insured loans) means the in- The average administrative costs will debtedness, plus any other charges au- be determined by: thorized under § 36.4313, remaining (A) Dividing the total cost for VA unsatisfied after the liquidation of all personnel and overhead salary and ben- available security and recourse to all efits costs by the average number of intangible rights of the holder against properties on hand and adjusting this those obligated on the debt. figure based on the average holding Net value. The fair market value of time for properties sold during the pre- real property, minus an amount rep- ceding fiscal year; then resenting the costs that the Secretary (B) Dividing the figure calculated in estimates would be incurred by VA in paragraph (3)(i)(A) of this definition by acquiring and disposing of the prop- the VBA ratio of personal services erty. The number to be subtracted costs to total obligations. (ii) The three cost averages will be from the fair market value will be cal- added to the average loss (or gain) on culated by multiplying the fair market property sold during the preceding fis- value by the current cost factor. The cal year (based on the average property cost factor used will be the most recent purchase price) and the sum will be di- percentage of the fair market value vided by the average fair market value that VA calculated and published in at the time of acquisition for prop- the Notices section of the FEDERAL erties which were sold during the pre- REGISTER (it is intended that this per- ceding fiscal year to derive the percentage will be calculated annually). In centage to be used in estimating net computing this cost factor, VA will de- value. termine the average operating expenses and losses (or gains) on resale (Authority: 38 U.S.C. 3732) incurred for properties acquired under § 36.4320 which were sold during the pre- Purchase price. The entire legal con- ceding fiscal year and the average ad- sideration paid or payable upon or on ministrative cost to VA associated account of the sale of property, exclu- with the property management activ- sive of acquisition costs, or for the cost of materials and labor to be applied to ity. The final net value derived from the property. this calculation will be stated as a Real-estate loan. Any obligation in- whole dollar amount (any fractional curred for the purchase of real property amount will be rounded up to the next or a leasehold estate as limited in whole dollar). The cost items included §§ 36.4300 to 36.4393, inclusive, or for the in the calculation will be: construction of fixtures or appur- (1) Property operating expenses. All tenances thereon or for alterations, im- disbursements made for payment of provements, or repairs thereon re- taxes, assessments, liens, property quired by §§ 36.4300 to 36.4393, inclusive, maintenance and related repairs, man- to be secured by a lien on such prop- agement broker’s fees and commis- erty or is so secured. Loans for the pur- sions, and any other charges to the pose specified in 38 U.S.C. 3710(a)(5) (re- property account excluding property financing of mortgage loans or other improvements and selling expenses. liens on a dwelling or farm residence), (2) Selling expenses. All disbursements loans for the purpose specified in 38 for sales commissions plus any other U.S.C. 3710(a)(8) (refinancing of a VA costs incurred and paid in connection guaranteed, insured or direct loan to with the sale of the property. lower the interest rate), loans for the (3) Administrative costs. (i) An esti- purposes specified in 38 U.S.C. 3710(a)(9) mate of the total cost for VA of per- (purchase of manufactured homes/lots sonnel (salary and benefits) and over- or the refinancing of such loans in head (which may include things such as order to reduce the interest rate or travel, transportation, communication, purchase a lot, in States in which man- utilities, printing, supplies, equipment, ufactured homes, when permanently af- insurance claims and other services) fixed to a lot, are considered real prop- associated with the acquisition, man- erty, and loans to purchase one-family agement and disposition of property residential units in condominium hous- acquired under § 36.4320 of this part. ing developments or projects within

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the purview of 38 U.S.C. 3710(a)(6) and Servicing agent. An agent designated §§ 36.4356 through 36.4360a shall also be by the loan holder as the entity to col- considered real estate loans. lect installments on the loan and/or Reasonable value means that figure perform other functions as necessary which represents the amount a rep- to protect the interests of the holder. utable and qualified appraiser, unaffected by personal interest, bias, or (Authority: 38 U.S.C. 3714) prejudice, would recommend to a prospective purchaser as a proper price or Specified amount. A sum, equal to the cost in the light of prevailing condi- lesser of the net value of real property tions. or the total indebtedness secured Registered mail. The term registered thereby, which the Secretary des- mail wherever used in the regulations ignates as the minimum amount to be concerning guaranty or insurance of credited to the indebtedness incident loans to veterans shall include cer- to a liquidation sale. tified mail. Repairs. Any alteration of existing (Authority: 38 U.S.C. 3732) improved realty or equipment which is necessary or advisable for protective, Unguaranteed portion of the indebted- safety or restorative purposes. ness. The indebtedness computed as of Repossession - repossessed means re- the applicable date of under paragraph covery or acquisition of such physical (f) of § 36.4319 or § 36.4321 of this part control of property (pursuant to the minus the amount of the guaranty pay- provisions of the security instrument able as of such date. or as otherwise provided by law) as to make further legal or other action un- (Authority: 38 U.S.C. 3732) necessary in order to obtain actual pos- (Authority: 38 U.S.C. 501, 3703(c)(1)) session of the property or to dispose of the same by sale or otherwise. [24 FR 2651, Apr. 7, 1959] Residential property. (1) Any one-fam- EDITORIAL NOTE: For FEDERAL REGISTER ci- ily residential unit in a condominium tations affecting § 36.4301, see the List of CFR housing development within the pur- Sections Affected, which appears in the view of 38 U.S.C. 3710(a)(6) and §§ 36.4356 Finding Aids section of the printed volume through 36.4360a, (2) any manufactured and on GPO Access. home permanently affixed to a lot owned or being purchased by a veteran GENERAL PROVISIONS and considered to be real property under the laws of the State where it is § 36.4302 Computation of guaranties or located, and (3) any improved real insurance credits. property (other than a condominium (a) With respect to a loan to a vet- housing development or a manufac- eran guaranteed under 38 U.S.C. 3710 tured home and/or lot) or leasehold es- the guaranty shall not exceed the less- tate therein as limited by §§ 36.4300 to er of the dollar amount of entitlement 36.4393, inclusive, the primary use of available to the veteran or which is for occupancy as a home, con- (1) 50 percent of the original principal sisting of not more than four family loan amount where the loan amount is units, plus an added unit for each eligi- not more than $45,000; or ble veteran if more than one partici- (2) $22,500 where the original prin- pates in the ownership thereof, or (4) cipal loan exceeds $45,000, but is not any land to be purchased out of the proceeds of a loan for the construction more than $56,250; or of a dwelling, and on which such dwell- (3) Except as provided in subpara- ing is to be erected. graph (4), the lesser of $36,000 or 40 percent of the original principal loan (Authority: 38 U.S.C. 3710(f)(2) and (3)) amount where the loan amount exceeds $56,250; or Secretary. The Secretary of Veterans Affairs, or any employee of the Depart- (4) The lesser of $60,000 or 25 percent ment of Veterans Affairs authorized to of the original principal loan amount act in the Secretary’s stead. where the loan amount exceeds $144,000

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and the loan is for the purchase or con- (2) If a veteran previously secured a struction of a home or the purchase of realty (home) loan, the amount of real- a condominium unit. ty (home) loan entitlement used is subtracted from $36,000. The sum remain- (Authority: 38 U.S.C. 3703(a)) ing is the amount of available entitle- (b) With respect to an interest rate ment for use, except that: reduction refinancing loan guaranteed (i) Entitlement may be increased by under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or up to $24,000 if the loan amount exceeds (a)(11), the dollar amount of guaranty $144,000 and the loan is for purchase or may not exceed the greater of the construction of a home or purchase of original guaranty amount of the loan a condominium: and being refinanced, or 25 percent of the (ii) Entitlement for manufactured refinancing loan amount. home loans that are to be guaranteed under 38 U.S.C. 3712 may not exceed (Authority: 38 U.S.C. 3703, 3710) $20,000. (c) With respect to a loan for an en- (3) If a veteran previously secured a ergy efficient mortgage guaranteed manufactured home loan under 38 under 38 U.S.C. 3710(d), the amount of U.S.C. 3712, the amount of entitlement the guaranty shall be in the same pro- used for that loan is subtracted from portion as would have been provided if $36,000. The sum remaining is the the energy efficient improvements amount of available entitlement for were not added to the loan amount, home loans and the sum remaining and there shall be no additional charge may be increased by up to $24,000 if the to the veteran’s entitlement as a result loan amount exceeds $144,000 and the of the increased guaranty amount. loan is for purchase or construction of a home or purchase of a condominium. (Authority: 38 U.S.C. 3703, 3710) To determine the amount of entitle- (d) An amount equal to 15 percent of ment available for manufactured home the original principal amount of each loans processed under 38 U.S.C. 3712, insured loan shall be credited to the in- the amount of entitlement previously surance account of the lender and shall used for that purpose is subtracted be charged against the guaranty enti- from $20,000. The sum remaining is the tlement of the borrower: Provided, That amount of available entitlement for no loan may be insured unless the bor- use for manufactured home loan pur- rower has sufficient entitlement re- poses under 38 U.S.C. 3712. maining to permit such credit. (e) Subject to the provisions of (Authority: 38 U.S.C. 3703) § 36.4303(g), the following formulas shall (f) For the purpose of computing the govern the computation of the amount remaining guaranty or insurance ben- of the guaranty or insurance entitle- efit to which a veteran is entitled, ment which remains available to an el- loans guaranteed prior to the effective igible veteran after prior use of entitle- date of §§ 36.4300 to 36.4393, inclusive, ment: (1) If a veteran previously secured a shall be taken into consideration as if nonrealty (business) loan, the amount made subsequent thereto. of nonrealty entitlement used is dou- (g) A loan eligible for insurance may bled and subtracted from $36,000. The be either guaranteed or insured at the sum remaining is the amount of avail- option of the borrower and the lender: able entitlement for use, except that: Provided, That if the Secretary is not (i) Entitlement may be increased by advised of the exercise of such option up to $24,000 if the loan amount exceeds at the time the loan is reported pursu- $144,000 and the loan is for purchase or ant to § 36.4303 such loan will not be eli- construction of a home or purchase of gible for insurance. a condominium; and (h) A guaranty is reduced or in- (ii) Entitlement for manufactured creased pro rata with any deduction or home loans that are to be guaranteed increase in the amount of the guaran- under 38 U.S.C. 3712 may not exceed teed indebtedness, but in no event will $20,000. the amount payable on a guaranty or

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the percentage of the indebtedness cor- a VA-guaranteed loan, the Secretary responding to that of the original guar- may, one time only, restore entitle- anty whichever is less. However, on a ment used on that loan if: graduated payment mortgage loan, the (i) the loan has been repaid in full or, percentage of guaranty applicable to if the Secretary has suffered a loss on the original loan amount pursuant to the loan, the loss has been paid in full; paragraph (a) of this section shall or apply to the loan indebtedness to the (ii) the Secretary has been released extent scheduled deferred interest is from liability as to the loan, and, if the added to principal during the gradua- Secretary has suffered a loss on the tion period without regard to the origi- loan, the loss has been paid in full. nal maximum dollar amount of guar- (k) The Secretary may, in any case anty. involving circumstances deemed appropriate, waive either or both of the re- (Authority: 38 U.S.C. 3703(b) and (d)) quirements set forth in paragraphs (i) The amount of any guaranty or (j)(1) and (j)(2)(i) of this section. the amount credited to a lender’s insurance account in relation to any in- (Authority: 38 U.S.C. 3702(b), 3710) sured loan shall be charged against the (l)(1) The amount of guaranty enti- original or remainder of the guaranty tlement, available and unused, of an el- benefit of the borrower. Complete or igible unmarried surviving spouse partial liquidation, by payment or oth- (whose eligibility does not result from erwise, of the veteran’s guaranteed or his or her own service) is determinable insured indebtedness does not increase in the same manner as in the case of the remainder of the guaranty benefit, any veteran, and any entitlement if any, otherwise available to the vet- which the decedent (who was his or her eran. When the maximum amount of spouse) used shall be disregarded. A guaranty or insurance legally available certificate as to the eligibility of such to a veteran shall have been granted, surviving spouse, issued by the Sec- no further guaranty or insurance is retary, shall be a condition precedent available to the veteran. to the guaranty or insurance of any (j) Notwithstanding the provisions of loan made to a surviving spouse in paragraph (g) of this section, the Sec- such capacity. retary may exclude the amount of guaranty or insurance entitlement (Authority: 38 U.S.C. 3701(a)) used for any guaranteed or insured (2) An unmarried surviving spouse loan provided: who was a co-obligor under an existing (1) The property which served as se- VA guaranteed, insured or direct loan curity for the loan has been disposed of shall be considered to be a veteran eli- by the veteran, or has been destroyed gible for an interest rate reduction re- by fire or other natural hazard; and financing loan pursuant to 38 U.S.C. (2)(i) The loan has been repaid in full 3710(a)(8) or (9)(B)(i). or the Secretary has been released from liability as to the loan, or if the (Authority: 38 U.S.C. 3710(e)(3)) Secretary has suffered a loss on said (Authority: 38 U.S.C. 501, 3703(c)(1)) loan, such loss has been paid in full; or (ii) A veteran-transferee has agreed [13 FR 7274, Nov. 27, 1948, as amended at 35 FR 17179, Nov. 7, 1970; 40 FR 34589, Aug. 18, to assume the outstanding balance on 1975; 46 FR 43672, Aug. 31, 1981; 47 FR 15139, the loan and consented to the use of his Apr. 8, 1982; 49 FR 28243, July 11, 1984; 50 FR or her entitlement to the extent the 3334, Jan. 24, 1985; 55 FR 40655, Oct. 4, 1990; 60 entitlement of the veteran-transferor FR 38259, July 26, 1995; 68 FR 6627, Feb. 10, had been used originally; or 2003] (3) The loan has been repaid in full, and the loan for which the veteran § 36.4303 Reporting requirements. seeks to use entitlement is secured by (a) With respect to loans automati- the same property which secured the cally guaranteed under 38 U.S.C. fully repaid loan; or 3703(a)(1), evidence of the guaranty will (4) In a case in which the veteran be issuable to a lender of a class de- still owns the property purchased with scribed under 38 U.S.C. 3702(d) if the

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loan is reported to the Secretary with- days thereafter of a supplemental rein 60 days following full disbursement port showing that fact and: and upon the certification of the lender (1) The identity of any property pur- that: chased therewith, (1) No default exists thereunder that (2) That all property purchased or ac- has continued for more than 30 days; quired with the proceeds of the loan (2) Except for acquisition and im- has been encumbered as required by provement loans as defined in § 36.4301, the regulations concerning guaranty or any construction, repairs, alterations, insurance of loans to veterans, or improvements effected subsequent (3) Except for acquisition and im- to the appraisal of reasonable value, and paid for out of the proceeds of the provement loans as defined in loan, which have not been inspected § 36.4301(c), any construction, repairs, and approved upon completion by a alterations, or improvements paid for compliance inspector designated by the out of the proceeds of the loan, which Secretary, have been completed prop- have not been inspected and approved erly in full accordance with the plans subsequent to completion by a compli- and specifications upon which the ance inspector designated by the Sec- original appraisal was based; and any retary, have been completed properly deviations or changes of identity in in full accordance with the plans and said property have been approved as re- specifications upon which the original quired in § 36.4304 concerning guaranty appraisal was based; and that any devi- or insurance of loans to veterans; ations or changes of identity in said (3) The loan conforms otherwise with property have been approved as re- the applicable provisions of 38 U.S.C. quired by § 36.4304, and Chapter 37 and of the regulations con- (4) That the loan conforms otherwise cerning guaranty or insurance of loans with the applicable provisions of 38 to veterans. U.S.C. Chapter 37 and the regulations concerning guaranty or insurance of (Authority: 38 U.S.C. 3703(c)(1)) loans to veterans. (b) Loans made pursuant to 38 U.S.C. 3703(a), although not entitled to auto- (Authority: 38 U.S.C. 3703(c)(1)) matic insurance thereunder, may, (e) Upon the failure of the lender to when made by a lender of a class de- report in accordance with the provi- scribed in 38 U.S.C. 3702(d)(1), be re- sions of paragraph (d) of this section, ported for issuance of an insurance credit. the certificate of commitment shall have no further effect, or the amount (Authority: 38 U.S.C. 3702(d), 3703(a)(2)) of guaranty or insurance shall be reduced pro rata, as may be appropriate (c) Each loan proposed to be made to under the facts of the case: Provided, an eligible veteran by a lender not nevertheless, that if the loan otherwise within a class described in 38 U.S.C. meets the requirements of this section, 3702(d) shall be submitted to the Sec- said certificate of commitment may be retary for approval prior to closing. given effect by the Secretary, notwith- Lenders described in 38 U.S.C. 3702(d) shall have the optional right to submit standing the report is received after any loan for such prior approval. The the date otherwise required. Secretary, upon determining any loan (f) For loans not reported within 60 so submitted to be eligible for a guar- days, evidence of guaranty will be anty, or for insurance, will issue a cer- issued only if the loan report is accom- tificate of commitment with respect panied by a statement signed by a cor- thereto. porate officer of the lending institution (d) A certificate of commitment shall which explains why the loan was re- entitle the holder to the issuance of ported late. The statement must iden- the evidence of guaranty or insurance tify the case or cases in issue and must upon the ultimate actual payment of set forth the specific reason or reasons the full proceeds of the loan for the why the loan was not submitted on purposes described in the original re- time. Upon receipt of such a statement port and upon the submission within 60 evidence of guaranty will be issued. A

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pattern of late reporting and the rea- (h) Subject to compliance with the sons therefore will be considered by VA regulations concerning guaranty or in- in taking action under § 36.4349. surance of loans to veterans, the cer- (g) Evidence of a guaranty will be tificate of guaranty or the evidence of issued by the Secretary by appropriate insurance credit will be issuable within endorsement on the note or other in- the available entitlement of the vet- strument evidencing the obligation, or eran on the basis of the loan stated in by a separate certificate at the option the final loan report or certification of of the lender. Notice of credit to an in- loan disbursement, except for refi- surance account will be given to the nancing loans for interest rate reduc- lender. Unused certificates of eligi- tions. The available entitlement of a bility issued prior to March 1, 1946, are veteran will be determined by the Sec- void. No certificate of commitment retary as of the date of receipt of an shall be issued and no loan shall be application for guaranty or insurance guaranteed or insured unless the lend- of a loan or of a loan report. Such date er, the veteran, and the loan are shown of receipt shall be the date the applica- to be eligible. Evidence of guaranty or tion or loan report is date-stamped insurance will not be issued on any into VA. Eligibility derived from the loan for the purchase or construction most recent period of service: of residential property unless the vet- (1) Shall cancel any unused entitle- eran, or the veteran’s spouse in the ment derived from any earlier period of case of a veteran who cannot occupy service, and the property because of active duty (2) Shall be reduced by the amount status with the Armed Forces, certifies by which entitlement from service dur- in such form as the Secretary shall pre- ing any earlier period has been used to scribe that the veteran, or spouse of obtain a direct, guaranteed, or insured the active duty veteran, intends to oc- loan. cupy the property as his or her home. (i) On property which the veteran Guaranty or insurance evidence will owns at the time of application, or not be issued on any loan for the alter- (ii) As to which the Secretary has ination, improvement, or repair of any curred actual liability or loss, unless in residential property or on a refinancing the event of loss or the incurrence and loan unless the veteran, or spouse of an payment of such liability by the Sec- active duty servicemember, certifies retary, the resulting indebtedness of that he or she presently occupies the the veteran to the United States has property as his or her home. An excep- been paid in full. Provided, That if the tion to this is if the home improvement Secretary issues or has issued a certifi- or refinancing loan is for extensive cate of commitment covering the loan changes to the property that will pre- described in the application for guar- vent the veteran or the spouse of the anty or insurance or in the loan report, active duty veteran from occupying the the amount and percentage of guaranty property while the work is being com- or the amount of the insurance credit pleted. In such a case the veteran or contemplated by the certificate of spouse of the active duty veteran must commitment shall not be subject to re- certify that he or she intends to occupy duction if the loan has been or is closed or reoccupy the property as his or her on a date that is not later than the ex- home upon completion of the substan- piration date of the certificate of com- tial improvements or repairs. All of the mitment, notwithstanding that the mentioned certifications must take Secretary in the meantime and prior to place at the time of loan application the issuance of the evidence of guar- and closing except in the case of loans anty or insurance shall have incurred automatically guaranteed, in which actual liability or loss on a direct, case veterans or, in the case of an ac- guaranteed, or insured loan previously tive duty veteran, the veterans’ spouse obtained by the borrower. For the pur- shall make the required certification poses of this paragraph, the Secretary only at the time the loan is closed. will be deemed to have incurred actual loss on a guaranteed or insured loan if (Authority: 38 U.S.C. 3704(c)) the Secretary has paid a guaranty or

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insurance claim thereon and the vet- contract purchase price or cost exceeds the eran’s resultant indebtedness to the reasonable value of the property established Government has not been paid in full, by the Department of Veterans Affairs. The and to have incurred actual liability on purchaser shall, however, have the privilege and option of proceeding with the con- a guaranteed or insured loan if the Sec- summation of this contract without regard retary is in receipt of a claim on the to the amount of the reasonable value estab- guaranty or insurance or is in receipt lished by the Department of Veterans Af- of a notice of default. In the case of a fairs. direct loan, the Secretary will be deemed to have incurred an actual loss (Authority: 38 U.S.C. 501, 3703(c)(1)) if the loan is in default. A loan, the (l) With respect to any loan for which proceeds of which are to be disbursed a commitment was made on or after progressively or at intervals, will be March 1, 1988, the Secretary must be deemed to have been closed for the pur- notified whenever the holder receives poses of this paragraph if the loan has been completed in all respects except- knowledge of disposition of the resi- ing the actual ‘‘payout’’ of the entire dential property securing a VA-guaran- loan proceeds. teed loan. (1) If the seller applies for prior ap- (Authority: 38 U.S.C. 3702(a), 3710(c)) proval of the assumption of the loan, then: (i) Any amounts that are disbursed (i) A holder (or its authorized serv- for an ineligible purpose shall be ex- icing agent) who is an automatic lend- cluded in computing the amount of er must examine the creditworthiness guaranty or insurance credit. of the purchaser and determine compli- (j) Notwithstanding the lender has erroneously, but without intent to mis- ance with the provisions of 38 U.S.C. represent, made certification with re- 3714. The creditworthiness review must spect to paragraph (a)(1) of this sec- be performed by the party that has tion, the guaranty or insurance will be- automatic authority. If both the holder come effective upon the curing of such and its servicing agent are automatic default and its continuing current for a lenders, then they must decide between period of not less than 60 days there- themselves which one will make the after. For the purpose of this para- determination of creditworthiness, graph a loan will be deemed current so whether the loan is current and wheth- long as the installment is received er there is a contractual obligation to within 30 days after its due date. assume the loan, as required by 38 (k) No guaranty or insurance com- U.S.C. 3714. If the actual loan holder mitment or evidence of guaranty or in- does not have automatic authority and surance will be issuable in respect to its servicing agent is an automatic any loan to finance a contract that: lender, then the servicing agent must (1) Is for the purchase, construction, make the determinations required by repair, alteration, or improvement of a 38 U.S.C. 3714 on behalf of the holder. dwelling or farm residence; The actual holder will remain ulti- (2) Is dated on or after June 4, 1969; mately responsible for any failure of (3) Provides for a purchase price or its servicing agent to comply with the cost to the veteran in excess of the rea- applicable law and VA regulations. sonable value established by the Sec- (A) If the assumption is approved and retary; and the transfer of the security is com- (4) Was signed by the veteran prior to pleted, then the notice required by this the veteran’s receipt of notice of such paragraph shall consist of the credit reasonable value; unless such contract package (unless previously provided in includes, or is amended to include, a accordance with paragraph (k)(1)(i)(B) provision substantially as follows: of this section) and a copy of the executed deed and/or assumption agree- It is expressly agreed that, notwith- ment as required by VA office of juris- standing any other provisions of this contract, the purchaser shall not incur any pen- diction. The notice shall be submitted alty by forfeiture of earnest money or other- to the Department with VA receipt for wise or be obligated to complete the pur- the funding fee provided for in chase of the property described herein, if the § 36.4312(e)(3) of this part.

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(B) If the application for assumption tion is not automatically approved by is disapproved, the holder shall notify the holder or its authorized agent, pur- the seller and the purchaser that the suant to the automatic authority pro- decision may be appealed to the VA of- visions, $50 of any fee collected in ac- fice of jurisdiction within 30 days. The cordance with § 36.4312(d)(8) of this part holder shall make available to that VA must be refunded. If the Department of office all items used by the holder in Veterans Affairs does not approve the making the holder’s decision in case assumption, the holder will be notified the decision is appealed to VA. If the and an additional $50 of any fee col- application remains disapproved after lected under § 36.4312(d)(8) of this sec- 60 days (to allow time for appeal to and tion must be refunded following the ex- review by VA), then the holder must piration of the 30-day appeal period set refund $50 of any fee previously col- out in paragraph (k)(l)(i)(B) of this sec- lected under the provisions of tion. If such an appeal is made to the § 36.4312(d)(8) of this part. If the appli- Department of Veterans Affairs, then cation is subsequently approved and the review will be conducted at the De- the sale is completed, then the holder partment of Veterans Affairs office of (or its authorized servicing agent) shall jurisdiction by an individual who was provide the notice described in para- not involved in the original disapproval graph (k)(1)(i)(A) of this section. decision. If the application for assump- (C) In performing the requirements of tion is approved and the transfer of se- paragraphs (k)(1)(i)(A) or (k)(1)(i)(B) of curity is completed, then the holder (or this section, the holder must complete its authorized servicing agent) shall its examination of the creditworthiness provide the notice required in para- of the prospective purchaser and advise graph (k)(l)(i)(A) of this section. the seller no later than 45 days after (2) If the seller fails to notify the the date of receipt by the holder of a holder before disposing of property se- complete application package for the curing the loan, the holder shall notify approval of the assumption. The 45-day the Secretary within 60 days after period may be extended by an interval learning of the transfer. Such notice not to exceed the time caused by shall advise whether or not the holder delays in processing of the application intends to exercise its option to imme- that are documented as beyond the diately accelerate the loan and wheth- control of the holder, such as employer or not an opportunity will be ex- ers or depositories not responding to tended to the transferor and transferee requests for verifications, which were to apply for retroactive approval of the timely forwarded, or follow-ups on assumption under the terms of this those requests. paragraph. (ii) If neither the holder nor its authorized servicing agent is an auto- (Authority: 38 U.S.C. 3714) matic lender, the notice to VA shall in- (The Information collection requirements in clude: this section have been approved by the Office (A) Advice regarding whether the of Management and Budget under control loan is current or in default; number 2900–0516) (B) A copy of the purchase contract; [63 FR 12002, Mar. 12, 1998] and (C) A complete credit package devel- § 36.4304 Deviations; changes of iden- oped by the holder which the Secretary tity. may use for determining the credit- A deviation of more than 5 percent worthiness of the purchaser. between the estimates upon which a (D) The notice and documents re- certificate of commitment has been quired by this section must be sub- issued and the report of final payment mitted to the VA office of jurisdiction of the proceeds of the loan, or a change no later than 35 days after the date of in the identity of the property upon receipt by the holder of a complete ap- which the original appraisal was based, plication package for the approval of will invalidate the certificate of com- the assumption, subject to the same mitment unless such deviation or extensions as provided in paragraph change be approved by the Secretary. (k)(l)(i) of this section. If the assump- Any deviation in excess of 5 percent or

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change in the identity of the property disbursed out of the proceeds of the upon which the original appraisal was loan which, when added to any other based must be supported by a new or payments made by or on behalf of the supplemental appraisal of reasonable veteran to the builder or the con- value: Provided, That substitution of tractor, does not exceed 80 percent of materials of equal or better quality the value of that portion of the con- and value approved by the veteran and struction performed (basing value on the designated appraiser shall not be the contract price) plus the sum, if deemed a ‘‘change in the identity of any, disbursed by the lender out of the the property’’ within the purview of proceeds of the loan for the land on this section. A deviation not in excess which the construction is situated: And of 5 percent will not require the prior provided further, That the lender shall approval of the Secretary. certify as follows: [17 FR 9668, Oct. 25, 1952] (1) Any amount advanced for land is protected by title or lien as provided in § 36.4305 Partial disbursement. the regulations concerning guaranty or In cases where intervening cir- insurance of loans to veterans; and cumstances make it impracticable to (2) No enforceable liens, for any work complete the actual paying out of the done or material furnished for that loan originally proposed, or justify the part of the construction completed and lender in declining to make further dis- for which payment has been made out bursements on a construction loan, evi- of the proceeds of the loan, exist or can dence of guaranty or of insurance of come into existence. the loan or the proper pro rata part [13 FR 7275, Nov. 27, 1948, as amended at 15 thereof will be issuable if the loan is FR 4397, July 12, 1950; 24 FR 2653, Apr. 7, 1959] otherwise eligible for automatic guaranty or a certificate of commitment § 36.4306 Refinancing of mortgage or was issued thereon: Provided, other lien indebtedness. (a) A report of the loan is submitted (a) Any loan for the purpose of refi- to the Secretary within a reasonable nancing (38 U.S.C. 3710(a)(5)) an exist- time subsequent to the last disburse- ing mortgage loan or other indebted- ment, but in no event more than 90 ness secured by a lien of record on a days thereafter, unless report of the dwelling or farm residence owned and facts and circumstances is made and an occupied or to be reoccupied if the refi- extension of time obtained from the nancing loan is for the completion of Secretary. major alterations, repairs or improve- (b) There has been no default on the ments to the property, by an eligible loan, except that the existence of a de- veteran as the veteran’s home, or in fault shall not preclude issuance of a the case of an eligible veteran unable guaranty certificate or insurance ad- to occupy the property because of ac- vice if a certificate of commitment was tive duty status in the Armed Forces, issued with respect to the loan. occupied or to be reoccupied by the (c) The Secretary determines that a veteran’s spouse as the spouse’s home, person of reasonable prudence simi- shall be eligible for guaranty in an larly situated would not make further amount as computed under § 36.4302(a) disbursements in the situation pre- provided that— sented. (d) There has been full compliance (1) The amount of the loan may not with the provisions of 38 U.S.C. Chap- exceed an amount equal to 90 percent ter 37 and of the applicable regulations of the reasonable value of the dwelling up to the time of the last disburse- or farm residence which will secure the ment. loan, as determined by the Secretary. (e) In the case of a construction loan when the construction is not fully com- (Authority: 38 U.S.C. 3710(e)(1) and 3710(h)) pleted, the amount and percentage of (2) The dollar amount of discount, if the guaranty and the amount of the any, to be paid by the veteran is rea- loan for the purposes of insurance or sonable in amount as determined by accounting to the Secretary shall be the Secretary in accordance with based upon such portion of the amount § 36.4312(d)(7)(i),

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(3) The loan is otherwise eligible for (4) The amount of the loan may not guaranty. exceed an amount equal to the sum of (b) [Reserved] the balance of the loan being refi- (c) Nothing shall preclude guaranty nanced; the purchase price, not to ex- of a loan to an eligible veteran having ceed the reasonable value of the lot; home loan guaranty entitlement to re- the costs of the necessary site prepara- finance under the provisions of 38 tion of the lot as determined by the U.S.C. 3710(a)(5) a VA guaranteed or in- Secretary; a reasonable discount as au- sured (or direct) mortgage loan made thorized in § 36.4312(d)(6) with respect to him or her which is outstanding on to that portion of the loan used to refi- the dwelling or farm residence owned nance the existing purchase money lien and occupied or to be reoccupied after on the manufactured home, and closing the completion of major alterations, costs as authorized in § 36.4312. repairs, or improvements to the prop- (5) If the loan being refinanced was erty, by the veteran as a home, or in guaranteed by VA, the portion of the the case of an eligible veteran unable loan made for the purpose of refi- to occupy the property because of ac- nancing an existing purchase money tive duty status in the Armed Forces, manufactured home loan may be, guar- occupied or to be reoccupied by the anteed without regard to the out- veteran’s spouse as the spouse’s home. standing guaranty entitlement available for use by the veteran, and the (Authority: 38 U.S.C. 3710(e)(1)) verteran’s guaranty entitlement shall (d) A refinancing loan may include not be charged as a result of any guar- contractual prepayment penalties, if anty provided for the refinancing por- any, due the holder of the mortgage or tion of the loan. For the purposes enu- other lien indebtedness to be refi- merated in 38 U.S.C. 3702(b) the refinanced. nancing portion of the loan shall be (e) [Reserved] considered to have been obtained with (f) Nothing in this section shall pre- the guaranty entitlement used to ob- clude the refinancing of the balance tain VA-guaranteed loan being refi- due for the purchase of land on which nanced. The total guaranty for the new new construction is to be financed loan shall be the sum of the guaranty through the proceeds of the loan, or entitlement used to obtain VA-guaran- the refinancing of the balance due on teed loan being refinanced and any ad- an existing land sale contract relating ditional guaranty entitlement avail- to a veteran’s dwelling or farm resi- able to the veteran. However, the total dence. guaranty may not exceed the guaranty (g) A veteran may refinance (38 amount as calculated under § 36.4302(a) U.S.C. 3710(a)(9)(B)(ii)) an existing loan of this part. that was for the purchase of, and is secured by, a manufactured home in (Authority: 38 U.S.C. 3703(a)) order to purchase the lot on which the [35 FR 18872, Dec. 11, 1970, as amended at 46 manufactured home is or will be per- FR 43672, Aug. 31, 1981; 48 FR 27403, June 15, manently affixed, provided the fol- 1983; 49 FR 42571, Oct. 23, 1984; 50 FR 3334, lowing requirements are met: Jan. 24, 1985; 55 FR 40656, Oct. 4, 1990] (1) The refinancing of a manufactured home and the purchase of a lot must be § 36.4306a Interest rate reduction refi- considered as one loan; nancing loan. (2) The manufactured home upon (a) Pursuant to 38 U.S.C. 3710(a)(8), being permanently affixed to the lot (a)(9)(B)(i), and (a)(11), a veteran may will be considered real property under refinance an existing VA guaranteed, the laws of the State where it is lo- insured, or direct loan to reduce the in- cated; terest rate payable on the existing loan (3) The loan must be secured by the provided the following requirements same manufactured home which is are met: being refinanced and the real property (1) The loan must be secured by the on which the manufactured home is or same dwelling or farm residence as the will be located; loan being refinanced; and

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(2) The veteran must own the dwell- graph (a)(4)(i) of this section, plus the ing or farm residence securing the loan amount authorized by § 36.4336(a)(4). and (i) Must occupy the dwelling or resi- (Authority: 38 U.S.C. 3703, 3710) dence as his or her home; or (5) If the loan being refinanced is de- (ii) Must have previously occupied linquent (delinquent means that a the dwelling or residence as his or her scheduled monthly payment of prin- home and must certify, in such form as cipal and interest is more than 30 days the Secretary shall require, that he or past due), the new loan will be guaran- she has previously occupied the dwell- teed only if the Secretary approves it ing or residence; or in advance after determining that the (iii) In any case in which the veteran borrower, through the lender, has pro- is on, or was on, active duty status as vided reasons for the loan deficiency, a member of the Armed Forces and is has provided information to establish unable, or was unable, to occupy the that the cause of the delinquency has residence or dwelling as a home be- been corrected, and qualifies for the cause of such active duty status, the loan under the credit standards con- spouse of the veteran must occupy, or tained in § 36.4337. In such cases, the must have previously occupied, such term ‘‘balance of the loan being refi- dwelling or residence as the spouse’s nanced’’ shall include any past due in- home and must certify to that occu- stallments, plus allowable late charges. pancy in such form as the Secretary (6) The dollar amount of guaranty on shall require. the 38 U.S.C. 3710(a)(8) or (a)(9)(B)(i) loan may not exceed the greater of the (Authority: 38 U. S.C. 3710(e)(1)) original guaranty amount of the loan (3) The monthly principal and inter- being refinanced or 25 percent of the est payment on the new loan must be loan; and lower than the payment on the loan (7) The term of the refinancing loan being refinanced, except when the term (38 U.S.C. 3710(a)(8)) may not exceed of the new loan is shorter than the the original term of the loan being refi- term of the loan being refinanced; or nanced plus ten years, or the maximum the new loan is a fixed-rate loan that loan term allowed under 38 U.S.C. refinances a VA-guaranteed adjustable 3703(d)(1), whichever is less. For manu- rate mortgage; or the increase in the factured home loans that were pre- monthly payments on the loan results viously guaranteed under 38 U.S.C. from the inclusion of energy efficient 3712, the loan term, if being refinanced improvements, as provided by under 38 U.S.C. 3710(a)(9)(B)(i), may ex- § 36.4336(a)(4); or the Secretary approves ceed the original term of the loan but the loan in advance after determining may not exceed the maximum loan that the new loan is necessary to pre- term allowed under 38 U.S.C. 3703(d)(1). vent imminent foreclosure and the veteran qualifies for the new loan under (Authority: 38 U.S.C. 3703(c)(1), 3710(e)(1)) the credit standards contained in (b) Notwithstanding any other regu- § 36.4337. latory provision, the interest rate re- (4) The amount of the refinancing duction refinancing loan may be guar- loan may not exceed: anteed without regard to the amount (i) An amount equal to the balance of of guaranty entitlement available for the loan being refinanced, which must use by the veteran, and the amount of not be delinquent, except in cases de- the veteran’s remaining guaranty enti- scribed in paragraph (a)(5) of this sec- tlement, if any, shall not be charged tion, and such closing costs as author- for an interest rate reduction refi- ized by § 36.4312(d) and a discount not to nancing loan. The interest rate reduc- exceed 2 percent of the loan amount; or tion refinancing loan will be guaran- (ii) In the case of a loan to refinance teed with the lesser of the entitlement an existing VA-guaranteed or direct used by the veteran to obtain the loan loan and to improve the dwelling secur- being refinanced or the amount of the ing such loan through energy efficient guaranty as calculated under improvements, the amount referred to § 36.4302(a) of this part. The veteran’s with respect to the loan under para- loan guaranty entitlement originally

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used for a purpose as enumerated in 38 (b) Notwithstanding the provisions of U.S.C. 3710(a) (1) through (7) and (9)(A) paragraph (a) of this section, the join- (i) and (ii) and subsequently trans- der of the spouse of a veteran-borrower ferred to an interest rate reduction rein the ownership of residential prop- financing loan (38 U.S.C. 3710(a) (8) or erty shall not require prior approval or (9)(B)(i)) shall be eligible for restora- preclude the issuance of a guaranty or tion when the interest rate reduction insurance credit based upon the entire refinancing loan or subsequent interest amount of the loan. If both spouses be rate reduction refinancing loans on the eligible veterans, either or both may, same property meets the requirements within permissible maxima, utilize of § 36.4302(h). available guaranty or insurance entitlement. (Authority: 38 U.S.C. 3703(a)) (c) For the purpose of determining (c) Title to the estate which is refi- the rights and the liabilities of the Sec- nanced for the purpose of an interest retary with respect to a loan subject to rate reduction must be in conformity paragraph (a) of this section, credits le- with § 36.4350. gally applicable to the entire loan shall be applied as follows: (Authority: 38 U.S.C. 3710(a) (8), (9)(B) (i) and (1) Prepayments made expressly for (e)) credit to that portion of the indebtedness allocable to the veteran (including (The Office of Management and Budget has approved the information collection require- the gratuity paid pursuant to former ments in this section under control number provisions of law), shall be applied to 2900–0601) such portion of the indebtedness. All other payments shall be applied rat- [46 FR 43672, Aug. 31, 1981, as amended at 48 FR 27403, June 15, 1983; 50 FR 3335, Jan. 24, ably to those portions of the loan allo- 1985; 55 FR 40656, Oct. 4, 1990; 60 FR 38260, cable respectively to the veteran and July 26, 1995; 61 FR 7415, Feb. 28, 1996; 62 FR to the other debtors. 63454, Dec. 1, 1997; 64 FR 19910, Apr. 23, 1999; (2) Proceeds of the sale or other liq- 64 FR 28363, May 26, 1999] uidation of the security shall be applied ratably to the respective portions § 36.4307 Joint loans. of the loan, such portion of the pro- (a) Except as provided in paragraph ceeds as represents the interest of the (b) of this section, the prior approval of veteran being applied to that portion of the Secretary is required in respect to the loan allocable to such veteran. any loan to be made to two or more [13 FR 7739, Dec. 15, 1948, as amended at 24 borrowers who become jointly and sev- FR 2653, Apr. 7, 1959; 40 FR 34590, Aug. 18, erally liable, or jointly liable therefor, 1975] and who will acquire an undivided interest in the property to be purchased § 36.4308 Transfer of title by borrower or who will otherwise share in the pro- or maturity by demand or accelera- ceeds of the loan, or in respect to any tion. loan to be made to an eligible veteran (a) Except as provided by paragraphs whose interest in the property owned, (b) or (c) of this section the conveyance or to be acquired with the loan proof or other transfer of title to property ceeds, is an undivided interest only, by operation of law or otherwise, after unless such interest is at least a 50 per- the creation of a lien thereon to secure cent interest in a partnership. The a loan which is guaranteed or insured amount of the guaranty or insurance in whole or in part by the Secretary, credit shall be computed in such cases shall not constitute an event of de- only on that portion of the loan allo- fault, or acceleration of maturity, elec- cable to the eligible veteran which, tive or otherwise, and shall not of itself taking into consideration all relevant terminate or otherwise affect the guar- factors, represents the proper contribu- anty or insurance. tion of the veteran to the transaction. (b)(1) The Secretary may issue guar- Such loans shall be secured to the ex- anty on loans in which a State, Terri- tent required by 38 U.S.C. Chapter 37 torial, or local governmental agency and the regulations concerning guar- provides assistance to a veteran for the anty or insurance of loans to veterans. acquisition of a dwelling. Such loans

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will not be considered ineligible for comes the sole owner of the property. guaranty if the State, Territorial, or In such a case the borrower shall have local authority, by virtue of its laws or the option of applying directly to the regulations or by virtue of Federal law, Department of Veterans Affairs re- requires the acceleration of maturity gional office of jurisdiction for a re- of the loan upon the sale or conveyance lease of liability in accordance with of the security property to a person in- § 36.4323 of this part; or eligible for assistance from such au- (viii) A transfer into an inter vivos thority. trust in which the borrower is and re- (2) At the time of application for a mains a beneficiary and which does not loan assisted by a State, Territorial, or relate to a transfer of rights of occu- local governmental agency, the vet- pancy in the property. eran-applicant must be fully informed (2) With respect to each such loan at and consent in writing to the housing least one of the instruments used in authority restrictions. A copy of the the transaction shall contain the fol- veteran’s consent statement must be forwarded with the loan application or lowing statement: ‘‘This loan is not as- the report of a loan processed on the sumable without the approval of the automatic basis. Department of Veterans Affairs or its authorized agent.’’ This statement (Authority: 38 U.S.C. 3703(c)) must be: (i) Printed in a font size which is the (c) Any housing loan which is fi- larger of: nanced under 38 U.S.C. chapter 37, and to which section 3714 of that chapter (A) Two times the largest font size applies, shall include a provision in the contained in the body of the instru- security instrument that the holder ment; or may declare the loan immediately due (B) 18 points; and and payable upon transfer of the prop- (ii) Contained in at least one of the erty securing such loan to any trans- following: feree unless the acceptability of the as- (A) The note; sumption of the loan is established pur- (B) The mortgage or deed of trust; or suant to section 3714. (C) A rider to either the note, the (1) A holder may not exercise its op- mortgage, or the deed of trust. tion to accelerate a loan upon: (i) The creation of a lien or other en- (Authority: 38 U.S.C.3714(d)) cumbrance subordinate to the lender’s security instrument which does not re- (d) The term of payment of any guar- late to the transfer of rights of occu- anteed or insured obligation shall bear pancy in the property; a proper relation to the borrower’s (ii) The creation of a purchase money present and anticipated income and ex- security interest for household appli- penses, (except loans pursuant to 38 ances; U.S.C. 3710(a)(8) or (9)(B)(i)). In addi- (iii) A transfer by devise, descent, or tion the terms of payment of any guar- operation of law on the death of a joint anteed or insured obligation shall pro- tenant or tenant by the entirety; vide for discharge of the obligation at a (iv) The granting of a leasehold inter- definite date or dates or intervals, in est of three years or less not con- amount specified on or computable taining an option to purchase; from the face of the instrument. A loan (v) A transfer to a relative resulting which is payable on demand, or at from the death of a borrower; sight, or on presentation, or at a time (vi) A transfer where the spouse or not specified or computable from the children of the borrower become joint language in the note, mortgage, or owners of the property with the bor- other loan instrument, or which con- rower; templates periodic renewals at the op- (vii) A transfer resulting from a de- tion of the holder to satisfy the repay- cree of a dissolution of marriage, legal ment requirements of this section, is separation agreement, or from an inci- not eligible for guaranty or insurance, dental property settlement agreement except as provided in paragraph (f) of by which the spouse of the borrower be- this section.

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(e) No guaranteed or insured obliga- charges plus any reasonable expenses tion shall contain a provision to the ef- incurred and paid by the holder if ter- fect that the holder shall have the mination proceedings have begun (e.g., right to declare the indebtedness due, advertising costs, foreclosure costs, at- or to pursue one or more legal or equi- torney or trustee fees, recording fees, table remedies, if holder ‘‘shall feel in- etc.). secure,’’ or upon the occurrence of one or more such conditions optional to the (Authority: 38 U.S.C. 501, 3703(c), 3712(g)) holder, without regard to an act or (Approved by the Office of Management and omission by the debtor, which condi- Budget under OMB control number 2900–0516) tion by the terms of the note, mort- [13 FR 7739, Dec. 15, 1948, as amended at 15 gage, or other loan instrument would FR 4397, July 12, 1950; 43 FR 53728, Nov. 17, at the option of the holder afford a 1978; 46 FR 43673, Aug. 31, 1981; 46 FR 51386, basis for declaring a default. Oct. 20, 1981; 50 FR 3335, Jan. 24, 1985; 55 FR (f) Notwithstanding the inclusion in 37476, Sept. 12, 1990; 55 FR 39404, Sept. 27, the guaranteed or insured obligation of 1990; 68 FR 6627, Feb. 10, 2003] a provision contrary to the provisions of this section, the right of the holder § 36.4309 Amortization. to payment of the guaranty or insur- (a) All loans, the maturity date of ance shall not be thereby impaired: which is beyond 5 years from date of Provided, loan or date of assumption by the vet- (1) Default was declared or maturity eran, shall be amortized. Except as pro- was accelerated under some other provided in paragraph (e) of this section, vision of the note, mortgage, or other the schedule of payments thereon shall loan instrument, or be in accordance with any generally (2) Activation or enforcement of such recognized plan of amortization requir- provision is warranted under § 36.4317 ing approximately equal periodic pay- (a), or ments and shall require a principal re- (3) The prior approval of the Sec- duction not less often than annually retary was obtained. during the life of the loan. The final installment on any loan shall not be in (Authority: 38 U.S.C. 3703(c)) excess of two times the average of the (g) The holder of any guaranteed or preceding installments, except that on insured obligation shall have the right, a construction loan such installment notwithstanding the absence of express may be for an amount not in excess of provision therefor in the instruments 5 per centum of the original principal evidencing the indebtedness, to accel- amount of the loan. The limitations erate the maturity or such obligation imposed herein on the amount of the at any time after the continuance of final installment shall not apply in the any default for the period specified in case of any loan extended pursuant to § 36.4316. § 36.4314(a). (h) If sufficient funds are tendered to (b) Any plan of repayment on loans bring a delinquency current at any required to be amortized which does time prior to a judicial or statutory not provide for approximately equal sale or other public sale under power of periodic payments shall not be eligible sale provisions contained in the loan unless the plan conforms with the pro- instruments to liquidate any security visions of paragraph (e) of this section, for a guaranteed loan, the holder shall or is otherwise approved by the Sec- be obligated to accept the funds in pay- retary. ment of the delinquency unless: (c) Every guaranteed or insured loan (1) The prior approval of the Sec- shall be repayable within the estimated retary is obtained to do otherwise, or economic life of the property securing (2) Reinstatement of the loan would the loan. adversely affect the dignity of the lien (d) Subject to paragraph (a) of this or be otherwise precluded by law. section, any amounts which under the A delinquency will include all install- terms of a loan do not become due and ment payments (principal, interest, payable on or before the last maturity taxes, insurance, advances, etc.) due date permissible for loans of its class and unpaid and any accumulated late under the limitations contained in 38

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U.S.C. Chapter 37 shall automatically indebtedness shall be credited on the fall due on such date. (See § 36.4334.) date received, and no interest may be (e) A graduated payment mortgage charged thereafter. Any partial prepay- loan, providing for deferrals of interest ment made on other than an install- during the first 5 years of the loan and ment due date need not be credited addition of the deferred amounts to until the next following installment principal shall be eligible, Provided: due date or 30 days after such prepay- (1) The loan is for the purpose of ac- ment, whichever is earlier. The holder quiring a single-family dwelling unit, and the debtor may agree at any time including a condominium unit or si- that any prepayment not previously multaneously acquiring and improving applied in satisfaction of matured in- a previously occupied, existing single- stallments shall be reapplied for the family dwelling unit. purpose of curing or preventing any (2)(i) For proposed construction or subsequent default. existing homes not previously occupied (new homes), the maximum loan [38 FR 25678, Sept. 14, 1973] amount cannot exceed 97.5 percent of § 36.4311 Interest rates. the lesser of the reasonable value of the property as of the time the loan is (a) In guaranteeing or insuring loans made or the purchase price. under 38 U.S.C. chapter 37, the Sec- (ii) For previously occupied, existing retary may elect to require that such homes the maximum loan amount loans either bear interest at a rate that must be computed to assure that the is agreed upon by the veteran and the principal amount of the loan, including lender, or bear interest at a rate not in all interest scheduled to be deferred excess of a rate established by the Sec- and added to the loan principal, will retary. The Secretary may, from time not exceed the purchase price or rea- to time, change that election by pub- sonable value of the property, which- lishing a notice in the FEDERAL REG- ever is less, as of the time the loan is ISTER. However, the interest rate of a made; loan for the purpose of an interest rate (3) The increases in the monthly peri- reduction under 38 U.S.C. 3710(a)(8), odic payment amount occur annually (a)(9)(B)(i), or (a)(11) must be less than on each of the first five annual anni- the interest rate of the VA loan being versary dates of the first loan install- refinanced. This paragraph does not ment due date, at a rate of 7.5 percent apply in the case of an adjustable rate over the preceding year’s monthly pay- mortgage being refinanced under 38 ment amount; U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) (4) Beginning with the payment due with a fixed rate loan. on the fifth annual anniversary date of the first loan installment due date, all (Authority: 38 U.S.C. 3703, 3710) remaining monthly periodic payments (b) For loans bearing an interest rate are approximately equal in amount and agreed upon by the veteran and the amortize the loan fully in accordance lender, the veteran may pay reasonable with the requirements of this section, discount points in connection with the and loan. The discount points may not be (5) The plan is otherwise acceptable included in the loan amount, except for to the Secretary. interest rate reduction refinancing (Authority: 38 U.S.C. 3703(d)) loans under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11). For loans bear- [13 FR 7275, Nov. 27, 1948, as amended at 24 FR 2653, Apr. 7, 1959; 47 FR 15139, Apr. 8, 1982] ing an interest rate agreed upon by the veteran and the lender, the provisions § 36.4310 Prepayment. of § 36.4312(d)(6) and (d)(7) do not apply. The debtor shall have the right to (Authority: 38 U.S.C. 3703, 3710) prepay at any time, without premium or fee, the entire indebtedness or any (c) Interest in excess of the rate re- part thereof not less than the amount ported by the lender when requesting of one installment, or $100, whichever evidence of guaranty or insurance shall is less. Any prepayment in full of the not be payable on any advance, or in

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the event of any delinquency or de- ure shall be the most recent index fig- fault: Provided, that a late charge not ure available 30 days before the date of in excess of an amount equal to 4 per- each interest rate adjustment. cent on any installment paid more (3) Method of rate changes. Interest than 15 days after due date shall not be rate changes may only be implemented considered a violation of this limita- through adjustments to the borrower’s tion. monthly payments. (4) Initial rate and magnitude of (Authority: 38 U.S.C. 3710) changes. The initial contract interest (d) Effective October 1, 2003, adjust- rate of an adjustable rate mortgage able rate mortgage loans which comply shall be agreed upon by the lender and with the requirements of this para- the veteran. Annual adjustments in the graph (d) are eligible for guaranty. interest rate shall correspond to an- (1) Interest rate index. Changes in the nual changes in the interest rate index, interest rate charged on an adjustable subject to the following conditions and rate mortgage must correspond to limitations: changes in the weekly average yield on (i) No single adjustment to the inter- one year (52 weeks) Treasury bills ad- est rate may result in a change in ei- justed to a constant maturity. Yields ther direction of more than one per- on one year Treasury bills at ‘‘constant centage point from the interest rate in maturity’’ are interpolated by the effect for the period immediately pre- United States Treasury from the daily ceding that adjustment. Index changes yield curve. This curve, which relates in excess of one percentage point may the yield on the security to its time to not be carried over for inclusion in an maturity, is based on the closing mar- adjustment in a subsequent year. Ad- ket bid yields on actively traded one justments in the effective rate of inter- year Treasury bills in the over-the- est over the entire term of the mort- counter market. The weekly average gage may not result in a change in ei- one year constant maturity Treasury ther direction of more than five per- bill yields are published by the Federal centage points from the initial con- Reserve Board of the Federal Reserve tract interest rate. System. The Federal Reserve Statis- tical Release Report H. 15 (519) is re- (ii) At each adjustment date, changes leased each Monday. These one year in the index interest rate, whether in- constant maturity Treasury bill yields creases or decreases, must be trans- are also published monthly in the Fed- lated into the adjusted mortgage inter- eral Reserve Bulletin, published by the est rate, rounded to the nearest one- Federal Reserve Board of the Federal eighth of one percent, up or down. For Reserve System, as well as quarterly in example, if the margin is 2 percent and the Treasury Bulletin, published by the the new index figure is 6.06 percent, the Department of the Treasury. adjusted mortgage interest rate will be (2) Frequency of interest rate changes. 8 percent. If the margin is 2 percent Interest rate adjustments must occur and the new index figure is 6.07 per- on an annual basis, except that the cent, the adjusted mortgage interest first adjustment may occur no sooner rate will be 81⁄8 percent. than 36 months from the date of the (5) Pre-loan disclosure. The lender borrower’s first mortgage payment. shall explain fully and in writing to the The adjusted rate will become effective borrower, at the time of loan applica- the first day of the month following tion, the nature of the obligation the adjustment date; the first monthly taken. The borrower shall certify in payment at the new rate will be due on writing that he or she fully under- the first day of the following month. stands the obligation and a copy of the To set the new interest rate, the lender signed certification shall be placed in will determine the change between the the loan folder and furnished to VA initial (i.e., base) index figure and the upon request. current index figure. The initial index (i) The fact that the mortgage inter- figure shall be the most recent figure est rate may change, and an expla- available before the date of mortgage nation of how changes correspond to loan origination. The current index fig- changes in the interest rate index;

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(ii) Identification of the interest rate such transaction may not be included index, its source of publication and in the loan. availability; (b) Except as provided in the regula- (iii) The frequency (i.e., annually) tions concerning the guaranty or insur- with which interest rate levels and ance of loans to veterans, no brokerage monthly payments will be adjusted, or service charge or their equivalent and the length of the interval that will may be charged against the debtor or precede the initial adjustment; and the proceeds of the loan either ini- (iv) A hypothetical monthly payment tially, periodically, or otherwise. schedule that displays the maximum (c) Brokerage or other charges shall potential increases in monthly pay- not be made against the veteran for ob- ments to the borrower over the first taining any guaranty or insurance five years of the mortgage, subject to under 38 U.S.C. chapter 37, nor shall the provisions of the mortgage instru- any premiums for insurance on the life ment. of the borrower be paid out of the pro- (6) Annual disclosure. At least 25 days ceeds of a loan. before any adjustment to a borrower’s (d) The following schedule of permis- monthly payment may occur, the lend- sible fees and charges shall be applica- er must provide a notice to the bor- ble to all Department of Veterans Af- rower which sets forth the date of the fairs guaranteed or insured loans. notice, the effective date of the change, (1) The veteran may pay reasonable the old interest rate, the new interest and customary amounts for any of the rate, the new monthly payment following items: amount, the current index and the date (i) Fees of Department of Veterans it was published, and a description of Affairs appraiser and of compliance in- how the payment adjustment was cal- spectors designated by the Department culated. A copy of the annual disclo- of Veterans Affairs except appraisal sure shall be made a part of the lend- fees incurred for the predetermination er’s permanent record on the loan. of reasonable value requested by others than veteran or lender. (Authority: 38 U.S.C. 3707A) (ii) Recording fees and recording taxes or other charges incident to rec- [60 FR 38260, July 26, 1995, as amended at 70 ordation. FR 22597, May 2, 2005] (iii) Credit report. (iv) That portion of taxes, assess- § 36.4312 Charges and fees. ments, and other similar items for the (a) No charge shall be made against, current year chargeable to the bor- or paid by, the borrower incident to the rower and an initial deposit (lump-sum making of a guaranteed or insured loan payment) for the tax and insurance ac- other than those expressly permitted count. under paragraph (d) or (e) of this sec- (v) Hazard insurance required by tion, and no loan shall be guaranteed § 36.4326. or insured unless the lender certifies to (vi) Survey, if required by lender or the Secretary that it has not imposed veteran; except that any charge for a and will not impose any charges or fees survey in connection with a loan under against the borrower in excess of those §§ 36.4356 through 36.4360a (Condo- permissible under paragraph (d) or (e) minium Loans) must have the prior ap- of this section. Any charge which is proval of the Secretary. proper to make against the borrower (vii) Title examination and title in- under the provisions of this paragraph surance, if any. may be paid out of the proceeds of the (viii) The actual amount charged for loan: Provided, That if the purpose of flood zone determinations, including a the loan is to finance the purchase or charge for a life-of-the-loan flood zone construction of residential property determination service purchased at the the costs of closing the loan including time of loan origination, if made by a the pro rata portion of the ground third party who guarantees the accu- rents, hazard insurance premiums, cur- racy of the determination. A fee may rent year’s taxes, and other prepaid not be charged for a flood zone deter- items normally involved in financing mination made by a Department of

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Veterans Affairs appraiser or for the such alternative charges would not re- lender’s own determination. sult in an aggregate charge or payment (ix) Such other items as may be au- in excess of the prescribed maximum. thorized in advance by the Under Sec- (6) Allowable discounts. The veteran retary for Benefits as appropriate for borrower subject to the limitations set inclusion under this paragraph as prop- forth in paragraphs (d) (6) and (7) of er local variances. this section may pay a discount re- (2) A lender may charge and the vet- quired by a lender when the proceeds of eran may pay a flat charge not exceed- the loan will be used for any of the fol- ing 1 percent of the amount of the loan, lowing purposes: provided that such flat charge shall be (i) To refinance existing indebtedness in lieu of all other charges relating to pursuant to 38 U.S.C. 3710(a)(5), (8), costs of origination not expressly spec- (9)(B)(i) or (ii); ified and allowed in this schedule. (ii) To repair, alter or improve a (3) In cases where a lender makes ad- dwelling owned by the veteran pursu- vances to a veteran during the progress ant to 38 U.S.C. 3710(a) (4) or (7) if such of construction, alteration, improve- loan is to be secured by a first lien; ment, or repair, either under a commit- (iii) To construct a dwelling or farm ment of the Department of Veterans residence on land already owned or to Affairs to issue a guaranty certificate be acquired by the veteran, provided or insurance credit upon completion, or that the veteran did not or will not ac- where the lender would be entitled to quire the land directly or indirectly guaranty or insurance on such ad- from a builder or developer who will be vances when reported under automatic constructing such dwelling or farm res- procedure, the lender may make a idence; charge against the veteran of not ex- (iv) To purchase a dwelling from a ceeding 2 percent of the amount of the class of sellers which the Secretary de- loan for its services in supervising the termines are legally precluded under making of advances and the progress of all circumstances from paying such a construction notwithstanding that the discount if the best interest of the vet- ‘‘holdback’’ or final advance is not ac- eran would be so served. tually paid out until after the con- (7) Computation of discounts—(i) struction, alteration, improvement, or Computation of discount—loans se- repair is fully completed: Provided, cured by a first lien. Unless otherwise That the major portion (51 percent or approved by the Secretary, the dis- more) of the loan proceeds is paid out count, if any, to be paid by the bor- during the actual progress of the con- rower may not exceed the difference struction, alteration, improvement, or between the bid price, rounded to the repair. Such charge may be in addition lower whole number, and par value for to the 1 percent charge allowed under GNMA ( Government National Mort- paragraph (d)(2) of this section. gage Association) 90-day forward bid (4) In consideration, alteration, im- closing price for pass through securi- provement or repair loans, including ties 1⁄2 percent less than the face note supplemental loans made pursuant to rate of the loan. Unless the lender and § 36.4355, where no charge is permissible borrower negotiate a firm written com- under the provisions of paragraph (d)(3) mitment for a maximum amount of of this section the lender may charge discount to be paid, the bid price to be and the veteran may pay a flat sum not used in the computation must be the exceeding 1 percent of the amount of GNMA 90-day forward bid closing quote the loan. Such charge may be in addi- for any day 1 to 4 business days prior to tion to the 1 percent allowed under loan closing. ‘‘Loan closing’’ is defined paragraph (d)(2) of this section. for this purpose as the date on which (5) The fees and charges permitted the borrower’s 3-day right of rescission under this paragraph are maximums commences pursuant to the Truth in and are not intended to preclude a Lending Act. If the lender and bor- lender from making alternative rower choose to negotiate a firm dis- charges against the veteran which are count commitment for a maximum not specifically authorized in the amount of discount to be paid, the bid schedule provided the imposition of price to be used in establishing the

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maximum discount must be the closing Acquisition and improvement loans quote for the business day prior to the may be closed either on the automatic date of the commitment. Lenders nego- or prior approval basis. tiating firm commitments must close (iv) Unless the Under Secretary for that loan at a discount no higher than Benefits otherwise directs, all powers the firm commitment regardless of of the Secretary under paragraphs (d) changes in the maximum allowable De- (6) and (7) of this section are hereby partment of Veterans Affairs interest delegated to the officials designated by rate. If a lender’s commitment expires § 36.4342(b). prior to loan closing, the lender and (Authority: 38 U.S.C. 3703, 3710; 42 U.S.C. 4001 borrower may negotiate a new firm note, 4012a) commitment based on the procedure outlined in this paragraph (d)(7)(i) or (8) On any loan to which section 3714 may use the procedure for determining of 38 U.S.C. chapter 37 applies, the the discount based on the GNMA 90-day holder may charge a reasonable fee, not to exceed the lesser of (i) $300 and forward bid closing quote for any day 1 the actual cost of any credit report re- to 4 business days prior to loan closing. quired, or (ii) any maximum prescribed (ii) Computation of discount—unse- by applicable State law, for processing cured loans or loans secured by less an application for assumption and than a first lien. The borrower, subject changing its records. to the limitations set forth in paragraphs (d) (6) and (7) of this section, (Authority: 38 U.S.C. 3714) may pay a discount required by the (e) Subject to the limitations set out lender when the proceeds of the loan in paragraph (e)(4) of this section, a fee will be used to repair, alter, or improve must be paid to the Secretary. a dwelling owned by the veteran pursu- (1) The fee on loans to veterans shall ant to 38 U.S.C. 3710(a)(4) or (7) if such be as follows: loan is unsecured or secured by less (i) On all interest rate reduction refi- than a first lien. No such discount may nancing loans guaranteed under 38 be charged unless: U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11), (A) The loan is submitted to the Sec- the fee shall be 0.50 percent of the total retary for prior approval; loan amount. (B) The dollar amount of the dis- (ii) On all refinancing loans other count is disclosed to the Secretary and than those described in paragraph the veteran prior to the issuance by (e)(1)(i) of this section, the funding fee the Secretary of the certificate of com- shall be 2.75 percent of the loan amount mitment. Said certificate of commit- for loans to veterans whose entitlement shall specify the discount to be ment is based on service in the Se- paid by the veteran, and this discount lected Reserve under the provisions of may not be increased once the commit- 38 U.S.C. 3701(b)(5), and 2 percent of the ment is issued without the approval of loan amount for loans to all other vet- the Secretary; erans; provided, however, that if the veteran is using entitlement for a sec- (C) The discount has been determined ond or subsequent time, the fee shall be by the Secretary to be reasonable in 3 percent of the loan amount. amount. (iii) Except for loans to veterans (iii) A veteran may pay the discount whose entitlement is based on service on an acquisition and improvement in the Selected Reserve under the pro- loan (as defined in § 36.4301 provided: visions of 38 U.S.C. 3701(b)(5), the fund- (A) The veteran pays no discount on ing fee shall be 2 percent of the total the acquisition portion of the loan ex- loan amount for all loans for the pur- cept in accordance with paragraph chase or construction of a home on (d)(6)(iv) of this section; and which the veteran does not make a (B) The discount paid on the im- down payment, unless the veteran is provements portion of the loan does using entitlement for a second or sub- not exceed the percentage of discount sequent time, in which case the fee paid on the acquisition portion of the shall be 3 percent. On purchase or con- loan. struction loans on which the veteran

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makes a down payment of 5 percent or tlement. The fee must be transmitted more, but less than 10 percent, the to the Secretary within 15 days of the amount of the funding fee shall be 1.50 receipt by the holder of the notice of percent of the total loan amount. On transfer. purchase or construction loans on which the veteran makes a down pay- (Authority: 38 U.S.C. 3714, 3729(d)) ment of 10 percent or more, the amount (3) The lender is required to pay to of the funding fee shall be 1.25 percent the Secretary the fee described in para- of the total loan amount. graph (e)(1) of this section within 15 (iv) On loans to veterans whose enti- days after loan closing. Any lender tlement is based on service in the Se- closing a loan, subject to the limita- lected Reserve under the provisions of tions set out in paragraph (e)(4) of this 38 U.S.C. 3701(b)(5), the funding fee section who fails to submit timely pay- shall be 2.75 percent of the total loan ment of this fee will be subject to a amount on loans for the purchase or late charge equal to 4 percent of the construction of a home on which the total fee due. If payment of the fee de- veteran does not make a down pay- scribed in paragraph (e)(1) of this sec- ment, unless the veteran is using enti- tion is made more than 30 days after tlement for a second or subsequent loan closing, interest will be assessed time, in which case the fee shall be 3 at a rate set in conformity with the percent. On purchase or construction Department of Treasury’s Fiscal Re- loans on which veterans whose entitle- quirements Manual. This interest ment is based on service in the Se- charge is in addition to the 4 percent lected Reserve make a down payment late charge, but the late charge is not of 5 percent or more, but less than 10 included in the amount on which inter- percent, the amount of the funding fee est is computed. This interest charge is shall be 2.25 percent of the total loan to be calculated on a daily basis begin- amount. On purchase or construction ning on the date of closing, although loans on which such veterans make a the interest will be assessed only on down payment of 10 percent or more, funding fee payments received more the amount of the funding fee shall be than 30 days after closing. 2 percent of the total loan amount. (4) The lender is required to pay to (v) All or part of the fee may be paid the Secretary electronically through in cash at loan closing or all or part of the Automated Clearing House (ACH) the fee may be included in the loan system the fees described in paragraphs without regard to the reasonable value (e)(1) and (e)(2) of this section and any of the property or the computed max- late fees and interest due on them. imum loan amount, as appropriate. In This shall be paid to a collection agent computing the fee, the lender will dis- by operator-assisted telephone, ter- regard any amount included in the loan minal entry, or CPU-to-CPU trans- to enable the borrower to pay such fee. mission. The collection agent will be identified by the Secretary. The lender (Authority: 38 U.S.C. 3729) shall provide the collection agent with (2) Subject to the limitations set out the following: authorization for pay- in this section, a fee of one-half of one ment of the funding fee (including late percent of the loan balance must be fees and interest) along with the fol- paid to the Secretary in a manner pre- lowing information: VA lender ID num- scribed by the Secretary by a person ber; four-digit personal identification assuming a loan to which section 3714 number; dollar amount of debit; VA of title 38 U.S. Code applies. The in- loan number; OJ (office of jurisdiction) strument securing such a loan shall code; closing date; loan amount; infor- contain a provision describing the mation about whether the payment in- right of the holder to collect this fee as cludes a shortage, late charge, or inter- trustee for the Department of Veterans est; veteran name; loan type; sale Affairs. The loan holder shall list the amount; downpayment; whether the amount of this fee in every assumption veteran is a reservist; and whether this statement provided and include a no- is a subsequent use of entitlement. For tice that the fee must be paid to the all transactions received prior to 8:15 holder immediately following loan set- p.m. on a workday, VA will be credited

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with the amount paid to the collection guaranty, if lawfully authorized by the agent at the opening of business the loan agreement and subject to next banking day. § 36.4321(a), or, in the computation of an insurance loss, any of the following (Authority: 38 U.S.C. 3729(a)) items actually paid: (5) The fees described in paragraph (1) Any expense which is reasonably (e)(1) and (e)(2) of this section shall not necessary for preservation of the secu- be collected from a veteran who is re- rity, ceiving compensation (or who but for (2) Court costs in a foreclosure or the receipt of retirement pay would be other proper judicial proceeding in- entitled to receive compensation) or volving the security, from a surviving spouse described in (3) Other expenses reasonably nec- section 3701(b) of title 38, United States essary for collecting the debt, or repos- Code. session or liquidation of the security, (4) Reasonable trustee’s fees or com- (Authority: 38 U.S.C. 3729(b)) missions not in excess of those allowed by statute and in no event in excess of (The information collection requirements in 5 percent of the unpaid indebtedness, this section have been approved by the Office of Management and Budget under control (5)(i) Fees for legal services actually numbers 2900–0474 and 2900–0516) performed, not to exceed the reasonable and customary fees for such serv- [13 FR 7275, Nov. 27, 1948] ices in the State where the property is EDITORIAL NOTE: For Federal Register cita- located, as determined by the Sec- tions affecting § 36.4312, see the List of CFR retary. Sections Affected, which appears in the (ii) In determining what constitutes Finding Aids section of the printed volume the reasonable and customary fees for and on GPO Access. legal services, the Secretary shall re- § 36.4313 Advances and other charges. view allowances for legal fees in connection with the foreclosure of single- (a) A holder may advance any family housing loans, including bank- amount reasonably necessary and prop- ruptcy-related services, issued by HUD, er for the maintenance or repair of the Fannie Mae, and Freddie Mac. The Sec- security, or for the payment of accrued retary will review such fees annually taxes, special assessments, ground or and, as the Secretary deems necessary, water rents, or premiums on fire or publish in the FEDERAL REGISTER a other casualty insurance against loss table setting forth the amounts the of or damage to such property and any Secretary determines to be reasonable such advance so made may be added to and customary. The table will reflect the guaranteed or insured indebted- the primary method for foreclosing in ness. A holder may also advance the each state, either judicial or non-judi- one-half of one percent funding fee due cial, with the exception of those States on a transfer under 38 U.S.C. 3714 when where either judicial or non-judicial is this is not paid at the time of transfer. acceptable. The use of a method not All security instruments for loans to authorized in the table will require which 38 U.S.C. 3714 applies must in- prior approval from VA. This table will clude a clause authorizing the collec- be available throughout the year on a tion of an assumption funding fee and VA controlled Web site, such as at an advance for this fee if it is not paid www.homeloans.va.gov. at the time of transfer. (iii) If the foreclosure attorney has the discretion to conduct the sale or to (Authority: 38 U.S.C. 3714) name a substitute trustee to conduct (b) In addition to advances allowable the sale, the combined total paid for under paragraph (a) of this section, the legal fees under paragraph (b)(5)(i) of holder may charge against the proceeds this section and trustee’s fees pursuant of the sale of the security; against to paragraph (b)(4) of this section shall gross amounts collected; in any ac- not exceed the applicable maximum al- counting to the Secretary after pay- lowance for legal fees established under ment of a claim under the guaranty, in paragraph (b)(5)(ii) of this section. If the computation of a claim under the the trustee conducting the sale must

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be a Government official under local absence of the prior approval of the law, or if an individual other than the Secretary. foreclosing attorney (or any employee [13 FR 7739, Dec. 15, 1948, as amended at 17 of that attorney) is appointed as part FR 9668, Oct. 25, 1952; 36 FR 320, Jan. 9, 1971; of judicial proceedings, and local law 40 FR 34591, Aug. 18, 1975; 45 FR 38056, June also establishes the fees payable for the 6, 1980; 53 FR 27049, July 18, 1988; 53 FR 34296, services of the public or judicially ap- Sept. 6, 1988; 55 FR 37477, Sept. 12, 1990; 58 FR pointed trustee, then those fees will 29116, May 19, 1993; 59 FR 48566, Sept. 22, 1994; 73 FR 6308, Feb. 1, 2008] not be subject to the maximum established for legal fees under paragraph § 36.4314 Extensions and reamortiza- (b)(5)(ii) of this section and may be in- tions. cluded in the total indebtedness. (a) Provided the debtor(s) is (are) a (6) The cost of a credit report(s) on reasonable credit risk(s), as determined the debtor(s), which is (are) to be for- by the holder based upon review of the warded to the Secretary in connection debtor’s (s’) creditworthiness, includ- with the claim, ing a review of a current credit re- (7) Reasonable and customary costs port(s) on the debtor(s), the terms of of property inspections, repayment of any loan may by written (8) Any other expense or fee that is agreement between the holder and the approved in advance by the Secretary. debtor(s), be extended in the event of default, to avoid imminent default, or (Authority: 38 U.S.C. 3720(a)(3)) in any other case where the prior approval of the Secretary is obtained. Ex- (c) Any advances or charges enumer- cept with the prior approval of the Sec- ated in paragraph (a) or (b) of this secretary, no such extension shall set a tion may be included as specified in the rate of amortization less than that suf- holder’s accounting to the Secretary, ficient to fully amortize at least 80 per- but they are not chargeable to the cent of the loan balance so extended debtor unless he or she otherwise be within the maximum maturity pre- liable therefor. scribed for loans of its class. (d) Advances of the type enumerated (b) In the event of a partial prepay- in paragraph (a) of this section and any ment pursuant to § 36.4310, the balance other advances determined to be nec- of the indebtedness may, by written essary and proper in order to preserve agreement between the holder and the or protect the security may be author- debtor(s), be reamortized, provided the ized by employees designated in reamortization schedule will result in § 36.4342(b) in the case of any property full repayment of the loan within the constituting the security for a loan ac- original maturity, and provided the quired by the Secretary or constituting debtor(s) is (are) reasonable credit the security for the unpaid balance of risk(s), as determined by the holder the purchase price owing to the Sec- based upon review of the debtor’s (s’) retary on account of the sale of such creditworthiness, including a review of property. Such advances shall be se- a current credit report(s) on the debt- or(s). cured to the extent legal and prac- (c) In the event an additional loan is ticable by a lien on the property. proposed to be made pursuant to (e) Notwithstanding the provisions of § 36.4351 for the repair, alteration, or paragraph (a) or (b) of this section, improvement of real property on which holders of condominium loans guaran- there is an existing loan guaranteed or teed or insured under 38 U.S.C. insured under 38 U.S.C. chapter 37, the 3710(a)(6) shall not pay those assess- terms of repayment of the prior loan ments or charges allocable to the con- may, by written agreement between dominium unit which are provided for the holder and the debtor, be recast to in the instruments establishing the combine the schedule of repayments on condominium form of ownership in the the two loans, provided the entire indebtedness is repayable within the permissible maximum maturity of the original loan.

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(d) Unless the prior approval of the amount less than the full amount due Secretary has been obtained, any ex- under the terms of the loan and secu- tension or reamortization agreed to by rity instruments at the time the remit- a holder which relieves any obligor tance is tendered. from liability will release the liability (1) Except as provided in paragraph of the Secretary under the guaranty or (b)(2) of this section, or upon the ex- insurance on the entire loan. However, press waiver of the Secretary, the if such release of liability of an obligor mortgage holder shall accept any par- results through operation of law by tial payment and either apply it to the reason of an extension or other act of mortgagor’s account or identify it with forbearance, the liability of the Sec- the mortgagor’s account and hold it in retary as guarantor or insurer will not a special account pending disposition. be affected thereby, provided the re- When partial payments held for dis- quired lien is maintained and the title position aggregate a full monthly in- holder is and will remain liable for the stallment, including escrow, they shall payment of the indebtedness: And fur- be applied to the mortgagor’s account. ther provided, That if such extension or (2) A partial payment may be re- act of forbearance will result in the returned to the mortgagor, within 10 cal- lease of the veteran, all delinquent in- endar days from date of receipt of such stallments, plus any foreclosure ex- payment, with a letter of explanation penses which may have been incurred, only if one or more of the following shall have been fully paid. conditions exist: (e) The holder shall promptly forward (i) The property is wholly or par- to the Secretary an advice of the terms tially tenant-occcupied and rental pay- of any agreement effecting a re- ments are not being remitted to the amortization or extension of a guaran- holder for application to the loan ac- teed or insured loan, together with a count; cop(y)(ies) of the credit report(s) ob- (ii) The payment is less than one full tained on the debtor(s). monthly installment, including es- crows and late charge, if applicable, (Authority: 38 U.S.C. 3703(c)(1)) unless the lesser payment amount has [13 FR 7276, Nov. 27, 1948, as amended at 19 been agreed to under a written repay- FR 4002, July 1, 1954; 24 FR 2653, Apr. 7, 1959; ment plan; 53 FR 34296, Sept. 6, 1988] (iii) The payment is less than 50 per- § 36.4315 Notice of default and accept- cent of the total amount then due, un- ability of partial payments. less the lesser payment amount has been agreed to under a written repay- (a) Reporting of defaults. The holder of any guaranteed or insured loan shall ment plan; give notice to the Secretary within 45 (iv) The payment is less than the days after any debtor: amount agreed to in a written repay- (1) Is in default by reason of non- ment plan; payment of any installment for a pe- (v) The amount tendered is in the riod of 60 days from the date of first form of a personal check and the holder uncured default (see § 36.4301(f)); or has previously notified the mortgagor (2) Is in default by failing to comply in writing that only cash or certified with any other covenant or obligation remittances are acceptable; of such guaranteed or insured loan (vi) A delinquency of any amount has which failure persists for a continuing continued for at least 6 months since period of 90 days after demand for com- the account first became delinquent pliance therewith has been made, ex- and no written repayment plan has cept that if the default is due to non- been arranged; payment of real estate taxes, the no- (vii) Foreclosure has been com- tice shall not be required until the fail- menced by the taking of the first ac- ure to pay when due has persisted for a tion required for foreclosure under continuing period of 180 days. local law; (b) Partial payments. A partial pay- (viii) The holder’s lien position would ment is a remittance on a loan in de- be jeopardized by acceptance of the fault (as defined in § 36.4301(g)) of any partial payment.

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(3) A failure by the holder to comply (b) Any right of a holder to repossess with the provisions of this paragraph personal property may be exercised may result in a partial or total loss of without prior notice to the Secretary; guaranty or insurance pursuant to but notice of any such action taken § 36.4325(b), but such failure shall not shall be given by certified mail to the constitute a defense to any legal action Secretary within ten days thereafter; to terminate the loan. and (c) The notice required under this (Authority: 38 U.S.C. 3703(c)(1)) paragraph shall also be provided to the [45 FR 31065, May 12, 1980] original veteran-borrower and any other liable obligors by certified mail § 36.4316 Continued default. within 30 days after such notice is pro- (a) In the event any failure of the vided to the Secretary in all cases in debtor to discharge the debtor’s obliga- which the current owner of the prop- tions under the loan continues for a pe- erty is not the original veteran-bor- riod of 3 months, or for more than 1 rower. A failure by the holder to make month on an extended loan or on a a good faith effort to comply with the term loan, the holder may at the hold- provisions of this subparagraph may er’s option then or thereafter give the result in a partial or total loss of guar- notice prescribed in § 36.4317. anty or insurance pursuant to VA Reg- (b) The notice prescribed in § 36.4317 ulation 36.4325(b), but such failure shall may be submitted prior to the time not constitute a defense to any legal prescribed in paragraph (a) of this sec- action to terminate the loan. A good tion in any case where any material faith effort will include, but is not lim- prejudice to the rights of the holder or ited to: to the Secretary or hazard to the secu- (1) A search of the holder’s auto- rity warrants more prompt action. mated and physical loan record systems to identify the name and current (Authority: 38 U.S.C. 3732) or last known address of the original (The information collection requirements veteran and any other liable obligors; contained in paragraph (c) were approved by (2) A search of the holder’s auto- the Office of Management and Budget under mated and physical loan record sys- control number 2900–0480) tems to identify sufficient information [13 FR 7276, Nov. 27, 1948, as amended at 45 (e.g., Social Security Number) to per- FR 31065, May 12, 1980; 53 FR 34296, Sept. 6, form a routine trace inquiry through a 1988; 61 FR 28058, June 4, 1996] major consumer credit bureau; (3) Conducting the trace inquiry § 36.4317 Notice of intention to fore- using an in-house credit reporting ter- close. minal; (See also § 36.4319.) Except upon the (4) Obtaining the results of the in- express waiver of the Secretary, a hold- quiry; er shall not begin proceedings in court (5) Mailing the required notices and or give notice of sale under power of concurrently providing the Secretary sale, or otherwise take steps to termi- with the names and addresses of all ob- nate the debtor’s rights in the security ligors identified and sent notice; and, until the expiration of 30 days after de- (6) Documentation of the holder’s livery by registered mail to the Sec- records. retary of a notice of intention to take such action: Provided, That (Approved by the Office of Management and Budget under Control Number 2900–0530) (a) Immediate action as required under 38 CFR 36.4346 (i), may be taken [58 FR 29116, May 19, 1993] if the property to be affected thereby has been abandoned by the debtor or § 36.4318 Refunding of loans in default. has been or may be otherwise subjected (a) Upon receiving a notice of default to extraordinary waste or hazard, or if or a notice under § 36.4317, the Sec- there exist conditions justifying the retary may within 30 days thereafter appointment of a receiver for the prop- require the holder upon penalty of oth- erty (without reference to any contrac- erwise losing the guaranty or insur- tual provisions for such appointment); ance to transfer and assign the loan

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and the security therefore to the Sec- other superior lien or judicial sale. retary or to another designated by the Such notice shall be accompanied by a Secretary upon receipt of payment in statement of the account indebtedness full of the balance of the indebtedness and a copy of the liquidation appraisal remaining unpaid to the date of such request, if not previously delivered. assignment. Such assignment may be made without recourse but the trans- (Authority: 38 U.S.C. 3732) feror shall not thereby be relieved from (c) The procedure prescribed in para- the provisions of § 36.4325. graphs (a) and (b) of this section shall (b) If the obligation is assigned or not be applicable in any proceeding to transferred to a third party pursuant which the Secretary is a party, after to paragraph (a) of this section the the Secretary’s appearance shall have Secretary may continue in effect the been entered therein by a duly author- guaranty or insurance issued with re- ized attorney. spect to the previous loan in such man- (d) In any legal or equitable pro- ner as to cover the assignee or trans- ceeding (including probate and bank- feree. ruptcy proceedings) to which the Sec- [13 FR 7276, Nov. 27, 1948, as amended at 45 retary is a party, original process and FR 31065, May 12, 1980; 61 FR 28058, June 4, any other process prior to appearance, 1996] proper to be served on the Secretary, shall be delivered to the loan guaranty § 36.4319 Legal proceedings. officer of the regional office of the VA (a) When the holder institutes suit or having jurisdiction of the area in which otherwise becomes a party in any legal the court is situated. Within the time or equitable proceeding brought on or required by applicable law, or rule of in connection with the guaranteed or court, the Secretary will cause appro- insured indebtedness, or involving title priate special or general appearance to to, or other lien on, the security, such be entered in the case by an authorized holder, within the time that would be attorney. required if the Secretary were a party to the proceeding, shall deliver to the (Authority: 38 U.S.C. 3732) Secretary, by mail or otherwise, by making such delivery to the loan guar- (e) After appearance of the Secretary anty officer at the office which granted by attorney all process and notice oth- the guaranty or the insurance, or other erwise proper to serve on the Secretary office to which the holder has been no- before or after judgment, if served on tified the file is transferred, a copy of the attorney of record, shall have the every procedural paper filed on behalf same effect as if the Secretary were of holder, and shall also so deliver, as personally served within the jurisdic- promptly as possible, a copy of each tion of the court. similar pleading served on holder or filed in the cause by any other party (Authority: 38 U.S.C. 3732) thereto. Notice of, or motion for, con- (f) If following a default, the holder tinuance and orders thereon are ex- does not bring appropriate action with- cepted from the foregoing. in 30 days after requested in writing by (b) A copy of a notice of sale shall be the Secretary to do so, or does not similarly delivered by the holder, or prosecute such action with reasonable the holder’s agent or trustee, to the diligence, the Secretary may at the Secretary at the VA Regional Office of Secretary’s option fix a date beyond jurisdiction at least 30 days prior to which no further charges may be in- the scheduled liquidation sale, or with- cluded in the computation of the in- in 5 days after the date of first publica- debtedness for the purposes of account- tion of the notice, whichever is later. A ing between the holder and the Sec- copy of any other notice of sale or ac- retary. The Secretary may also inter- quisition of the property served on the vene in, or begin and prosecute to com- holder or advice of any sale of which pletion any action or proceeding, in the the holder has knowledge shall be simi- Secretary’s name or in the name of the larly delivered to the Secretary, in- holder, which the Secretary deems nec- cluding any such notice of a tax sale or essary or appropriate. The Secretary

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shall pay, in advance if necessary, any credit to the indebtedness the amount court costs or other expenses incurred specified. The holder then may retain by the Secretary or properly taxed the property or, not later than 15 days against the Secretary in any such ac- after the date of sale, advise the Sec- tion to which the Secretary is a party, retary of the holder’s election to con- but may charge the same, and also a vey or transfer the property, or the reasonable amount for legal services, rights to the property, to the Sec- against the guaranteed or insured in- retary; debtedness, or the proceeds of the sale (B) The holder acquires the property, of the security to the same extent as or the rights to the property, at the the holder (see § 36.4313 of this part), or liquidation sale for an amount in ex- otherwise collect from the holder any cess of the specified amount, the in- such expenses incurred by the Sec- debtedness shall be credited with the retary because of the neglect or failure proceeds of the sale. The holder may of the holder to take or complete prop- elect to convey the property to the er action. The rights and remedies Secretary under the terms of para- herein reserved are without prejudice graph (a)(1)(ii)(A) of this section, un- to any other rights, remedies, or de- less a bid in excess of the specified fenses, in law or in equity, available to amount was made pursuant to para- the Secretary. graph (a)(3) of this section.

(Authority: 38 U.S.C. 3732) (Authority: 38 U.S.C. 3732(c)) [13 FR 7276, Nov. 27, 1948, as amended at 45 (C) A third party acquires the prop- FR 31065, May 12, 1980; 53 FR 1351, Jan. 19, erty, or the rights to the property, at 1988; 53 FR 4978, Feb. 19, 1988; 53 FR 42950, the liquidation sale for an amount Oct. 25, 1988, 54 FR 612, Jan. 9, 1989; 54 FR equal to or in excess of that specified, 27163, June 28, 1989] the holder shall credit to the indebtedness the net proceeds of the sale; § 36.4320 Sale of security. (D) A third party acquires the prop- (a) Upon receipt by the Secretary of erty, or the rights to the property, at notice of a liquidation sale of any secu- the liquidation sale for an amount less rity for a guaranteed or insured loan, than that specified, the holder shall the Secretary shall determine the net credit to the indebtedness the amount value of the security and shall notify specified. the holder of the net value and of the (iii) If a minimum amount has been regulatory provision which will govern specified by the Secretary, the Sec- the disposition of the security. retary’s liability under loan guaranty (1) If the net value of the real prop- shall be the total indebtedness less the erty securing a guaranteed or insured amount credited to the indebtedness loan exceeds the unguaranteed portion under paragraph (a)(1)(ii) of this sec- of the indebtedness, the Secretary shall tion, not to exceed the Secretary’s specify in advance of the liquidation maximum liability as computed under sale the minimum amount which shall § 35.4321 of this part. be credited to the indebtedness of the (2) If the net value of the real prop- borrower on account of the value of the erty securing a guaranteed or insured security to be sold, subject to the fol- loan does not exceed the unguaranteed lowing: portion of the indebtedness: (i) The specified amount in such (i) The Secretary shall notify the cases shall be the lesser of the net holder that no minimum amount will value of the property or the total in- be specified for credit to the indebted- debtedness. ness on account of the value of the se- (ii) If a minimum amount for credit curity to be sold; to the indebtedness has been specified (ii) The Secretary may not accept in relation to a liquidation sale of real conveyance or transfer of the property; property, and: (iii) The holder shall credit against (A) The holder acquires the property, the indebtedness the net proceeds of or the rights to the property, at the the sale, and the Secretary’s liability sale for an amount not in excess of under loan guaranty shall be limited to such specified amount, the holder shall the total indebtedness less the amount

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credited to the indebtedness not to exer to avoid foreclosure or other judi- ceed the Secretary’s maximum liabil- cial, contractural, or statutory disposi- ity as computed under § 36.4321 of this tion of the obligation or of the secu- part; and rity, the consent of the Secretary to (iv) The liability of the Secretary the terms of such proposal shall be ob- shall not be subject to adjustment by tained in advance of such conveyance reason of any subsequent disposition of or transfer. In consenting to the terms the property by the holder. of the debtor’s proposal the Secretary (3) If a minimum bid is required shall furnish the notice required under under applicable State law, or decree of paragraph (a) of this section. foreclosure or order of sale, or other lawful order or decree, and: (Authority: 38 U.S.C. 3732) (i) Such minimum bid exceeds an (d) Upon receipt by the Secretary of amount which has been specified by the notice of a judicial or statutory sale, or Secretary under paragraph (a)(1) of this other public sale under power of sale section; and contained in the loan instruments, to (ii) The holder acquires the property liquidate any personal property which at the liquidation sale for an amount is security for a guaranteed or insured not exceeding the amount legally re- loan, the Secretary may specify in ad- quired; the holder may elect to convey vance of such sale the minimum the property to the Secretary pursuant amount which shall be credited to the to paragraph (a)(1)(ii)(A) of this sec- indebtedness of the borrower on action. The amount bid at the sale or the count of the value of the security to be total indebtedness, whichever is less, sold. shall govern instead of the specified amount and for the purpose of deter- (1) If a minimum amount has been mining the Secretary’s liability under specified by the Secretary, and loan guaranty. (i) The holder is the successful bidder at the sale for an amount not in excess (Authority: 38 U.S.C. 3732) of such minimum amount, the holder shall sell the property pursuant to (b) The holder should not carry out a paragraph (d)(3) of this section and the liquidation sale until the Secretary has amount realized from the resale of the furnished the notice required under property shall govern, instead of the paragraph (a) of this section. In the specified minimum amount, in the event the holder carries out a liquida- final accounting for determining the tion sale prior to receiving such notice, rights and liabilities of the holder and the holder shall credit against the in- the Secretary, debtedness the greater of: (ii) A third party is the successful (1) The net proceeds of the sale; or bidder at the sale for an amount equal (2) The amount of the indebtedness or to or in excess of that specified, the the net value of the property, which- holder shall credit to the indebtedness ever is less. the net proceeds of the sale, The provisions of paragraph (iii) A third party is the successful (a)(1)(ii)(A) of this section, which ex- bidder at the sale for an amount less tends to the holder the option of con- than that specified, the holder shall veying or transferring the property to credit to the indebtedness the amount the Secretary, shall not be applicable, specified, and the Secretary’s liability under the (iv) The holder is the successful bid- loan guaranty shall be the total indebt- der at the sale for an amount in excess edness less the amount credited to the of the specified amount, the indebted- indebtedness under paragraph (b) (1) or ness shall be credited with the proceeds (2) of this section, not to exceed the of the sale or the amount realized from Secretary’s maximum liability as com- the resale of the property pursuant to puted under § 36.4321 of this part. paragraph (d)(3) of this section, whichever is the greater, unless the bid in ex- (Authority: 38 U.S.C. 3732) cess of the specified amount was made (c) When a debtor proposes to convey pursuant to paragraph (d)(4) of this sec- or transfer any real property to a hold- tion.

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(2) If a minimum amount has not the successful bidder for an amount not been specified by the Secretary under exceeding the amount legally required, paragraph (d)(1) of this section, the the amount paid or payable by the Sec- holder shall credit against the indebt- retary under the guaranty shall not be edness the net proceeds of the sale ex- subject to any adjustment by reason of cept as provided in paragraph (d)(4) of such bid. this section. (3) If personal property has been re- (Authority: 38 U.S.C. 3732) possessed or otherwise acquired by a holder and no public sale is proposed or (e) If the Secretary has specified an required to be held to entitle the hold- amount as provided in this section, and er to effect a further disposition of the holder learns of any material dam- such property, or if the holder is the age to the property occurring prior to successful bidder at the sale of personal the foreclosure sale or to the accept- property as provided in paragraph (d)(1) ance of a deed in lieu of foreclosure or of this section, the holder shall sell the prior to any other event to which such property within a reasonable time. The specified amount is applicable, the holder shall submit to the Secretary a holder shall promptly advise the Sec- written advice setting forth the price, retary of such damage. terms, conditions and the expenses of (f) The holder in accounting to the the proposed sale at least 10 days in ad- Secretary in connection with the dis- vance, and the Secretary shall either position of any property in accordance assent to such sale in which event the with paragraph (a), (b), or (d) of this holder shall credit against the indebt- section, may include as a part of the edness the net proceeds of the sale or, indebtedness all actual expenses or upon agreement to indemnify the hold- costs of the proceedings, paid by the er to the extent of any increased or re- holder, within the limits defined in sultant loss, the Secretary may specify § 36.4313 of this part. In connection with the minimum net price for which the the conveyance or transfer of property security may be sold. If such amount to the Secretary the holder may in- has been specified, the holder shall sell clude in accounting to the Secretary the personal property within a reason- the following expense items if actually able time in the open market for the paid by the holder, in addition to the best price obtainable: Provided, that the consideration payable for the property prior approval of the Secretary shall be obtained if the property is to be sold under paragraph (g) of this section: for a net amount less than the specified amount, or if the property is to be sold (Authority: 38 U.S.C. 3732) on terms other than all cash. The ulti- (1) State and documentary stamp mate net amount realized by the holder taxes as may be required. from such sale shall be reported by the (2) The customary cost of obtaining holder to the Secretary in an account- evidence of title in favor of the Sec- ing which will determine their respec- retary as specified in paragraph (h)(5) tive rights and liabilities. of this section but not including title (4) If a minimum bid is required evidence obtained incident to the mak- under applicable State law, or decree of ing of the loan or any expenses in- foreclosure or order of sale, or other curred to clear title defects. lawful order or decree, the holder may (3) Amount expended for taxes, spe- bid an amount not exceeding such cial assessments, including such pay- amount legally required. If an amount has been specified by the Secretary and ments which are specified in paragraph the holder is the successful bidder for (h)(4) of this section. an amount not exceeding the amount (4) Recording fees. legally required, such specified amount (5) Any other expenditures in connec- shall govern for the purposes of this tion with the property which are ap- paragraph and for the purpose of com- proved by the Secretary. puting the ultimate loss under the (g) In the event a holder elects to guaranty or insurance. In the event no convey or transfer the property to the amount is specified and the holder is Secretary pursuant to paragraph (a),

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(b), or (c) of this section, the consider- the Secretary or as soon after that ation to be paid by the Secretary in re- time as feasible. turn for the property shall be the speci- (3) Occupancy of the property by any- fied amount: Provided, That if a claim one properly in possession by virtue of under the guaranty was previously and during a period of redemption, or paid, the consideration payable for the by anyone else unless under a claim of property shall be an amount equal to title which makes the title sought to the indebtedness (less the amount pre- be conveyed by the holder of less dig- viously paid on the guaranty) or the nity or quality than that required by specified amount, whichever is less. If this section, shall not preclude the no claim under the guaranty was pre- holder from conveying or transferring viously paid, the holder may, pursuant the property to the Secretary. Except to § 36.4321(b) submit a claim within the with the prior approval of the Sec- maximum guaranty liability for the retary, the holder shall not rent the difference between the specified property to a new tenant, nor extend amount and an amount equal to the in- the term of an existing tenancy on debtedness. In the case of an insured other than a month-to-month basis. loan, the holder may submit a claim (4) Any taxes, special assessments or for the difference between an amount ground rents due and payable within 30 equal to the indebtedness and the spec- days after date of conveyance or trans- ified amount pursuant to § 36.4374. fer to the Secretary shall be paid by (h) The conveyance or transfer of any the holder if bills therefor are obtain- property to the Secretary pursuant to able before such conveyance or trans- paragraphs (a), (b), or (c) of this section fer. shall be subject to the following provi- (5) Each conveyance or transfer of sions: real property to the Secretary pursu- (1) If the holder’s notice to the Sec- ant to this section shall be acceptable retary electing to convey or transfer if the holder thereby convenants or the property precedes the acquisition warrants against the acts of the holder of the property by the holder and the holder then acquires the property, the and those claiming under the holder holder shall promptly after such acqui- (e.g., by special warranty deed) and if sition advise the Secretary of the ac- it vests in the Secretary or will entitle quisition. Such advice, or the notice of the Secretary to such title as is or election if given subsequent to acquisi- would be acceptable to prudent lending tion, shall state the amount of the suc- institutions, informed buyers, title cessful bid (if the property was ac- companies, and attorneys, generally, in quired by the holder at public sale) and the community in which the property shall state the insurance coverage then is situated. Any title so acceptable will in force, specifying for each policy, the not be unacceptable to the Secretary name of the insurance company, the by reason of any of the limitations on hazard covered, the amount, and the the quantum or quality of the property expiration date. or title stated in § 36.4350(b) of this (2) The holder may cancel any insur- part: ance in force when the holder acquires Provided, That (i) at the time of con- the property, provided the holder has veyance or transfer to the Secretary obtained the prior approval of the Sec- there has been no breach of any condi- retary. Coincident with the notice of tions affording a right to the exercise election to convey or transfer the prop- of any reverter, except that title will erty to the Secretary or with the ac- not be unacceptable to the Secretary quisition of the property by the holder, by reason of a violation of a restriction following such notice, whichever is based on race, color, creed, or national later, the holder shall obtain endorse- origin, whether or not such restriction ments on all such insurance policies provides for reversion or forfeiture of naming the Secretary as an assured, as title or a lien for liquidated damages in his/her interest may appear. Such in- the event of a breach. surance policies shall be forwarded to (ii) With respect to any such limita- the Secretary at the time of the con- tions which came into existence subse- veyance or transfer of the property to quent to the making of the loan, full

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compliance was had with the require- loss due to damage to or destruction of ments of § 36.4324 of this part. The ac- the property or due to personal injury ceptability of a conveyance or transfer sustained in respect to such property pursuant to the requirements of this shall be governed by the provisions of paragraph will be established by deliv- this paragraph and paragraph (h)(10) of ery to the Secretary of any of the fol- this section. Ordinary wear and tear lowing evidence of title issued by an in- excepted, the holder shall bear such stitution or person satisfactory to the risk of loss from the date of acquisition Secretary, in form satisfactory to him/ by the holder to the date such risk of her showing that title to the property loss is assumed by the Secretary. Such of the quality specified in this para- risk of loss is assumed by the Sec- graph is or will be vested in the Sec- retary from the date of receipt of the retary: holder’s election to convey or transfer (A) A title policy insuring the Sec- the property to the Secretary or, in the retary in an amount approximately event of receipt of notice of such elec- equal to the consideration for the prop- tion prior to acquisition, from the date erty, or a commitment for such title of the Secretary’s receipt of notice of policy; or acquisition by the holder: (B) A certificate of record title; or Provided, That if custody over the prop- (C) An abstract of title accompanied erty has not been delivered by the by a legal opinion as to the quality of holder to the Secretary on the date such title of record; or when the Secretary otherwise would (D) A Torrens or similar title certifi- have assumed the risk of loss, the Sec- cate; or retary’s assumption of the risk of loss (E) Such other evidence of title as will be deferred until such custody over the Secretary may approve. the property is delivered, or until the In lieu of such title evidence, the Sec- property has been conveyed or trans- retary will accept a conveyance or ferred to the Secretary. The amount of transfer with general warranty with re- any loss chargeable to the holder may spect to the title from a holder de- be deducted from the amount payable scribed in 38 U.S.C. 3702(d) or from a by the Secretary at the time the prop- holder of financial responsibility satis- erty is transferred. In any case where factory to the Secretary. In any case pursuant to the VA regulations rejec- where the holder does not deliver evi- tion of the title is legally proper, the dence of title of the character specified Secretary may surrender custody of in this paragraph, the holder to aid the the property as of the date specified in Secretary in determination of accept- the Secretary’s notice to the holder. ability of title shall without expense to The Secretary’s assumption of such the Secretary furnish such evidence of risk shall terminate upon such sur- title, including survey, if any, as may render. have been obtained by the holder inci- (8) The holder shall not be liable to dent to the making of the loan or at- the Secretary for any portion of the tendant to the foreclosure. paid or unpaid taxes, special assess- (6) Except with respect to matters ments, ground rents, insurance pre- covered by any covenants or warran- miums, or other similar items. ties of the holder, the acceptance by (9) The Secretary shall be entitled to the Secretary of a conveyance or trans- all rentals and other income collected fer by the holder shall conclude the re- from the property and to any insurance sponsibility of the holder to the Sec- proceeds or refunds subsequent to the retary under the regulations of this date of acquisition by the holder. subpart with respect to the title and in (10) In respect to a property which the event of the subsequent discovery was the security for a condominium of title defects, the Secretary shall loan guaranteed or insured 38 U.S.C. have no recourse against the holder 3710(a)(6) the responsibility for any loss with respect to such title other than by due to damage to or destruction of the reason of such covenants and warran- property or due to personal injury sus- ties. tained in respect to such property shall (7) As between the holder and the in no event pass to the Secretary until Secretary, the responsibility for any the Secretary expressly assumes such

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responsibility or until conveyance of approved prior to the date the holder is the property to the Secretary, which- notified of such action. ever first occurs. The holder shall have the right to convey such property to (Authority: 38 U.S.C. 3732, Pub. L. 100–527) the Secretary only if the property (in- [13 FR 7739, Dec. 15, 1948, as amended at 20 cluding elements of the development or FR 9180, Dec. 10, 1955; 24 FR 2654, Apr. 7, 1959; project owned in common with other 28 FR 11505, Oct. 29, 1963; 33 FR 6975, May 9, unit owners) is undamaged by fire, 1968; 33 FR 18026, Dec. 4, 1968; 34 FR 11095, earthquake, windstorm, flooding or July 1, 1969; 36 FR 320, Jan. 9, 1971; 40 FR 34591, Aug. 18, 1975; 53 FR 1352, Jan. 19, 1988; boiler explosion. The absence of a right 54 FR 27163, June 28, 1989; 60 FR 38262, July in the holder to convey such property 26, 1995; 61 FR 28058, June 4, 1996] which is so damaged shall not preclude a conveyance, if the Secretary agrees § 36.4321 Computation of guaranty in a given case to such a conveyance claims; subsequent accounting. upon completion of repairs within a (a) Subject to the limitation that the specified period of time and such re- total amounts payable shall in no pairs are so completed and the convey- event exceed the amount originally ance is otherwise in order. guaranteed, the amount payable on a (i)(1) The terms ‘‘date of sale’’ or claim for the guaranty shall be the per- ‘‘date of acquisition’’ as used in this centage of the loan originally guaran- section are defined as the date of the teed applied to the indebtedness com- event (e.g., sale, confirmation of sale puted as of the earliest of the following when required under local practice, de- dates: livery of deed in case of voluntary con- (1) The date of the liquidation sale; veyance, etc.) which fixes the rights of or, the parties in the property. (2) The cutoff date established under (2) The term ‘‘property’’ or ‘‘real paragraph (f) of § 36.4319 of this part; or, property’’ as used in this section shall (3) The cutoff date established under include paragraph (b) of this section. (i) A leasehold estate which at the Deposits or other credits or setoffs time of closing the loan was not less legally applicable to the indebtedness duration than prescribed by on the date of computation shall be ap- § 36.4350(a)(2) of this part, and plied in reduction of the indebtedness on which the claim is based. Any (ii) The rights derived by the holder escrowed or earmarked funds not sub- through a foreclosure sale of real es- ject to superior claims of third persons tate whether or not such rights con- must likewise be so applied. stitute an estate in real property under (b) In any case in which there is a local law. delay in the liquidation sale caused by: (j) Except as provided in paragraph (1) The holder of the loan extending (h)(6) of this section, the provisions of forbearance in excess of 30 days at the this section shall not be in derogation request of the Secretary, the cutoff of any rights which the Secretary may date for computation of the indebted- have under § 36.4325 of this part. The ness shall be 30 days after the date the Under Secretary for Benefits, or the Secretary determines the liquidation Director, Loan Guaranty Service, may sale would have taken place if there authorize any deviation from the provi- had been no such delay, provided: the sions of this section, within the limita- net value of the real property securing tions prescribed in 38 U.S.C. Chapter 37, the loan does not exceed the which may be necessary or desirable to unguaranteed portion of the indebted- accomplish the objectives of this sec- ness as of the actual liquidation sale tion if such deviation is made nec- date and such net value will exceed the essary by reason of any laws or prac- unguaranteed portion of the indebted- tice in any State or Territory or the ness as ofthe cutoff date; District of Columbia: Provided, that no (2) The Secretary, including the Sec- such deviation shall impair the rights retary’s failure to provide the holder of any holder not consenting to the de- with advice as to the net value of the viation with respect to loans made or security within two working days prior

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to a scheduled liquidation sale but ex- that paragraph are applicable after cluding forbearance exercised at the re- such date has been established. quest of the Secretary, with respect to a holder which has complied with the (Authority: 38 U.S.C. 501) provisions of § 36.4319(b) of this part, (d) Credits accruing from the pro- the cutoff date for computation of the ceeds of a sale or other disposition of indebtedness shall be the date the liq- the security subsequent to the date of uidation sale would have taken place if computation, and prior to the submis- there had been no such delay; sion of this claim, shall be reported to (3) A voluntary case commenced the Secretary incident to such submis- under Title 11, United States Code (re- sion, and the amount payable on the lating to bankruptcy), the cutoff date claim shall in no event exceed the re- for computation of the indebtedness maining balance of the indebtedness. shall be 30 days after the date the Sec- retary determines the liquidation sale (Authority: 38 U.S.C. 501) would have taken place if there had (e) The claimant shall be deemed to been no such delay, provided: the net have received as trustee for the benefit value of the real property securing the of the United States any amounts re- loan does not exceed the unguaranteed ceived on account of the indebtedness portion of the indebtedness as of the after the date of the claim, from the actual liquidation sale date and such proceeds of a sale of the security or net value will exceed the unguaranteed otherwise, to the extent such credits portion of the indebtedness as of the exceed the balance of the indebtedness cutoff date. unsatisfied by the payment of the guaranty. The claimant shall immediately (c) Adjustment of cutoff dates: pay such amounts to the Secretary to (1) Any cutoff date established under the extent of the debtor’s liability to § 36.4319(f) of this part or paragraph (b) the Secretary as guarantor. of this section will be adjusted by a pe- (f)(1)(i) Except as provided in para- riod of months corresponding to the graph (f)(1)(ii) of this section, a holder number of installment payments, if shall file a claim for payment under any, received by the holder and cred- the guaranty no later than 1 year after ited to the indebtedness after the cut- the completion of the liquidation sale. off date is established. For purposes of this section, the liq- (2) When a cutoff date is established uidation sale will be considered com- under paragraph (b)(2) of this section, pleted when: the actual liquidation sale date will be (A) The last act required under State used for purposes of computing the in- law is taken to make the liquidation debtedness in any subsequent account- sale final, but excluding any redemp- ing between the holder and the Sec- tion period permitted under State law; retary; if an earlier cutoff date is in ef- (B) If a holder accepts a voluntary fect at the time delay in a liquidation conveyance of the property in lieu of foreclosure, the date of recordation of sale is caused by the Secretary, such the deed to the holder or the holder’s date will not be modified by applica- designee; or tion of the provisions of paragraph (C) In the case of a sale of the prop- (b)(2) of this section, but will be ex- erty to a third party for an amount less tended by an interval corresponding to than is sufficient to repay the unpaid the delay in the liquidation sale caused balance on the loan where the holder by the Secretary for purposes of com- has agreed in advance to release the puting the indebtedness in any subse- lien in exchange for the proceeds of quent accounting between the holder such sale, the date of settlement of and the Secretary. such sale. (3) Any cutoff date established under (ii) With respect to any liquidation § 36.4319 of this part or paragraph (b) of sale completed prior to February 1, this section will be considered to be the 2008, all claims must be submitted no liquidation sale date. Such date will be later than February 2, 2009. modified in accordance with paragraph (2) If additional information becomes (b) of this section if the provisions of known to a holder after the filing of a

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guaranty claim, the holder may file a appropriate instrument tendered for supplemental claim provided that such that purpose, evidencing any payment supplemental claim is filed within the received from the Secretary and the time period specified in paragraph (f)(1) Secretary’s resulting right of subroga- of this section. tion. (3) No claim under a guaranty shall (c) The Secretary shall cause the in- be payable unless it is submitted with- strument required by paragraph (b) of in the time period specified in para- this section to be filed for record in the graph (f)(1) of this section. office of the recorder of deeds, or other (4) In the event that VA does not ap- appropriate office of the proper county, prove payment of any item submitted town or State, in accordance with the under a guaranty claim, VA shall no- applicable State law. The filing or fail- tify the holder what items are being ure to file such instrument for record denied and the reasons for such denial. shall have the legal results prescribed The holder may, within 30 days after by the applicable law of the State the date of such denial notification, where the real or personal property is submit a request to VA that one or situated, with respect to filing or fail- more items that were denied be recon- ure to so file mortgages and other lien sidered. The holder must present any instruments and assignments thereof. additional information justifying pay- The references herein to ‘‘filing for ment of items denied. record’’ include ‘‘registration’’ or any similar transaction, by whatever name (Authority: 38 U.S.C. 501) designated when title to the encum- [54 FR 27163, June 28, 1989, as amended at 73 bered property has been ‘‘registered’’ FR 6308, Feb. 1, 2008] pursuant to a Torrens or other similar title registration system provided by § 36.4322 Computation of indebted- law. ness. (d) As a condition to paying a claim In computing the indebtedness for for an insured loss the Secretary may the purpose of filing a claim for pay- require that the loan, including any se- ment of a guaranty or for payment of curity or judgment held therefor, be as- an insured loss, or in the event of a signed to the extent of such payment, transfer of the loan under § 36.4318 (a), and if any claim has been filed in bank- or other accounting to the Secretary, ruptcy, insolvency, probate, or similar the holder shall not be entitled to treat proceedings such claim may likewise repayments theretofore made as liq- be required to be so assigned. uidated damages, or rentals, or other- (e) Any amounts paid by the Sec- wise than as payments on the indebted- retary on account of the liabilities of ness, notwithstanding any provision in any veteran guaranteed or insured the note, or mortgage, or otherwise, to under the provisions of 38 U.S.C. chap- the contrary. ter 37 shall constitute a debt owing to [13 FR 7278, Nov. 27, 1948] the United States by such veteran.

§ 36.4323 Subrogation and indemnity. (Authority: 38 U.S.C. 3732) (a) The Secretary shall be subrogated (1) Prior to a liquidation sale, an offi- to the contract and the lien or other cial authorized to act for the Secretary rights of the holder to the extent of under provisions of § 36.4342 of this part any sum paid on a guaranty or on ac- may approve a complete release of the count of an insured loss, which right Secretary’s right to collect a debt shall be junior to the holder’s rights as owing to the United States under this against the debtor or the encumbered paragraph and/or under paragraph (a) property until the holder shall have re- of this section provided such official ceived the full amount payable under determines: the contract with the debtor. No par- (i) The loan default was caused by tial or complete release by a creditor circumstances beyond the control of shall impair the rights of the Secretary the obligor; with respect to the debtor’s obligation. (ii) There are no indications of fraud, (b) The holder, upon request, shall misrepresentation or bad faith on the execute, acknowledge and deliver an part of the obligor in obtaining the

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loan or in connection with the loan de- loan or in connection with the loan default; fault; (iii) The obligor cooperated with VA (iii) The obligor cooperated with VA in exploring all realistic alternatives in exploring all realistic alternatives to termination of the loan through to termination of the loan through foreclosure; and, either foreclosure; (iv) Review of the obligor’s current (iv) Review of the obligor’s current financial situation and prospective financial situation and prospective earning potential and obligations indi- earning potential and obligations indicates there are no realistic prospects cates there are no realistic prospects that the obligor could repay all or part that the obligor could repay all of the of the anticipated debt within six years anticipated debt within six years of the of the liquidation sale while providing liquidation sale while providing the ne- the necessities of life for himself or cessities of life for himself or herself herself and his or her family; or, and his or her family; and, (v) In consideration for a release of (v) The obligor executes a written the Secretary’s collection rights the agreement acknowledging his or her li- obligor completes, or VA is enabled to ability to VA under this paragraph and authorize, an action which reduces the executes a promissory note which pro- Government’s claim liability suffi- vides for regular amortized monthly ciently to offset the amount of the an- payments of an amount determined by ticipated indebtedness which would VA in accordance with paragraph (e)(3) otherwise be established pursuant to of this section including interest on this paragraph and likely be collect- the total amount payable at the rate in able by VA after foreclosure in view of effect for Loan Guaranty liability ac- the obligor’s financial situation; such counts at the time of execution, or, the actions would include termination of obligor agrees to other terms of repay- the loan by means of a deed in lieu of ment acceptable to VA including pay- foreclosure, private sale of the prop- ment of a lump sum in settlement of erty for less than the indebtedness his or her obligation under this para- with a reduced claim paid by VA for graph; the balance due the loan holder or ena- (3) For purposes of this paragraph a bling VA to authorize the holder to review of an obligor’s financial situa- elect a more expeditious foreclosure tion will take into consideration: procedure when such an election would result in the legal release of the obli- (i) The obligor’s current and antici- gor’s liability; or pated family income based on employ- (vi) The obligor being released is not ment skills and experience; the current titleholder to the property (ii) The obligor’s current short-term and there are no indications of fraud, and long-term financial obligations, in- misrepresentation, or bad faith on the cluding the obligation to repay the obligor’s part in obtaining the loan or Government which must be afforded disposing of the property or in connec- consideration at least equal to his or tion with the loan default. her consumer debt obligations; (2) Prior to a liquidation sale, an offi- (iii) A current credit report on the cial authorized to act for the Secretary obligor; under provisions of section 4342 of this (iv) The obligor’s assets and net part may approve a partial release of worth; and, the Secretary’s right to collect a debt (v) The required balance available for owing to the United States under this family support used in underwriting paragraph and/or under paragraph (a) VA guaranteed loans in the area. of this section provided such official The amount of indebtedness estab- determines: lished will be such that the obligor’s fi- (i) The loan default was caused by nancial situation permits repayment of circumstances beyond the control of the debt to the Government in regular the obligor: monthly installments of principal plus (ii) There are no indications of fraud, interest over a five year period com- misrepresentation or bad faith on the mencing within one year after the date part of the obligor in obtaining the the promissory note is executed, except

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in those cases in which a lump sum set- to a release of the veteran from liabil- tlement appears to be in the best inter- ity on the loan by the holder thereof. est of the Government or in which it appears the obligor may reasonably ex- (Authority: 38 U.S.C. 3713) pect significant changes in his or her (g) If, on or after July 1, 1972, any financial situation which would permit veteran disposes of residential property higher payments to be made during securing a guaranteed or insured loan later periods of the life of the note. obtained under 38 U.S.C. Chapter 37, (4) Determinations made under para- without receiving a release from liabil- graphs (e)(1) and (e)(2) of this section ity with respect to such loan under 38 are intended for the benefit of the Gov- U.S.C. 3713 and a default subsequently ernment in reducing the amount of occurs which results in liability of the claim payable by VA and/or avoiding veteran to the Secretary on account of the establishment of uncollectible the loan, the Secretary may relieve the debts owing to the United States. Such veteran of such liability if he deter- determinations are discretionary on mines that: the part of VA and shall not constitute (1) A transferee either immediate or a defense to any legal action to termi- remote is legally liable to the Sec- nate the loan nor vest any appellate retary for the debt of the original vet- right in an obligor which would require eran-borrower established after the ter- further review of the case. mination of the loan, and (2) The original loan was current at (Authority: 38 U.S.C. 501, 3703(c)(1)) the time such transferee acquired the property, and (f) Whenever any veteran disposes of (3) The transferee who is liable to the residential property securing a guaran- Secretary is found to have been a satis- teed or insured loan obtained by him or factory credit risk at the time he or her under 38 U.S.C. chapter 37, and for she acquired the property. which the commitment to make the (h) If a veteran or any other person loan was made prior to March 1, 1988, disposes of residential property secur- the Secretary, upon application made ing a guaranteed or insured loan for by such veteran, shall issue to the vet- which a commitment was made on or eran a release relieving him or her of after March 1, 1988, and the veteran or all further liability to the Secretary on other person notifies the loan holder in account of such loan (including liabil- writing before disposing of the prop- ity for any loss resulting from any de- erty, the veteran or other person shall fault of the transferee or any subse- be relieved of all further liability to quent purchaser of such property) if the Secretary with respect to the loan the Secretary has determined, after (including liability for any loss result- such investigation as may be deemed ing from any default of the purchaser appropriate, that there has been com- or any subsequent owner of the prop- pliance with the conditions prescribed erty) and the application for assump- in 38 U.S.C. 3713. The assumption of full tion shall be approved if the holder de- liability for repayment of the loan by termines that: the transferee of the property must be (1) The proposed purchaser is credit- evidenced by an agreement in writing worthy; in such form as the Secretary may re- (2) The proposed purchaser is con- quire. Release of the veteran from li- tractually obligated to assume the loan ability to the Secretary will not impair and the liability to indemnify the De- or otherwise affect the Secretary’s partment of Veterans Affairs for the guaranty or insurance liability on the amount of any claim paid under the loan, or the liability of the veteran to guaranty as a result of a default on the the holder. Any release of liability loan, or has already done so; and, granted to a veteran by the Secretary (3) The payments on the loan are cur- shall inure to the spouse of such vet- rent. eran. The release of the veteran from Should these requirements be satisfied, liability to the Secretary will con- the holder may also release the veteran stitute the Secretary’s prior approval or other person from liability on the

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loan. This does not apply if the ap- (f) The release of the personal liabil- proval for the assumption is granted ity of any obligor on a guaranteed or upon special appeal to avoid immediate insured obligation resultant from the foreclosure. act or omission of any holder without the prior approval of the Secretary (Authority: 38 U.S.C. 3714) shall release the obligation of the Sec- [13 FR 7278, Nov. 27, 1948, as amended at 24 retary as guarantor or insurer, except FR 2654, Apr. 7, 1959; 33 FR 5362, Apr. 4, 1968; when such act or omission consists of 37 FR 24034, Nov. 11, 1972; 54 FR 30211, July 19, (1) failure to establish the debt as a 1989; 54 FR 34988, Aug. 23, 1989; 55 FR 27467, July 3, 1990; 55 FR 31387, Aug. 2, 1990; 55 FR valid claim against the assets of the es- 33904, Aug. 20, 1990; 55 FR 37477, Sept. 12, 1990; tate of any deceased obligor, provided 67 FR 62647, Oct. 8, 2002] no lien for the guaranteed or insured debt is thereby impaired or destroyed; § 36.4324 Release of security. or (2) an election and appropriate pros- (a) Except upon full payment of the ecution of legally available effective indebtedness the holder shall not re- remedies with respect to the reposses- lease a lien or other right in or to real sion or the liquidation of the security property held as security for a guaran- in any case, irrespective of the identity teed or insured loan, or grant a fee or or the survival of the original or of any other interest in such property, with- subsequent debtor, if holder shall have out the prior approval of the Secretary, given such notice as required by unless in the opinion of the holder such § 36.4317 of this part and if, after receiv- release does not involve a decrease in ing such notice, the Secretary shall the value of the security in excess of have failed to notify the holder within $2,500: Provided, That the aggregate of 15 days to proceed in such manner as to the reduction in the original value of effectively preserve the personal liabil- the security resultant from such re- ity of the parties liable, or such of leases without the Secretary’s prior ap- them as the Secretary indicates in proval does not exceed $2,500. such notice to the holder; or (3) the re- (b) Holder may release from the lien lease of an obligor, or obligors, from li- personal property including crops with- ability on an obligation secured by a out the prior approval of the Secretary. lien on property, which release is an in- (c) Except upon full payment of the cident of and contemporaneous with indebtedness or upon the prior approval of the Secretary, the holder the sale of such property to an eligible shall not release a lien under para- veteran who assumed such obligation, graph (a) or (b) of this section unless which assumed obligation is guaran- the consideration received for the re- teed on the assuming veteran’s account lease is commensurate with the fair pursuant to 38 U.S.C. chapter 37; or (4) market value of the property released the release of an obligor or obligors as and the entire consideration is applied provided in § 36.4314(d) of this part; or, to the indebtedness, or if encumbrance the release of an obligor, or obligors, on other property is accepted in lieu of incident to the sale of property secur- that released it shall be the holder’s ing the loan which the holder is au- duty to acquire such lien on property thorized to approve under the provi- of substantially equal value which is sions of 38 U.S.C. 3714. reasonably capable of serving the purpose for which the property released (Authority: 38 U.S.C. 3714) was utilized. [13 FR 7278, Nov. 27, 1948, as amended at 24 (d) Failure of the holder to comply FR 6315, Aug. 6, 1959; 35 FR 7728, May 20, 1970; with the provisions of this section shall 46 FR 43673, Aug. 31, 1981; 52 FR 26342, July 14, not in itself affect the validity of the 1987; 55 FR 37477, Sept. 12, 1990] title of a purchaser to the property released. § 36.4325 Partial or total loss of guar- (e) The holder shall notify the Sec- anty or insurance. retary of any such release or substi- (a) Subject to the incontestable pro- tution of security within 30 days after visions of 38 U.S.C. 3721 as to loans completion of such transaction. guaranteed or insured on or subsequent

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to July 1, 1948, there shall be no liabil- concerning guaranty or insurance of ity on account of a guaranty or insur- loans to veterans, ance, or any certificate or other evi- (2) Inclusion of power to substitute dence thereof, with respect to a trans- trustees (§ 36.4327), action in which a signature to the (3) The procurement and mainte- note, the mortgage, or any other loan nance of insurance coverage (§ 36.4326), papers, or the application for guaranty (4) Advice to Secretary as to default or insurance is a forgery; or in which (§ 36.4315), the certificate of discharge or the cer- (5) Notice of intention to begin ac- tificate of eligibility is counterfeited, tion (§ 36.4317), or falsified, or is not issued by the Gov- (6) Notice to the Secretary in any ernment. suit or action, or notice of sale (1) Except as to a holder who ac- (§ 36.4319), quired the loan instrument before ma- (7) The release, conveyance, substi- turity, for value, and without notice, tution, or exchange of security and who has not directly or by agent (§ 36.4324), participated in the fraud, or in the mis- (8) Lack of legal capacity of a party representation hereinafter specified, to the transaction incident to which any wilful and material misrepresenta- the guaranty or the insurance is grant- tion or fraud by the lender, or by a ed (§ 36.4328), holder, or the agent of either, in pro- (9) Failure of the lender to see that curing the guaranty or the insurance any escrowed or earmarked account is credit, shall relieve the Secretary of li- expended in accordance with the agree- ability, or, as to loans guaranteed or ment, insured on, or subsequent to July 1, (10) The taking into consideration of 1948, shall constitute a defense against limitations upon the quantum or qual- liability on account of the guaranty or ity of the estate or property insurance of the loan in respect to (§ 36.4350(b)), which the wilful misrepresentation, or (11) Any other requirement of 38 the fraud, is practiced: Provided, That U.S.C. chapter 37 or the regulations if a misrepresentation, although mate- concerning guaranty or insurance of rial, is not made wilfully, or with loans to veterans which does not by the fraudulent intent, it shall have only terms of said chapter or the regula- the consequences prescribed in para- tions concerning guaranty or insurance graphs (b) and (c) of this section. of loans to veterans result in relieving (2) [Reserved] the Secretary of all liability with re- (b) In taking security required by 38 spect to the loan, U.S.C. chapter 37 and the regulations no claim on the guaranty or insurance concerning guaranty or insurance of shall be paid on account of the loan loans to veterans, a holder shall obtain with respect to which such failure oc- the required lien on property the title curred, or in respect to which an to which is such as to be acceptable to unwillful misrepresentation occurred, prudent lending institutions, informed until the amount by which the ulti- buyers, title companies, and attorneys, mate liability of the Secretary would generally, in the community in which thereby be increased has been the property is situated: Provided, That ascertained. The burden of proof shall a title will not be unacceptable by rea- be upon the holder to establish that no son of any of the limitations on the increase of ultimate liability is attrib- quantum or quality of the property or utable to such failure or misrepresen- title stated in § 36.4350(b) and if such tation. The amount of increased liabil- holder fails in this respect or fails to ity of the Secretary shall be offset by comply with 38 U.S.C. chapter 37 and deduction from the amount of the the regulations concerning guaranty or guaranty or insurance otherwise pay- insurance of loans to veterans with re- able, or if consequent upon loss of secu- spect to: rity shall be offset by crediting to the (1) Obtaining and retaining a lien of indebtedness the amount of the impair- the dignity prescribed on all property ment as proceeds of the sale of security upon which a lien is required by 38 in the final accounting to the Sec- U.S.C. chapter 37 or the regulations retary. To the extent the loss resultant

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from the failure or misrepresentation is then participating in the National prejudices the Secretary’s right of sub- Flood Insurance Program. rogation acceptance by the holder of (Authority: 42 U.S.C. 4012a, 4106(a)) the guaranty or insurance payment shall subordinate the holder’s right to [62 FR 5531, Feb. 6, 1997] those of the Secretary. § 36.4327 Substitution of trustees. (c) If after the payment of a guaranty or an insurance loss, or after a loan is In jurisdictions in which valid, any transferred pursuant to § 36.4318 (a), the deed of trust or mortgage securing a fraud, misrepresentation or failure to guaranteed or insured loan, if it names comply with the regulations in this trustees, or confers a power of sale oth- subpart as provided in this section is erwise, shall contain a provision em- discovered and the Secretary deter- powering any holder of the indebted- mines that an increased loss to the ness to appoint substitute trustees, or government resulted therefrom the other person with such power to sell, transferor or person to whom such pay- who shall succeed to all the rights, ment was made shall be liable to the powers and duties of the trustees, or Secretary for the amount of the loss other person, originally designated. caused by such misrepresentation or [13 FR 7279, Nov. 27, 1948] failure. § 36.4328 Capacity of parties to con- [13 FR 7741, Dec. 15, 1948, as amended at 24 tract. FR 2654, Apr. 7, 1959] Nothing in §§ 36.4300 to 36.4375, inclu- § 36.4326 Hazard insurance. sive, shall be construed to relieve any lender of responsibility otherwise ex- The holder shall require insurance isting, for any loss caused by the lack policies to be procured and maintained of legal capacity of any person to con- in an amount sufficient to protect the tract, convey, or encumber, or caused security against the risks or hazards to by the existence of other legal dis- which it may be subjected to the ex- ability or defects invalidating, or ren- tent customary in the locality. All dering unenforceable in whole or in moneys received under such policies part, either the loan obligation or the covering payment of insured losses security therefor. shall be applied to restoration of the security or to the loan balance. Flood [13 FR 7279, Nov. 27, 1948] insurance will be required on any § 36.4329 Geographical limits. building or personal property securing a loan at any time during the term of Any real property purchased, con- the loan that such security is located structed, altered, improved, or repaired in an area identified by the Federal with the proceeds of a guaranteed or Emergency Management Agency as insured loan shall be situated within having special flood hazards and in the United States which for purposes of which flood insurance has been made 38 U.S.C. Chapter 37 is here defined as available under the National Flood In- the several States, Territories and pos- surance Act, as amended. The amount sessions, and the District of Columbia, of flood insurance must be at least the Commonwealth of Puerto Rico, and equal to the lesser of the outstanding the Commonwealth of the Northern principal balance of the loan or the Mariana Islands. maximum limit of coverage available [46 FR 43673, Aug. 31, 1981] for the particular type of property under the National Flood Insurance § 36.4330 Maintenance of records. Act, as amended. The Secretary cannot (a) The holder shall maintain a guarantee a loan for the acquisition or record of the amounts of payments re- construction of property located in an ceived on the obligation and disburse- area identified by the Federal Emer- ments chargeable thereto and the dates gency Management Agency as having thereof. This record shall be main- special flood hazards unless the com- tained until the Secretary ceases to be munity in which such area is situated liable as guarantor or insurer of the

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loan. For the purpose of any account- case by the Secretary, if available, or ing with the Secretary or computation otherwise the name and serial number of a claim, any holder who fails to of the veteran. If mailed, the notice maintain such record shall be pre- shall be by certified mail when so pro- sumed to have received on the dates vided by §§ 36.4300 to 36.4375. This para- due all sums which by the terms of the graph does not apply to legal process. contract are payable prior to date of [58 FR 29117, May 19, 1993] claim for default, and the burden of going forward with evidence and of ul- § 36.4333 Satisfaction of indebtedness. timate proof of the contrary shall be Upon full satisfaction of a guaran- on such holder. teed loan by payment or otherwise it (b) The lender shall retain copies of shall be the duty of the holder to can- all loan origination records on a VA- cel the endorsement, if any, of the Sec- guaranteed loan for at least two years retary; and forthwith inform the Sec- from the date of loan closing. Loan retary of such cancellation. In the origination records include the loan ap- event the Secretary’s liability thereon plication, including any preliminary is evidenced by an instrument separate application, verifications of employ- from the instrument evidencing the ment and deposit, all credit reports, in- debtor’s obligation, the instrument evi- cluding preliminary credit reports, dencing the obligation of the Secretary copies of each sales contract and shall be returned to the Department of addendums, letters of explanation for Veterans Affairs office issuing same, or adverse credit items, discrepancies and to the central office, with the holder’s the like, direct references from credi- cancellation or endorsement of release tors, correspondence with employers, thereon. appraisal and compliance inspection reports, reports on termite and other [13 FR 7279, Nov. 27, 1948] inspections of the property, builder § 36.4334 Incorporation by reference. change orders, and all closing papers and documents. Regulations issued under 38 U.S.C. Chapter 37 and in effect on the date of (Authority: 38 U.S.C. 501, 3703(c)(1)) any loan which is submitted and accepted or approved for a guaranty or (c) The Secretary has the right to infor insurance thereunder, shall govern spect, examine, or audit, at a reason- the rights, duties, and liabilities of the able time and place, the records or ac- parties to such loan and any provisions counts of a lender or holder pertaining of the loan instruments inconsistent to loans guaranteed or insured by the with such regulations are hereby Secretary. amended and supplemented to conform (The information collection requirements in thereto. this section have been approved by the Office [24 FR 2655, Apr. 7, 1959] of Management and Budget under control number 2900–0515) § 36.4335 Supplementary administra- [63 FR 12004, Mar. 12, 1998] tive action. Notwithstanding any requirement, § 36.4332 Delivery of notice. condition, or limitation stated in or Any notice required by §§ 36.4300 to imposed by the regulations concerning 36.4375 to be given the Secretary must the guaranty or insurance of loans to be in writing or such other communica- veterans, the Under Secretary for Ben- tions medium as may be approved by efits, or the Director, Loan Guaranty an official designated in § 36.4342 and Service, within the limitations and delivered, by mail or otherwise, to the conditions prescribed by the Secretary, VA office at which the guaranty or in- is hereby authorized, if he or she finds surance was issued, or to any changed the interests of the Government are address of which the holder has been not adversely affected, to relieve undue given notice. Such notice must plainly prejudice to a debtor, holder, or other identify the case by setting forth the person, which might otherwise result, name of the original veteran-obligor provided no such action may be taken and the file number assigned to the which would impair the vested rights

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of any person affected thereby. If such chased, constructed, repaired, refi- requirement, condition, or limitation nanced, altered, or improved and; is of an administrative or procedural (2)(i) Except as to refinancing loans (not substantive) nature, any employee pursuant to 38 U.S.C. 3710(a)(8), designated in § 36.4342 is hereby author- (a)(9)(B)(i), (a)(11), or (b)(7) and energy ized to grant similar relief if he or she efficient mortgages pursuant to 38 finds the failure or error of the lender U.S.C. 3710(d), the loan (including any was due to misunderstanding or mis- scheduled deferred interest added to take and that the interests of the Gov- principal) does not exceed the reason- ernment are not adversely affected. able value of the property or projected Provisions of the regulations consid- reasonable value of a new home which ered to be of an administrative or pro- is security for a graduated payment cedural (nonsubstantive) nature are mortgage loan, as appropriate, as de- limited to the following: termined by the Secretary, and (a) The requirement in § 36.4314(e) (ii) For the purpose of determining that a holder promptly forward an ad- the reasonable value of a graduated vice of the terms of any agreement ef- payment mortgage loan to purchase a fecting a reamortization or extension new home, the reasonable value of the of a loan. property as of the time the loan is (b) The 45-day requirement in made shall be calculated to increase at § 36.4315(a) concerning the giving of no- a rate not in excess of 2.5 percent per tice of default. year, but in no event may the projected (c) The requirement in § 36.4317 that a value of the property exceed 115 per- holder give 30 days advance notice of cent of the initially established reason- its intention to foreclose. able value, and (d) The requirement in § 36.4317(b) (Authority: 38 U.S.C. 3703(d)(2)) that a holder give notice of repossession of personal property within 10 (3) The veteran has certified, in such days after such repossession has oc- form as the Secretary may prescribe, curred. that the veteran has paid in cash from (e) The requirement in § 36.4307(a) his or her own resources on account of that a lender obtain in prior approval such purchase, construction, alter- of the Secretary before closing a joint ation, repair, or improvement a sum loan if the lender or class of lenders is equal to the difference, if any, between eligible or has been approved by the the purchase price or cost of the prop- Secretary to close loans on the auto- erty and its reasonable value. matic basis pursuant to 38 U.S.C. (4) A loan guaranteed under 38 U.S.C. 3702(d). 3710(d) which includes the cost of en- (f) The requirements in § 36.4303(k) of ergy efficient improvements may ex- this part concerning the giving of no- ceed the reasonable value of the prop- tice in assumption cases under 38 erty. The cost of the energy efficient U.S.C. 3714. improvements that may be financed may not exceed $3,000; provided, how- (Authority: 38 U.S.C. 3714 and 3720) ever, that up to $6,000 in energy efficient improvements may be financed if [20 FR 4855, July 8, 1955, as amended at 20 FR the increase in the monthly payment 9180, Dec. 10, 1955; 23 FR 2217, Apr. 4, 1958; 27 for principal and interest does not ex- FR 224, Jan. 9, 1962; 40 FR 34592, Aug. 18, 1975; 45 FR 53809, Aug. 13, 1980; 49 FR 13352, Apr. 4, ceed the likely reduction in monthly 1984; 55 FR 37477, Sept. 12, 1990; 61 FR 28058, utility costs resulting from the energy June 4, 1996; 63 FR 12004, Mar. 12, 1998] efficient improvements.

§ 36.4336 Eligibility of loans; reason- (Authority: 38 U.S.C. 3710) able value requirements. (b) Notwithstanding that the aggre- (a) Evidence of guaranty or insurance gate of the loan amount in the case of shall be issued in respect to a loan for loans for the purposes specified in para- any of the purposes specified in 38 graph (a) of this section, and the U.S.C. 3710(a) only if: amount remaining unpaid on taxes, (1) The proceeds of such loan have special assessments, prior mortgage in- been used to pay for the property pur- debtedness, or other obligations of any

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character secured by enforceable supe- loans will be waived only in extraor- rior liens or a right to such lien exist- dinary circumstances when the Sec- ing as of the date the loan is closed ex- retary determines, considering the to- ceeds the reasonable value of such tality of circumstances, that the vet- property as of said date and that evi- eran is a satisfactory credit risk. dence of guaranty or insurance credit (c) Methods. The two primary under- is issued in respect thereof, as between writing tools that will be used in deter- the holder and Secretary (for the pur- mining the adequacy of the veteran’s pose of computing the claim on the present and anticipated income are guaranty or insurance and for the pur- debt-to-income ratio and residual in- poses of § 36.4320, and all accountings), come analysis. They are described in the indebtedness which is the subject paragraphs (d) through (f) of this sec- of the guaranty or insurance shall be tion. Ordinarily, to qualify for a loan, deemed to have been reduced as of the the veteran must meet both standards. date of the loan by a sum equal to such Failure to meet one standard, however, excess, less any amounts secured by will not automatically disqualify a vet- liens released or paid on the obliga- eran. The following shall apply to cases tions secured by such superior liens or where a veteran does not meet both rights by a holder or others without ex- standards: pense to or obligation on the debtor re- (1) If the debt-to-income ratio is 41 sulting from such payment, or release percent or less, and the veteran does of lien or right; and all payments made not meet the residual income standard, on the loan shall be applied to the in- the loan may be approved with jus- debtedness as so reduced. Nothing in tification, by the underwriter’s super- this paragraph affects any right or li- visor, as set out in paragraph (c)(4) of ability resulting from fraud or willful this section. misrepresentation. (2) If the debt-to-income ratio is greater than 41 percent (unless it is (Authority: 38 U.S.C. 501, 3703(c)(1); 38 U.S.C. larger due solely to the existence of 501, 3710, 3712) tax-free income which should be noted [33 FR 6975, May 9, 1968, as amended at 35 FR in the loan file), the loan may be ap- 17180, Nov. 7, 1970; 40 FR 34592, Aug. 18, 1975; proved with justification, by the under- 46 FR 43673, Aug. 31, 1981; 47 FR 15139, Apr. 8, 1982; 50 FR 3335, Jan. 24, 1985; 60 FR 38262, writer’s supervisor, as set out in para- July 26, 1995] graph (c)(4) of this section. (3) If the ratio is greater than 41 per- UNDERWRITING STANDARDS, PROCESSING cent and the residual income exceeds PROCEDURES, AND LENDER RESPONSI- the guidelines by at least 20 percent, BILITY AND CERTIFICATION the second level review and statement of justification are not required. § 36.4337 Underwriting standards, (4) In any case described by para- processing procedures, lender re- graphs (c)(1) and (c)(2) of this section, sponsibility, and lender certifi- the lender must fully justify the deci- cation. sion to approve the loan or submit the (a) Use of standards. The standards loan to the Secretary for prior ap- contained in paragraphs (c) through (j) proval in writing. The lender’s state- of this section will be used to deter- ment must not be perfunctory, but mine whether the veteran’s present and should address the specific compen- anticipated income and expenses, and sating factors, as set forth in para- credit history are satisfactory. These graph (c)(5) of this section, justifying standards do not apply to loans guar- the approval of the loan. The state- anteed pursuant to 38 U.S.C. 3710(a)(8) ment must be signed by the under- except for cases where the Secretary is writer’s supervisor. It must be stressed required to approve the loan in advance that the statute requires not only con- under § 36.4306a. sideration of a veteran’s present and anticipated income and expenses, but (Authority: 38 U.S.C. 3703, 3710) also that the veteran be a satisfactory (b) Waiver of standards. Use of the credit risk. Therefore, meeting both standards in paragraphs (c) through (j) the debt-to-income ratio and residual of this section for underwriting home income standards does not mean that

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the loan is automatically approved. It ratio should be rounded to the nearest is the lender’s responsibility to base two digits; e.g., 35.6 percent would be the loan approval or disapproval on all rounded to 36 percent. The standard is the factors present for any individual 41 percent or less. If the ratio is greater veteran. The veteran’s credit must be than 41 percent, the steps cited in para- evaluated based on the criteria set graphs (c)(1) through (c)(6) of this sec- forth in paragraph (g) of this section as tion apply. well as a variety of compensating fac- (e) Residual income guidelines. The tors that should be evaluated. guidelines provided in this paragraph (5) The following are examples of ac- for residual income will be used to de- ceptable compensating factors to be termine whether the veteran’s monthly considered in the course of under- residual income will be adequate to writing a loan: meet living expenses after estimated (i) Excellent long-term credit; monthly shelter expenses have been (ii) Conservative use of consumer paid and other monthly obligations credit; have been met. All members of the (iii) Minimal consumer debt; household must be included in deter- (iv) Long-term employment; mining if the residual income is suffi- (v) Significant liquid assets; cient. They must be counted even if the (vi) Downpayment or the existence of veteran’s spouse is not joining in title equity in refinancing loans; or on the note, or if there are any other (vii) Little or no increase in shelter individuals depending on the veteran expense; for support, such as children from a (viii) Military benefits; spouse’s prior marriage who are not (ix) Satisfactory homeownership ex- the veteran’s legal dependents. It is ap- perience; propriate, however, to reduce the num- (x) High residual income; ber of members of a household to be (xi) Low debt-to-income ratio; counted for residual income purposes if (xii) Tax credits of a continuing na- there is sufficient verified income not ture, such as tax credits for child care; otherwise included in the loan anal- and ysis, such as child support being regu- (xiii) Tax benefits of home owner- larly received as discussed in para- ship. graph (e)(4) of this section. In the case (6) The list in paragraph (c)(5) of this of a spouse not to be obligated on the section is not exhaustive and the items note, verification that he/she has sta- are not in any priority order. Valid ble and reliable employment as dis- compensating factors should represent cussed in paragraph (f)(3) of this sec- unusual strengths rather than mere tion would allow not counting the satisfaction of basic program require- spouse in determining the sufficiency ments. Compensating factors must be of the residual income. The guidelines relevant to the marginality or weak- for residual income are based on data ness. supplied in the Consumer Expenditure (d) Debt-to-income ratio. A debt-to-in- Survey (CES) published by the Depart- come ratio that compares the veteran’s ment of Labor’s Bureau of Labor Sta- anticipated monthly housing expense tistics. Regional minimum incomes and total monthly obligations to his or have been developed for loan amounts her stable monthly income will be up to $79,999 and for loan amounts of computed to assist in the assessment of $80,000 and above. It is recognized that the potential risk of the loan. The the purchase price of the property may ratio will be determined by taking the affect family expenditure levels in indi- sum of the monthly Principal, Interest, vidual cases. This factor may be given Taxes and Insurance (PITI) of the loan consideration in the final determina- being applied for, homeowners and tion in individual loan analyses. For other assessments such as special as- example, a family purchasing in a sessments, condominium fees, home- higher-priced neighborhood may feel a owners association fees, etc., and any need to incur higher-than-average ex- long-term obligations divided by the penses to support a lifestyle com- total of gross salary or earnings and parable to that in their environment, other compensation or income. The whereas a substantially lower-priced

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home purchase may not compel such (2) Table of residual incomes by re- expenditures. It should also be clearly gion (for loan amounts of $80,000 and understood from this information that above): no single factor is a final determinant in any applicant’s qualification for a TABLE OF RESIDUAL INCOMES BY REGION VA-guaranteed loan. Once the residual [For loan amounts of $80,000 and above] income has been established, other im- Family size * North- Mid- South West portant factors must be examined. One east west such consideration is the amount being 1 ...... 450 441 441 491 paid currently for rental or housing ex- 2 ...... 755 738 738 823 penses. If the proposed shelter expense 3 ...... 909 889 889 990 4 ...... 1,025 1,003 1,003 1,117 is materially in excess of what is cur- 5 ...... 1,062 1,039 1,039 1,158 rently being paid, the case may require * For families with more than five members, add $80 for closer scrutiny. In such cases, consider- each additional member up to a family of seven. ‘‘Family’’ ination should be given to the ability of cludes all members of the household. the borrower and spouse to accumulate (3) Geographic regions for residual in- liquid assets, such as cash and bonds, come guidelines: Northeast—Con- and to the amount of debts incurred necticut, Maine, Massachusetts, New while paying a lesser amount for shel- Hampshire, New Jersey, New York, ter. For example, if an application in- Pennsylvania, Rhode Island and dicates little or no capital reserves and Vermont; Midwest—Illinois, Indiana, excessive obligations, it may not be Iowa, Kansas, Michigan, Minnesota, reasonable to conclude that a substan- Missouri, Nebraska, North Dakota, tial increase in shelter expenses can be Ohio, South Dakota and Wisconsin; absorbed. Another factor of prime im- South—Alabama, Arkansas, Delaware, portance is the applicant’s manner of District of Columbia, Florida, Georgia, meeting obligations. A poor credit his- Kentucky, Louisiana, Maryland, Mis- tory alone is a basis for disapproving a sissippi, North Carolina, Oklahoma, loan, as is an obviously inadequate in- Puerto Rico, South Carolina, Ten- nessee, Texas, Virginia, West Virginia; come. When one or the other is mar- West—Alaska, Arizona, California, Col- ginal, however, the remaining aspect orado, Hawaii, Idaho, Montana, Ne- must be closely examined to assure vada, New Mexico, Oregon, Utah, Wash- that the loan applied for will not ex- ington and Wyoming. ceed the applicant’s ability or capacity (4) Military adjustments. For loan ap- to repay. Therefore, it is important to plications involving an active-duty remember that the figures provided servicemember or military retiree, the below for residual income are to be residual income figures will be reduced used as a guide and should be used in by a minimum of 5 percent if there is a conjunction with the steps outlined in clear indication that the borrower or paragraphs (c) through (j) of this sec- spouse will continue to receive the ben- tion. The residual income guidelines efits resulting from the use of facilities are as follows: on a nearby military base. (This reduc- (1) Table of residual incomes by re- tion applies to tables in paragraph (e) gion (for loan amounts of $79,999 and of this section.) below): (f) Stability and reliability of income. Only stable and reliable income of the TABLE OF RESIDUAL INCOMES BY REGION veteran and spouse can be considered [For loan amounts of $79,999 and below] in determining ability to meet mortgage payments. Income can be consid- North- Mid- Family size * east west South West ered stable and reliable if it can be concluded that it will continue during the 1 ...... 390 382 382 425 foreseeable future. 2 ...... 654 641 641 713 (1) Verification. Income of the bor- 3 ...... 788 772 772 859 rower and spouse which is derived from 4 ...... 888 868 868 967 employment and which is considered in 5 ...... 921 902 902 1,004 determining the family’s ability to * For families with more than five members, add $75 for meet the mortgage payments, pay- each additional member up to a family of seven. ‘‘Family’’ includes all members of the household. ments on debts and other obligations,

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and other expenses must be verified. If (2) Active-duty, Reserve, or National the spouse is employed and will be con- Guard applicants. (i) In the case of an tractually obligated on the loan, the active-duty applicant, a military Leave combined income of both the veteran & Earnings Statement is required and and spouse is considered when the in- will be used instead of an employment come of the veteran alone is not suffi- verification. The statement must be no cient to qualify for the amount of the more than 120 days old (180 days for loan sought. In other than community new construction) and must be the property states, if the spouse will not original or a lender-certified copy of be contractually obligated on the loan, the original. For loans closed auto- Regulation B (12 CFR part 202), pro- matically, this requirement is satisfied mulgated by the Federal Reserve Board if the date of the Leave & Earnings pursuant to the Equal Credit Oppor- Statement is within 120 days (180 days tunity Act, prohibits any request for, for new construction) of the date the or consideration of, information con- note is signed. For prior approval cerning the spouse (including income, loans, this requirement will be consid- employment, assets, or liabilities), ex- ered satisfied if the verification of em- cept that if the applicant is relying on ployment is dated within 120 days of alimony, child support, or maintenance the date the application is received by payments from a spouse or former VA. spouse as a basis for repayment of the (ii) For servicemembers within 12 months of release from active duty, or loan, information concerning such members of the Reserves or National spouse or former spouse may be re- Guard within 12 months of release, one quested and considered (see paragraph of the following is also required: (f)(4) of this section). In community (A) Documentation that the property states, information con- servicemember has in fact already re- cerning a spouse may be requested and enlisted or extended his/her period of considered in the same manner as that active duty or Reserve or National for the applicant. The standards ap- Guard service to a date beyond the 12- plied to income of the veteran are also month period following the projected applicable to that of the spouse. There closing of the loan. can be no discounting of income on ac- (B) Verification of a valid offer of count of sex, marital status, or any local civilian employment following re- other basis prohibited by the Equal lease from active duty. All data perti- Credit Opportunity Act. Income nent to sound underwriting procedures claimed by an applicant that is not or (date employment will begin, earnings, cannot be verified cannot be considered etc.) must be included. when analyzing the loan. If the veteran (C) A statement from the or spouse has been employed by a servicemember that he/she intends to present employer for less than 2 years, reenlist or extend his/her period of ac- a 2-year history covering prior employ- tive duty or Reserve or National Guard ment, schooling, or other training service to a date beyond the 12 month must be secured. Any periods of unem- period following the projected loan ployment must be explained. Employ- closing date, and a statement from the ment verifications and pay stubs must servicemember’s commanding officer be no more than 120 days (180 days for confirming that the servicemember is new construction) old to be considered eligible to reenlist or extend his/her ac- valid. For loans closed automatically, tive duty or Reserve or National Guard this requirement will be considered service as indicated and that the com- satisfied if the date of the employment manding officer has no reason to be- verification is within 120 days (180 days lieve that such reenlistment or exten- for new construction) of the date the sion will not be granted. note is signed. For prior approval (D) Other unusually strong positive loans, this requirement will be consid- underwriting factors, such as a down- ered satisfied if the verification of em- payment of at least 10 percent, signifi- ployment is dated within 120 days of cant cash reserves, or clear evidence of the date the application is received by strong ties to the community coupled VA. with a nonmilitary spouse’s income so

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high that only minimal income from compensation and other income, such the active duty servicemember or as dividends from stocks, interest from member of the Reserves or National bonds, savings accounts, or other de- Guard is needed to qualify. posits, rents, royalties, etc., will be (iii) Each active-duty member who used as primary income if it is reason- applies for a loan must be counseled able to conclude that such income will through the use of VA Form 26–0592, continue in the foreseeable future. Oth- Counseling Checklist for Military erwise, it may be used only to offset in- Homebuyers. Lenders must submit a termediate-term debts, as described in signed and dated VA Form 26–0592 with this paragraph. Also, the likely dura- each prior approval loan application or tion of certain military allowances automatic loan report involving a bor- cannot be determined and, therefore, rower on active duty. will be used only to offset inter- (3) Income reliability. Income received mediate-term debts, as described in by the borrower and spouse is to be this paragraph. Such allowances are: used only if it can be concluded that Pro-pay, flight or hazard pay, and over- the income will continue during the seas or combat pay, all of which are foreseeable future and, thus, should be subject to periodic review and/or test- properly considered in determining ing of the recipient to ascertain wheth- ability to meet the mortgage pay- er eligibility for such pay will con- ments. If an employer puts N/A or oth- tinue. Only if it can be shown that such erwise declines to complete a pay has continued for a prolonged pe- verification of employment statement riod and can be expected to continue regarding the probability of continued because of the nature of the recipient’s employment, no further action is re- assigned duties, will such income be quired of the lender. Reliability will be considered as primary income. For in- determined based on the duration of the borrower’s current employment to- stance, flight pay verified for a pilot gether with his or her overall docu- can be regarded as probably continuous mented employment history. There can and, thus, should be added to the base be no discounting of income solely be- pay. Income derived from service in the cause it is derived from an annuity, Reserves or National Guard may be pension or other retirement benefit, or used if the applicant has served in such from part-time employment. However, capacity for a period of time sufficient unless income from overtime work and to evidence good probability that such part-time or second jobs can be ac- income will continue beyond 12 corded a reasonable likelihood that it months. The total period of active and is continuous and will continue in the reserve service may be helpful in this foreseeable future, such income should regard. Otherwise, such income may be not be used. Generally, the reliability used to offset intermediate-term debts. of such income cannot be demonstrated There are a number of additional in- unless the income has continued for 2 come sources whose contingent nature years. The hours of duty and other precludes their being considered as work conditions of the applicant’s pri- available for repayment of a long-term mary job, and the period of time in mortgage obligation. Temporary in- which the applicant was employed come items such as VA educational al- under such arrangement, must be such lowances and unemployment com- as to permit a clear conclusion as to a pensation do not represent stable and good probability that overtime or part- reliable income and will not be taken time or secondary employment can and into consideration in determining the will continue. Income from overtime ability of the veteran to meet the in- work and part-time jobs not eligible for come requirement of the governing inclusion as primary income may, if law. As required by the Equal Oppor- properly verified for at least 12 months, tunity Act Amendments of 1976, Public be used to offset the payments due on Law 94–239, income from public assist- debts and obligations of an inter- ance programs is used to qualify for a mediate term, i.e., 6 to 24 months. Such loan if it can be determined that the income must be described in the loan income will probably continue for 3 file. The amount of any pension or years or more.

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(4) Tax-exempt income. Special consid- the extent it can be determined such eration can be given to verified non- income will continue. taxable income once it has been estab- (iii) Income received specifically for lished that such income is likely to the care of any foster child(ren) may be continue (and remain untaxed) into the counted as income if documented. Gen- foreseeable future. Such income in- erally, however, such foster care includes certain military allowances, come is to be used only to balance the child support payments, workers’ com- expenses of caring for the foster pensation benefits, disability retire- child(ren) against any increased resid- ment payments and certain types of ual income requirements. public assistance payments. In such (6) Military quarters allowance. With cases, current income tax tables may respect to off-base housing (quarters) be used to determine an amount which allowances for service personnel on ac- can be prudently employed to adjust tive duty, it is the policy of the De- the borrower’s actual income. This ad- partment of Defense to utilize avail- justed or ‘‘grossed up’’ income may be able on-base housing when possible. In used to calculate the monthly debt-to- order for a quarters allowance to be income ratio, provided the analysis is considered as continuing income, it is documented. Only the borrower’s ac- necessary that the applicant furnish tual income may be used to calculate written authorization from his or her the residual income. Care should be ex- commanding officer for off-base hous- ercised to ensure that the income is in ing. This authorization should verify fact tax-exempt. that quarters will not be made avail- (5) Alimony, child support, mainte- able and that the individual should nance, workers’ compensation, foster care make permanent arrangements for payments. (i) If an applicant chooses to nonmilitary housing. A Department of reveal income from alimony, child sup- Defense form, DD Form 1747, Status of port or maintenance payments (after Housing Availability, is used by the first having been informed that any Family Housing Office to advise per- such disclosure is voluntary pursuant sonnel regarding family housing. The to the Federal Reserve Board’s Regula- applicant’s quarters allowance cannot tion B), such payments are considered be considered unless item b (Perma- as income to the extent that the pay- nent) or d is completed on DD Form ments are likely to be consistently 1747, dated October 1990. Of course, if made. Factors to be considered in de- the applicant’s income less quarters al- termining the likelihood of consistent lowance is sufficient, there is no need payments include, but are not limited for assurance that the applicant has to: Whether the payments are received permission to occupy nonmilitary pursuant to a written agreement or housing provided that a determination court decree; the length of time the can be made that the occupancy repayments have been received; the regu- quirements of the law will be met. larity of receipt; the availability of Also, authorization to obtain off-base procedures to compel payment; and the housing will not be required when cer- creditworthiness of the payor, includ- tain duty assignments would clearly ing the credit history of the payor qualify service personnel with families when available under the Fair Credit for quarters allowance. For instance, Reporting Act or other applicable laws. off-base housing authorizations need However, the Fair Credit Reporting not be obtained for service personnel Act (15 U.S.C. 1681(b)) limits the per- stationed overseas who are not accom- missible purposes for which credit re- panied by their families, recruiters on ports may be ordered, in the absence of detached duty, or military personnel written instructions of the consumer stationed in areas where no on-base to whom the report relates, to business housing exists. In any case in which no transactions involving the subject of off-base housing authorization is ob- the credit report or extensions of credit tained, an explanation of the cir- to the subject of the credit report. cumstances justifying its omission (ii) If the applicant chooses to reveal must be included with the loan applica- income related to workers’ compensation except when it has been estab- tion, it will be considered as income to lished by the VA facility of jurisdiction

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that the waiting lists for on-base hous- least 2 years. Less than 2 years of in- ing are so long that it is improbable come from commissions cannot usually that individuals desiring to purchase be considered stable. When an appli- off-base housing would be precluded cant has received income from commis- from doing so in the foreseeable future. sions for less than 1 year, it will rarely If stations make such a determination, be possible to demonstrate that the in- a release shall be issued to inform lend- come is stable for qualifying purposes; ers. such cases would require in-depth de- (7) Automobile (or similar) allowance. velopment. Generally, automobile allowances are (9) Self-employment. Generally, in- paid to cover specific expenses related come from self-employment is consid- to an applicant’s employment, and it is ered stable when the applicant has appropriate to use such income to off- been in business for at least 2 years. set a corresponding car payment. How- Less than 2 years of income from self- ever, in some instances, such an allow- employment cannot usually be consid- ance may exceed the car payment. ered stable unless the applicant has With proper documentation, income had previous related employment and/ from a car allowance which exceeds the or extensive specialized training. When car payment can be counted as effec- an applicant has been self-employed tive income. Likewise, any other simi- less than 1 year, it will rarely be pos- lar type of allowance which exceeds the sible to demonstrate that the income is specific expense involved may be added stable for qualifying purposes; such to gross income to the extent it is doc- cases would require in-depth develop- umented to exceed the actual expense. ment. The following documentation is (8) Commissions. When all or a major required for all self-employed bor- portion of the veteran’s income is de- rowers: rived from commissions, it will be nec- (i) A profit-and-loss statement for essary to establish the stability of such the prior fiscal year (12-month ac- income if it is to be considered in the counting cycle), plus the period year to loan analysis for the repayment of the date since the end of the last fiscal mortgage debt and/or short-term obli- year (or for whatever shorter period gations. In order to assess the value of records may be available), and balance such income, lenders should obtain sheet based on the financial records. written verification of the actual The financial statement must be suffi- amount of commissions paid to date, cient for a loan underwriter to deter- the basis for the payment of such com- mine the necessary information for missions and when commissions are loan approval and an independent audit paid; i.e., monthly, quarterly, semi- (on the veteran and/or the business) by annually, or annually. Lenders should a Certified Public Accountant will be also obtain signed and dated individual required if necessary for such deter- income tax returns, plus applicable mination; and schedules, for the previous 2 years, or (ii) Copies of signed individual infor whatever additional period is come tax returns, plus all applicable deemed necessary to properly dem- schedules for the previous 2 years, or onstrate a satisfactory earnings record. for whatever additional period is The length of the veteran’s employ- deemed necessary to properly dem- ment in the type of occupation for onstrate a satisfactory earnings record, which commissions are paid is also an must be obtained. If the business is a important factor in the assessment of corporation or partnership, copies of the stability of the income. If the vet- signed Federal business income tax re- eran has been employed for a relatively turns for the previous two years plus short time, the income should not nor- all applicable schedules for the cor- mally be considered stable unless the poration or partnership must be ob- product or service was the same or tained; and closely related to the product or serv- (iii) If the business is a corporation ice sold in an immediate prior position. or partnership, a list of all stock- Generally, income from commissions is holders or partners showing the inter- considered stable when the applicant est each holds in the business will be has been receiving such income for at required. Some cases may justify a

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written credit report on the business as formed in the military service. When it well as the applicant. When the busi- can be determined that the duties a ness is of an unusual type and it is dif- veteran performed in the service are ficult to determine the probability of similar or are in direct relation to the its continued operation, explanation as duties of the applicant’s present posi- to the function and purpose of the busi- tion, such duties may be construed as ness may be needed from the applicant adding weight to his or her present em- and/or any other qualified party with ployment experience and the income the acknowledged expertise to express from the veteran’s present employment a valid opinion. thus may be considered available for (10) Recently discharged veterans. Loan qualifying the loan, notwithstanding applications received from recently the fact that the applicant has been on discharged veterans who have little or the present job only a short time. This no employment experience other than same principle may be applied to vet- their military occupation and from erans recently retired from the service. veterans seeking VA-guaranteed loans In addition, when the veteran’s income who have retired after 20 years of ac- from retirement, in relation to the tive military duty require special at- total of the estimated shelter expense, tention. The retirement income of the long-term debts and amount available latter veterans in many cases may not for family support, is such that only be sufficient to meet the statutory in- minimal income from employment is come requirements for the loan necessary to qualify from the income amount sought. Many have obtained standpoint, it would be proper to re- full-time employment and have been solve the doubt in favor of the veteran. employed in their new jobs for a very It would be erroneous, however, to give short time. consideration to a veteran’s income (i) It is essential in determining from employment for a short duration whether veterans in these categories in a job requiring skills for which the qualify from the income standpoint for applicant has had no training or expe- the amount of the loan sought, that rience. the facts in respect to their present (iv) To illustrate the provisions of employment and retirement income be paragraph (f)(10), it would be proper to fully developed, and that each case be use short-term employment income in considered on its individual merits. qualifying a veteran who had experi- (ii) In most cases the veteran’s cur- ence as an airplane mechanic in the rent income or current income plus his military service and the individual’s or her retirement income is sufficient. employment after discharge or retire- The problem lies in determining ment from the service is in the same or whether it can be properly concluded allied fields; e.g., auto mechanic or ma- that such income level will continue chinist. This presumes, however, that for the foreseeable future. If the vet- the verification of employment in- eran’s employment status is that of a cluded a statement that the veteran trainee or an apprentice, this will, of was performing the duties of the job course, be a factor. In cases of the self- satisfactorily, the possibility of contin- employed, the question to be resolved ued employment was favorable and is whether there are reasonable pros- that the loan application is eligible in pects that the business enterprise will all other respects. An example of non- be successful and produce the required qualifying experience is that of a vet- income. Unless a favorable conclusion eran who was an Air Force pilot and can be made, the income from such has been employed in insurance sales source should not be considered in the on commission for a short time. Most loan analysis. cases, of course, fall somewhere be- (iii) If a recently discharged veteran tween those extremes. It is for this rea- has no prior employment history and son that the facts of each case must be the veteran’s verification of employ- fully developed prior to closing the ment shows he or she has not been on loan automatically or submitting the the job a sufficient time in which to be- case to VA for prior approval. come established, consideration should (11) Employment of short duration. The be given to the duties the veteran per- provisions of paragraph (f)(7) of this

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section are similarly applicable to ap- payment on that property, provided plicants whose employment is of short there is no indication that the property duration. Such cases will entail careful will be difficult to rent. If available, a consideration of the employer’s con- copy of the rental agreement should be firmation of employment, probability obtained. It is the responsibility of the of permanency, past employment loan underwriter to be aware of the record, the applicant’s qualifications condition of the local rental market. for the position, and previous training, For instance, in areas where the rental including that received in the military market is very strong the absence of a service. In the event that such consid- lease should not automatically pro- erations do not enable a determination hibit the offset of the mortgage by the that the income from the veteran’s proposed rental income. current position has a reasonable like- (iii) Other rental property. If income lihood of continuance, such income from rental property will be used to should not be considered in the anal- qualify for the new loan, the docu- ysis. Applications received from per- mentation required of a self-employed sons employed in the building trades, applicant should be obtained together or in other occupations affected by cli- with evidence of cash reserves equaling matic conditions, should be supported 3 months PITI on the rental property. by documentation evidencing the ap- As for any self-employed earnings (see plicant’s total earnings to date and paragraph (f)(7) of this section), depre- covering a period of not less than 1 ciation claimed may be added back in year as well as signed and dated copies as income. In the case of a veteran who of complete income tax returns, includ- has no experience as a landlord, it is ing all schedules for the past 2 years or unlikely that the income from a rental for whatever additional period is deemed necessary to properly dem- property may be used to qualify for the onstrate a satisfactory earnings record. new loan. If the applicant works out of a union, (13) Taxes and other deductions. De- evidence of the previous year’s earn- ductions to be applied for Federal in- ings should be obtained together with a come taxes and Social Security may be verification of employment from the obtained from the Employer’s Tax current employer. Guide (Circular E) issued by the Inter- (12) Rental income—(i) Multi-unit sub- nal Revenue Service (IRS). (For vet- ject property. When the loan pertains to erans receiving a mortgage credit cer- a structure with more than a one-fam- tificate (MCC), see paragraph (f)(14) of ily dwelling unit, the prospective rent- this section.) Any State or local taxes al income will not be considered unless should be estimated or obtained from the veteran can demonstrate a reason- charts similar to those provided by IRS able likelihood of success as a landlord, which may be available in those states and sufficient cash reserves are verified with withholding taxes. A determina- to enable the veteran to carry the tion of the amount paid or withheld for mortgage loan payments (principal, in- retirement purposes should be made terest, taxes, and insurance) without and used when calculating deductions assistance from the rental income for a from gross income. In determining period of at least 6 months. The deter- whether a veteran-applicant meets the mination of the veteran’s likelihood of income criteria for a loan, some con- success as a landlord will be based on sideration may be given to the poten- documentation of any prior experience tial tax benefits the veteran will real- in managing rental units or other col- ize if the loan is approved. This can be lection activities. The amount of rent- done by using the instructions and al income to be used in the loan anal- worksheet portion of IRS Form W–4, ysis will be based on 75 percent of the Employee’s Withholding Allowance amount indicated on the lease or rental Certificate, to compute the total num- agreement, unless a greater percentage ber of permissible withholding allow- can be documented. ances. That number can then be used (ii) Rental of existing home. Proposed when referring to IRS Circular E and rental of a veteran’s existing property any appropriate similar State with- may be used to offset the mortgage holding charts to arrive at the amount

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of Federal and State income tax to be ysis of the available credit data. Regu- deducted from gross income. lation B (12 CFR part 202), promulgated (14) Mortgage credit certificates. (i) The by the Federal Reserve Board pursuant Internal Revenue Code (26 U.S.C.) as to the Equal Credit Opportunity Act, amended by the Tax Reform Act of requires that lenders, in evaluating 1984, allows states and other political creditworthiness, shall consider, on the subdivisions to trade in all or part of applicant’s request, the credit history, their authority to issue mortgage rev- when available, of any account re- enue bonds for authority to issue ported in the name of the applicant’s MCCs. Veterans who are recipients of spouse or former spouse which the ap- MCCs may realize a significant reduc- plicant can demonstrate accurately re- tion in their income tax liability by reflects the applicant’s creditworthiness. ceiving a Federal tax credit for a per- In other than community property centage of their mortgage interest pay- states, if the spouse will not be con- ment on debt incurred on or after Jan- tractually obligated on the loan, Regu- uary 1, 1985. lation B prohibits any request for or (ii) Lenders must provide a copy of consideration of information about the the MCC to VA with the home loan ap- spouse concerning income, employ- plication. The MCC will specify the ment, assets or liabilities. In commu- rate of credit allowed and the amount nity property states, information con- of certified indebtedness; i.e., the in- cerning a spouse may be requested and debtedness incurred by the veteran to considered in the same manner as that acquire a principal residence or as a for the applicant. qualified home improvement or reha- (1) Adverse data. If the analysis devel- bilitation loan. ops any derogatory credit information (iii) For credit underwriting pur- and, despite such facts, it is deter- poses, the amount of tax credit allowed mined that the veteran and spouse are to a veteran under an MCC will be satisfactory credit risks, the basis for treated as a reduction in the monthly the decision must be explained. If a Federal income tax. For example, a veteran and spouse have debts out- veteran having a $600 monthly interest standing which have not been paid payment and an MCC providing a 30- timely, or which they have refused to percent tax credit would receive a $180 pay, the fact that the outstanding (30 percent×$600) tax credit each debts are paid after the acceptability month. However, because the annual of the credit is questioned or in antici- tax credit, which amounts to $2,160 pation of applying for new credit does (12×$180), exceeds $2,000 and is based on not, of course, alter the fact that the a 30-percent credit rate, the maximum record for paying debts has been unsat- tax credit the veteran can receive is isfactory. With respect to unpaid debts, limited to $2,000 per year (Pub. L. 98– lenders may take into consideration a 369) or $167 per month ($2,000/12). As a veteran’s claim of bona fide or legal de- consequence of the tax credit, the in- fenses. Such defenses are not applica- terest on which a deduction can be ble when the debt has been reduced to taken will be reduced by the amount of judgment. Where a collection account the tax credit to $433 ($600¥$167). This has been established, if it is determined reduction should also be reflected when that the borrower is a satisfactory calculating Federal income tax. credit risk, it is not mandatory that (iv) For underwriting purposes, the such an account be paid off in order for amount of the tax credit is limited to a loan to be approved. Court-ordered the amount of the veteran’s maximum judgments, however, must be paid off tax liability. If, in the example in para- before a new loan is approved. graph (f)(14)(iii) of this section, the vet- (2) Bankruptcy. When the credit infor- eran’s tax liability for the year were mation shows that the borrower or only $1,500, the monthly tax credit spouse has been discharged in bank- would be limited to $125 ($1,500/12). ruptcy under the ‘‘straight’’ liquida- (g) Credit. The conclusion reached as tion and discharge provisions of the to whether or not the veteran and bankruptcy law, this would not in spouse are satisfactory credit risks itself disqualify the loan. However, in must also be based on a careful anal- such cases it is necessary to develop

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complete information as to the facts given if at least 12 months’ worth of and circumstances concerning the payments have been made satisfac- bankruptcy. Generally speaking, when torily and the Trustee or Bankruptcy the borrower or spouse, as the case Judge approves of the new credit. may be, has been regularly employed (4) Foreclosures. (i) When the credit (not self-employed) and has been dis- information shows that the veteran or charged in bankruptcy within the last spouse has had a foreclosure on a prior one to two years, it probably would not mortgage; e.g., a VA-guaranteed or be possible to determine that the bor- HUD-insured mortgage, this will not in rower or spouse is a satisfactory credit itself disqualify the borrower from ob- risk unless both of the following retaining the loan. Lenders and field sta- quirements are satisfied: tion personnel should refer to the pre- (i) The borrower or spouse has ob- ceding guidelines on bankruptcies for tained credit subsequent to the bank- cases involving foreclosures. As with a ruptcy and has met the credit pay- borrower who has been adjudicated ments in a satisfactory manner over a bankrupt, it is necessary to develop continued period; and complete information as to the facts (ii) The bankruptcy was caused by and circumstances of the foreclosure. circumstances beyond the control of (ii) When VA pays a claim on a VA- the borrower or spouse, e.g., unemploy- guaranteed loan as a result of a fore- ment, prolonged strikes, medical bills closure, the original veteran may be re- not covered by insurance. Divorce is quired to repay any loss to the Govern- not generally viewed as beyond the ment. In some instances VA may waive control of the borrower and/or spouse. the veteran’s debt, in part or totally, The circumstances alleged must be based on the facts and circumstances of verified. If a borrower or spouse is self- the case. However, guaranty entitle- employed, has been adjudicated bank- ment cannot be restored unless the rupt, and subsequently obtains a per- Government’s loss has been repaid in manent position, a finding as to satis- full, regardless of whether or not the factory credit risk may be made pro- debt has been waived, compromised, or vided there is no derogatory credit in- discharged in bankruptcy. Therefore, a formation prior to self-employment, veteran who is seeking a new VA loan there is no derogatory credit informa- after having experienced a foreclosure tion subsequent to the bankruptcy, and on a prior VA loan will in most cases the failure of the business was not due have only remaining entitlement to to misconduct. If a borrower or spouse apply to the new loan. The lender has been discharged in bankruptcy should assure that the veteran has suf- within the past 12 months, it will not ficient entitlement for its secondary generally be possible to determine that marketing purposes. the borrower or spouse is a satisfactory (5) Federal debts. An applicant for a credit risk. Federally-assisted loan will not be con- (3) Petition under chapter 13 of Bank- sidered a satisfactory credit risk for ruptcy Code. A petition under chapter such loan if the applicant is presently 13 of the Bankruptcy Code (11 U.S.C.) delinquent or in default on any debt to filed by the borrower or spouse is indic- the Federal Government, e.g., a Small ative of an effort to pay their creditors. Business Administration loan, a U.S. Some plans may provide for full pay- Guaranteed Student loan, a debt to the ment of debts while others arrange for Public Health Service, or where there payment of scaled-down debts. Regular is a judgment lien against the appli- payments are made to a court-ap- cant’s property for a debt owed to the pointed trustee over a 2- to 3-year pe- Government. The applicant may not be riod (or up to 5 years in some cases). approved for the loan until the delin- When the borrowers have made all pay- quent account has been brought cur- ments in a satisfactory manner, they rent or satisfactory arrangements have may be considered as having reestab- been made between the borrower and lished satisfactory credit. When they the Federal agency owed, or the judg- apply for a home loan before comple- ment is paid or otherwise satisfied. Of tion of the payout period, favorable course, the applicant must also be able consideration may nevertheless be to otherwise qualify for the loan from

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an income and remaining credit stand- ments for 12 months after the date of point. Refinancing under VA’s interest the last derogatory credit item. rate reduction refinancing provisions, (9) Long-term v. short-term debts. All however, is allowed even if the bor- known debts and obligations including rower is delinquent on the VA guaran- any alimony and/or child support pay- teed mortgage being refinanced. Prior ments of the borrower and spouse must approval processing is required in such be documented. Significant liabilities, cases. to be deducted from the total income (6) Absence of credit history. The fact in determining ability to meet the that recently discharged veterans may mortgage payments are accounts that, have had no opportunity to develop a generally, are of a relatively long credit history will not preclude a deter- term, i.e., 10 months or over. Other ac- mination of satisfactory credit. Simi- counts for terms of less than 10 months larly, other loan applicants may not must, of course, be considered in deter- have established credit histories as a mining ability to meet family ex- result of a preference for purchasing penses. Certainly, any severe impact on consumer items with cash rather than the family’s resources for any period of credit. There are also cases in which time must be considered in the loan individuals may be genuinely wary of analysis. For example, monthly pay- acquiring new obligations following ments of $300 on an auto loan with a re- bankruptcy, consumer credit coun- maining balance of $1,500 would be in- seling (debt proration), or other disrup- cluded in those obligations to be deducted from the total income regard- tive credit occurrence. The absence of less of the fact that the account can be the credit history in these cases will expected to pay out in 5 months. It is not generally be viewed as an adverse clear that the applicant will, in this factor in credit underwriting. However, case, continue to carry the burden of before a favorable decision is made for those $300 payments for the first, most cases involving bankruptcies or other critical months of the home loan. derogatory credit factors, efforts (10) Requirements for verification. If should be made to develop evidence of the credit investigation reveals debts timely payment of non-installment or obligations of a material nature debts such as rent and utilities. It is which were not divulged by the appli- anticipated that this special consider- cant, lenders must be certain to obtain ation in the absence of a credit history clarification as to the status of such following bankruptcy would be the rare debts from the borrower. A proper case and generally confined to bank- analysis is obviously not possible un- ruptcies that occurred over 3 years ago. less there is total correlation between (7) Consumer credit counseling plan. If the obligations claimed by the bor- a veteran, or veteran and spouse, have rower and those revealed by a credit re- prior adverse credit and are partici- port or deposit verification. Con- pating in a Consumer Credit Coun- versely, significant debts and obliga- seling plan, they may be determined to tions reported by the borrower must be be a satisfactory credit risk if they dated. If the credit report fails to pro- demonstrate 12 months’ satisfactory vide necessary information on such ac- payments and the counseling agency counts, lenders will be expected to ob- approves the new credit. If a veteran, tain their own verifications of those or veteran and spouse, have good prior debts directly from the creditors. Cred- credit and are participating in a Con- it reports and verifications must be no sumer Credit Counseling plan, such more than 120 days old (180 days for participation is to be considered a neu- new construction) to be considered tral factor, or even a positive factor, in valid. For loans closed automatically, determining creditworthiness. this requirement will be considered (8) Re-establishment of satisfactory satisfied if the date of the credit report credit. In circumstances not involving or verification is within 120 days (180 bankruptcy, satisfactory credit is gen- days for new construction) of the date erally considered to be reestablished the note is signed. For prior approval after the veteran, or veteran and loans, this requirement will be consid- spouse, have made satisfactory pay- ered satisfied if the date of the credit

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report or verification is within 120 days Corporation, Federal Housing Adminis- of the date of the application is re- tration, Farmers Home Administra- ceived by VA. Of major significance are tion, credit repositories, repository af- the applicant’s rental history and out- filiated consumer reporting agencies standing or recently retired mortgages, and independent consumer reporting if any, particularly prior VA loans. agencies. All credit reports obtained by Lenders should be sure ratings on such the lender must be submitted to VA. accounts are obtained; a written expla- (h) Borrower’s personal and financial nation is required when ratings are not status. The number and ages of depend- available. A determination is necessary ents have an important bearing on as to whether alimony and/or child sup- whether income after deduction of port payments are required. fixed charges is sufficient to support Verification of the amount of such ob- the family. Type and duration of em- ligations should be obtained, although ployment of both the borrower and documentation concerning an appli- spouse are important as an indication cant’s divorce should not be obtained automatically unless it is necessary to of stability of their employment. The verify the amount of any alimony or amount of liquid assets owned by the child support liability indicated by the borrower or spouse, or both, is an im- applicant. If in the routine course of portant factor in determining that processing the loan application, how- they have sufficient funds to close the ever, direct evidence is received (e.g., loan, as well as being significant in from the credit report) that an obliga- analyzing the overall qualifications for tion to pay alimony or child support the loan. (It is imperative that ade- exists (as opposed to mere evidence quate cash assets from the veteran’s that the veteran was previously di- own resources are verified to allow the vorced), the discrepancy between the payment (see § 36.4336(a)(3)) of any dif- loan application and credit report can ference between the sales price of the and should be fully resolved in the property and the loan amount, in addi- same manner as any other such dis- tion to that necessary to cover closing crepancy would be handled. When a pay costs, if the sales price exceeds the rea- stub or leave-and-earnings statement sonable value established by VA.) indicates an allotment, the lender Verifications must be no more than 120 must investigate the nature of the al- days old (180 days for new construc- lotment(s) to determine whether the tion) to be considered valid. For loans allotment is related to a debt. Debts closed on the automatic basis, this re- assigned to an ex-spouse by a divorce quirement will be considered satisfied decree will not generally be charged if the date of the deposit verification is against a veteran-borrower. within 120 days (180 days for new con- (11) Job-related expenses. Known job- struction) of the date of the veteran’s related expenses should be docu- application to the lender. For prior ap- mented. This will include costs for any proval loans, this requirement will be dependent care, significant commuting considered satisfied if the verification costs, etc. When a family’s cir- of employment is dated within 120 days cumstances are such that dependent of the date the application is received care arrangements would probably be by VA. Current monthly rental or necessary, it is important to determine the cost of such services in order to ar- other housing expense is an important rive at an accurate total of deductions. consideration when compared to that (12) Credit reports. Credit reports ob- to be undertaken in connection with tained by lenders on VA-guaranteed the contemplated housing purchase. loan applications must be either a (i) Estimated monthly shelter expenses. three-file Merged Credit Report (MCR) It is important that monthly expenses or a Residential Mortgage Credit Re- such as taxes, insurance, assessments port (RMCR). If used, the RMCR must and maintenance and utilities be esti- meet the standards formulated jointly mated accurately based on property lo- by the Department of Veterans Affairs, cation and type of house; e.g., old or Federal National Mortgage Associa- new, large or small, rather than using tion, Federal Home Loan Mortgage or applying a ‘‘rule of thumb’’ to all

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properties alike. Maintenance and util- by such parties shall be imputed to the ity amounts for various types of prop- lender as if the lender had processed erty should be realistically estimated. those documents and the lender shall Local utility companies should be con- remain responsible for the quality and sulted for current rates. The age and accuracy of the information provided type of construction of a house may to VA. well affect these expenses. In the case (5) All credit reports secured by the of condominiums or houses in a lender or other parties as identified in planned unit development (PUD), the paragraphs (j)(3) and (j)(4) of this sec- monthly amount of the maintenance tion shall be provided to VA. If updated assessment payable to a homeowners credit reports reflect materially dif- association should be added. If the ferent information than that in other amount currently assessed is less than reports, such discrepancies must be ex- the maximum provided in the cov- plained by the lender and the ultimate enants or master deed, and it appears decision as to the effects of the discrep- likely that the amount will be insuffi- ancy upon the loan application fully cient for operation of the condominium addressed by the underwriter. or PUD, the amount used will be the (k) Lender certification. Lenders origi- maximum the veteran could be nating loans are responsible for deter- charged. If it is expected that real es- mining and certifying to VA on the ap- tate taxes will be raised, or if any spe- propriate application or closing form cial assessments are expected, the in- that the loan meets all statutory and creased or additional amounts should regulatory requirements. Lenders will be used. In special flood hazard areas, affirmatively certify that loans were include the premium for any required made in full compliance with the law flood insurance. and loan guaranty regulations as pre- (j) Lender responsibility. (1) Lenders scribed in this section. are fully responsible for developing all (1) Definitions. The definitions con- credit information; i.e., for obtaining tained in part 42 of this title and the verifications of employment and de- following definitions are applicable in posit, credit reports, and for the accu- this section. racy of the information contained in (i) Another appropriate amount. In de- the loan application. termining the appropriate amount of a (2) Verifications of employment and lender’s civil penalty in cases where deposits, and requests for credit re- the Secretary has not sustained a loss ports and/or credit information must or where two times the amount of the be initiated and received by the lender. Secretary’s loss on the loan involved (3) In cases where the real estate does not exceed $10,000, the Secretary broker/agent or any other party re- shall consider: quests any of this information, the re- (A) The materiality and importance port(s) must be returned directly to the of the false certification to the deter- lender. This fact must be disclosed by mination to issue the guaranty or to appropriately completing the required approve the assumption; certification on the loan application or (B) The frequency and past pattern of report and the parties must be identi- such false certifications by the lender; fied as agents of the lender. and (4) Where the lender relies on other (C) Any exculpatory or mitigating parties to secure any of the credit or circumstances. employment information or otherwise (ii) Complaint includes the assessment accepts such information obtained by of liability served pursuant to this sec- any other party, such parties shall be tion. construed for purposes of the submis- (iii) Defendant means a lender named sion of the loan documents to VA to be in the complaint. authorized agents of the lender, regard- (iv) Lender includes the holder ap- less of the actual relationship between proving loan assumptions pursuant to such parties and the lender, even if dis- 38 U.S.C. 3714. closure is not provided to VA under (2) Procedures for certification. (i) As a paragraph (j)(3) of this section. Any condition to VA issuance of a loan negligent or willful misrepresentation guaranty on all loans closed on or after

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October 27, 1994, and as a prerequisite and will either inform the Under Sec- to an effective loan assumption on all retary for Benefits and the Inves- loans assumed pursuant to 38 U.S.C. tigating Official that there is not ade- 3714 on or after November 17, 1997, the quate evidence, that the lender is lia- following certification shall accom- ble, or serve a complaint on the lender pany each loan closing or assumption stating: package: (i) The allegations of a false certification and of liability; The undersigned lender certifies that the (loan) (assumption) application, all (ii) The amount being assessed by the verifications of employment, deposit, and Secretary and the basis for the amount other income and credit verification docu- assessed; ments have been processed in compliance (iii) Instructions on how to satisfy with 38 CFR part 36; that all credit reports the assessment and how to file an an- obtained or generated in connection with the swer to request a hearing, including a processing of this borrower’s (loan) (assump- specific statement of the lender’s right tion) application have been provided to VA; to request a hearing by filing an an- that, to the best of the undersigned lender’s knowledge and belief the (loan) (assumption) swer and to be represented by counsel; meets the underwriting standards recited in and chapter 37 of title 38 United States Code and (iv) That failure to file an answer 38 CFR part 36; and that all information pro- within 30 days of the complaint will re- vided in support of this (loan) (assumption) sult in the imposition of the assess- is true, complete and accurate to the best of ment without right to appeal the as- the undersigned lender’s knowledge and be- sessment to the Secretary. lief. (m) Hearing procedures. A lender hear- (ii) The certification shall be exe- ing on an assessment established pur- cuted by an officer of the lender au- suant to this section shall be governed thorized to execute documents and act by the procedures recited at 38 CFR on behalf of the lender. 42.8 through 42.47. (3) Any lender who knowingly and (n) Additional remedies. Any assess- willfully makes a false certification re- ment under this section may be in ad- quired pursuant to § 36.4337(k)(2) shall dition to other remedies available to be liable to the United States Govern- VA, such as debarment and suspension ment for a civil penalty equal to two pursuant to 38 U.S.C. 3704 and 2 CFR times the amount of the Secretary’s parts 180 and 801 or loss of automatic loss on the loan involved or to another processing authority pursuant to 38 appropriate amount, not to exceed U.S.C. 3702, or other actions by the $10,000, whichever is greater. Government under any other law in- (l) Assessment of liability. (1) Upon an cluding but not limited to title 18 assessment confirmed by the Under U.S.C. and 31 U.S.C. 3732. Secretary for Benefits, in consultation with the Investigating Official, that a (Authority: 38 U.S.C. 3703, 3710) certification, as required in this sec- (Approved by the Office of Management and tion, is false, a report of findings of the Budget under control number 2900–0521) Under Secretary for Benefits shall be [59 FR 49200, Sept. 27, 1994, as amended at 61 submitted to the Reviewing Official FR 56449, Nov. 1, 1996; 62 FR 53965, Oct. 17, setting forth: 1997; 62 FR 63454, Dec. 1, 1997; 64 FR 19910, (i) The evidence that supports the al- Apr. 23, 1999; 72 FR 30242, May 31, 2007] legations of a false certification and of liability; § 36.4338 Death or insolvency of hold- (ii) A description of the claims or er. statements upon which the allegations (a) Immediately upon the death of of liability are based; the holder and without the necessity of (iii) The amount of the VA demand to request or other action by the debtor be made; and or the Secretary, all sums then stand- (iv) Any exculpatory or mitigating ing as a credit balance in a trust, or de- circumstances that may relate to the posit, or other account to cover taxes, certification. insurance accruals, or other items in (2) The Reviewing Official shall re- connection with the loan secured by view all of the information provided the encumbered property, whether

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stated to be such or otherwise des- § 36.4339 Qualification for designated ignated, and which have not been cred- fee appraisers. ited on the note shall, nevertheless, be To qualify for approval as a des- treated as a setoff and shall be deemed ignated fee appraiser, an applicant to have been credited thereon as of the must show to the satisfaction of the date of the last debit to such account, Secretary that his or her character, ex- so that the unpaid balance of the note perience, and the type of work in which as of that date will be reduced by the he or she has had experience for at amount of such credit balance: least 5 years qualifies the applicant to Provided, That any unpaid taxes, insur- competently appraise and value within ance premiums, ground rents, or ad- a prescribed area the type of property to which the approval relates. vances may be paid by the holder of the indebtedness, at the holder’s option, [40 FR 34593, Aug. 18, 1975] and the amount which otherwise would have been deemed to have been cred- § 36.4340 Restriction on designated fee appraisers. ited on the note reduced accordingly. This paragraph shall be applicable (a) A designated fee appraiser shall whether the estate of the deceased not make an appraisal, excepting of al- holder is solvent or insolvent. terations, improvements, or repairs to (b) The provisions of paragraph (a) of real property entailing a cost of not more than $3,500, if such appraiser is an this section shall also be applicable in officer, director, trustee, employer, or the event of: employee of the lender, contractor, or (1) Insolvency of holder; vendor. (2) Initiation of any bankruptcy or (b) An appraisal made by a des- reorganization, or liquidation pro- ignated fee appraiser shall be subject ceedings as to the holder, whether vol- to review and adjustment by the Sec- untary or involuntary; retary. The amount determined to be (3) Appointment of a general or ancil- proper upon any such review or adjust- lary receiver for the holder’s property; ment shall constitute the ‘‘reasonable or in any case value’’ for the purpose of determining (4) Upon the written request of the the eligibility of the related loan. debtor if all secured and due insurance [15 FR 4398, July 12, 1950, as amended at 24 premiums, taxes, and ground rents FR 2655, Apr. 7, 1959; 43 FR 51016, Nov. 2, 1978] have been paid, and appropriate provisions made for future accruals. § 36.4342 Delegation of authority. (c) Upon the occurrence of any of the (a) Except as hereinafter provided, events enumerated in paragraph (a) or each employee of the Department of (b) of this section, interest on the note Veterans Affairs heretofore or here- and on the credit balance of the depos- after appointed to, or lawfully filling, its mentioned in paragraph (a) shall be any position designated in paragraph set off against each other at the rate (b) of this section is hereby delegated payable on the principal of the note, as authority, within the limitations and of the date of last debit to the deposit conditions prescribed by law, to exer- account. Any excess credit of interest cise the powers and functions of the shall be treated as a set-off against the Secretary with respect to the guaranty unpaid advances, if any, and the unpaid or insurance of loans and the rights balance of the note. and liabilities arising therefrom, in- (d) The provisions of paragraphs (a), cluding but not limited to the adju- (b) and (c) of this section shall apply dication and allowance, disallowance, also to corporations. The dissolution and compromise of claims; the collection or compromise of amounts due, in thereof by expiration of charter, by for- money or other property; the exten- feiture, or otherwise shall be treated as sion, rearrangement, or acquisition of is the death of an individual as pro- loans; the management and disposition vided in paragraph (a) of this section. of secured and unsecured notes and [13 FR 7279, Nov. 27, 1948, as amended at 40 other property; and those functions ex- FR 34593, Aug. 18, 1975] pressly or impliedly embraced within

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paragraphs (2) to (6), inclusive, of 38 authorized agent or a loan guaranty U.S.C. 3720(a). Incidental to the exer- agent shall be deemed to have been cise and performance of the powers and issued by the Secretary, subject to the functions hereby delegated, each such defenses reserved in 38 U.S.C. 3721. employee is authorized to execute and (d) Each Regional Office, regional of- deliver (with or without acknowledg- fice and insurance center , and Medical ment) for, and on behalf of, the Sec- and Regional Office Center shall main- retary, evidence of guaranty or of in- tain and keep current a cumulative list surance credits and such certificates, of all employees of that Office or Cen- forms, conveyances, and other instru- ter who, since May 1, 1980, have occu- ments as may be appropriate in con- pied the positions of Director, Loan nection with the acquisition, owner- Guaranty Officer, and Assistant Loan ship, management, sale, transfer, as- Guaranty Officer. This list will include signment, encumbrance, rental, or each employee’s name, title, date the other disposition of real or personal employee assumed the position, and property, or, of any right, title, or in- the termination date, if applicable, of terest therein, including, but not lim- the employee’s tenure in such position. ited to, contracts of sale, installment The list shall be available for public in- contracts, deeds, leases, bills of sale, spection and copying at the Regional assignments, and releases; and to ap- Office, or Center, during normal busi- prove disbursements to be made for ness hours. any purpose authorized by 38 U.S.C. (e)(1) Authority is hereby delegated chapter 37. to the officers, designated in paragraph (b) Designated positions: (e)(2) of this section, of the entity per- Under Secretary for Benefits forming loan servicing functions under Director, Loan Guaranty Service a contract with the Secretary to exe- Director, Medical and Regional Office Center cute on behalf of the Secretary all doc- Director, VA Regional Office and Insurance uments necessary for the servicing and Center termination of a loan made or acquired Director, Regional Office Loan Guaranty Officer by the Secretary pursuant to 38 U.S.C. Assistant Loan Guaranty Officer chapter 37 (other than under sub- chapter vi of that chapter). Documents The authority hereby delegated to em- executed under this paragraph include ployees of the positions designated in but are not limited to: loan modifica- this paragraph may, with the approval tion agreements, notices of default and of the Under Secretary for Benefits, be other documents necessary for loan redelegated. foreclosure or termination, notices of (c) Nothing in this section shall be appointment or substitution of trust- construed (1) to authorize any such em- ees under mortgages or deeds of trust, ployee to exercise the authority vested releases or satisfactions of mortgages in the Secretary under 38 U.S.C. 501 or or deeds of trust, acceptance of deeds- 3703(a)(2) or to sue, or enter appearance in-lieu of foreclosure, loan assumption for and on behalf of the Secretary, or agreements, loan assignments, deeds confess judgment against the Secretary tendered upon satisfaction or conver- in any court without the Secretary’s sion of an installment land sales con- prior authorization; or (2) to include tract, and documents related to filing, the authority to exercise those powers pursuing and settling claims with in- delegated to the Under Secretary for surance companies relating to hazard Benefits, or the Director, Loan Guar- coverage on properties securing loans anty Service, under §§ 36.4320(j), 36.4335 being serviced. or 36.4343: (2) The designated officers are: Vice Provided, That, anything in the regula- President, Assistant Vice President, tions concerning guaranty or insurance and Assistant Secretary. of loans to veterans to the contrary (3) The Director, Loan Guaranty notwithstanding, any evidence of guar- Service, Washington, DC, shall main- anty or insurance issued on or after tain a log listing all persons authorized July 1, 1948, by any of the employees to execute documents pursuant to designated in paragraph (b) of this sec- paragraph (e) of this section and the tion or by any employee designated an dates such persons held such authority,

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together with certified copies of resolu- dividuals will participate; or (2) to be tions of the board of directors of the made for the purchase or construction entity authorizing such individuals to of residential units in any housing de- perform the functions specified in para- velopment, cooperative or otherwise, graph (e)(1) of this section. These the title to which development or to records shall be available for public in- the individual units therein is not to be spection and copying at the Office of held directly by the veteran-partici- the Director of VA Loan Guaranty pants, or which contemplates the own- Service, Washington, DC 20420. ership or maintenance of more than (f)(1) Authority is hereby delegated three units or of their major appur- to the officers, designated in paragraph tenances in common, to be eligible for (f)(2) of this section, of the entity per- guaranty or insurance shall require forming property management and prior approval of the Under Secretary sales functions under a contract with for Benefits, or the Director, Loan the Secretary to execute on behalf of Guaranty Service, who may issue such the Secretary all documents necessary approval upon such conditions and lim- for the management and sales of resi- itations deemed appropriate, not incon- dential real property acquired by the Secretary pursuant to 38 U.S.C. chap- sistent with the provisions of 38 U.S.C. ter 37. Documents executed under this chapter 37 and the regulations con- paragraph include but are not limited cerning guaranty or insurance of loans to: sales contracts, deeds, documents to veterans. relating to removing adverse occu- (b) The issuance of such approval pants, and any documents relating to with respect to a residential develop- sales closings. The authorization to ment under paragraph (a)(2) of this sec- execute deeds is limited to deeds other tion also shall be subject to such condi- than general warranty deeds. tions and stipulation as in the judg- (2) The designated officers are: Sen- ment of the approving officer are pos- ior Vice President, Vice President, As- sible and proper to (1) afford reasonable sistant Vice President, Assistant Sec- and feasible protection to the rights of retary, Director, Senior Manager, and the Government as guarantor or in- Regional Manager. surer, and as subrogee, and to each vet- (3) The Director, Loan Guaranty eran-participant against loss of his or Service, Washington, DC, shall main- her respective equity consequent upon tain a log listing all persons authorized the failure of other participants to dis- to execute documents pursuant to charge their obligations; (2) provide for paragraph (f) of this section and the a reasonable and workable plan for the dates such persons held such authority, operation and management of the together with certified copies of resolu- project; (3) limit the personal liability tions of the board of directors of the of each veteran-participant to those entity authorizing such individuals to sums allocable on a proper ratable perform the functions specified in para- basis to the purchase, cost, and main- graph (f)(1) of this section. These tenance of his or her individual unit or records shall be available for public in- participating interest; (4) limit com- spection and copying at the Office of mercial features to those reasonably the Director of VA Loan Guaranty calculated to promote the economic Service, Washington, DC 20420. soundness of the project and the living convenience of the participants, retain- (Authority: 38 U.S.C. 501, 3720(a)(5)) ing the essential character of a residen- [23 FR 2217, Apr. 4, 1958, and 24 FR 2655, Apr. tial project. 7, 1959, as amended at 40 FR 34593, Aug. 18, (c) No such project, development, or 1975; 43 FR 60460, Dec. 28, 1978; 45 FR 21243, Apr. 1, 1980; 46 FR 43673, Aug. 31, 1981; 54 FR enterprise may be approved which in- 34988, Aug. 23, 1989; 61 FR 28058, June 4, 1996; volves an initial grouping of more than 66 FR 32231, June 14, 2001; 69 FR 10619, Mar. 500 veterans, or a cost of more than 8, 2004; 71 FR 30618, May 30, 2006] five million dollars, unless it is conclu- sively shown to the satisfaction of the § 36.4343 Cooperative loans. approving officer that a greater num- (a) Any loan, which is (1) related to ber of veterans or dollar amount will an enterprise in which more than 10 in- assure substantial advantages to the

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veteran-participants which could not performance as a Lender Appraisal be achieved in a smaller project. Processing Program (LAPP) staff ap- (d) When approved as in this section praisal reviewer. Three years of experi- provided, and upon performance of the ence is necessary to qualify as a lend- conditions indicated in the prior ap- er’s staff appraisal reviewer. That expe- proval, proper guaranty certificate or rience must demonstrate a knowledge certificates may be issued in connec- of, and the ability to apply industry- tion with the loan or loans to be guar- accepted principles, methods, practices anteed on behalf of eligible veterans and techniques of appraising, and the participating in the project, develop- ability to competently determine the ment or enterprise not to exceed in value of property within a prescribed total amount the sum of the guaranties geographical area. The individual must applied for by the individual partici- demonstrate the ability to review the pants and for which guaranty each par- work of others and to recognize devi- ticipant is then eligible. ations from accepted appraisal prin- (e) In lieu of guaranty as authorized ciples, practices, and techniques, errors in paragraph (d) of this section, insur- in computations, and unjustifiable and ance shall be available on application unsupportable conclusions. by the lender and all veterans con- (3) Lenders that meet the require- cerned. In such case the insurance ments of 38 U.S.C. 3702(d), and have a credit shall be limited to 15 percent of staff appraisal reviewer determined ac- the obligation of the veteran applicant (subject to available eligibility) and ceptable by VA, will be authorized to the total insurance credit in respect to review appraisals and make reasonable the veterans’ loans involved in the value determinations on properties project shall not exceed 15 percent of that will be security for VA guaranteed the aggregate of the principal sums of loans. The lender’s authorization will the individual indebtedness incurred by be subject to a one-year probationary the veterans participating in the period. Additionally, lenders must sat- project for the purpose of acquiring isfy initial and subsequent VA office their respective interests therein. case review requirements prior to being allowed to determine reasonable value [13 FR 7280, Nov. 27, 1948, as amended at 20 without VA involvement. The initial FR 9180, Dec. 10, 1955; 24 FR 2656, Apr. 7, 1959; office case review requirement must be 40 FR 34593, Aug. 18, 1975; 46 FR 43673, Aug. 31, 1981; 61 FR 28058, June 4, 1996] satisfied in the VA regional office in whose jurisdiction the lender’s staff ap- § 36.4344 Lender Appraisal Processing praisal reviewer is located before the Program. LAPP authority may be utilized by (a) Delegation of authority to lenders to that lender in any other VA office’s ju- review appraisals and determine reason- risdiction. To satisfy the initial office able value. (1) To be eligible for delega- case review requirement, the first five tion of authority to review VA apprais- cases of each lender staff appraisal re- als and determine the reasonable value viewer involving properties in the re- of properties to be purchased with VA gional office location where the staff guaranteed loans, a lender must (i) appraisal reviewer is located will be have automatic processing authority processed by him or her up to the point under 38 U.S.C. 3702(d), and (ii) employ where he or she has made a reasonable one or more staff appraisal reviewers value determination and fully drafted, acceptable to the Secretary. but not issued, the lender’s notification (2) To qualify as a lender’s staff ap- of reasonable value letter to the vet- praisal reviewer an applicant must be a eran. At that point, and prior to loan full-time member of the lender’s per- closing, each of the five cases will be manent staff and may not be employed submitted to the local VA office. After by, or perform services for, any other a staff review of each case, VA will mortgagee. The individual must not issue a Certificate of Reasonable engage in any private pursuits in which Value, which the lender may use in there will be, or appear to be, any con- closing the loan automatically if it flict of interest between those pursuits meets all other requirements of the and his/her duties, responsibilities, and VA. If these five cases are found to be

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acceptable by VA, the lender’s staff ap- cable VA requirements, and concur with the praisal reviewer will be allowed to recommendations of the fee appraiser, who fully process subsequent appraisals for was assigned by VA to the case. Further- properties located in that VA office’s more, in those cases where clarifications or jurisdiction without prior submission corrections have been requested from the VA fee appraiser there has been no pressure or to VA and issuance by VA of a Certifi- influence exerted on that appraiser to re- cate of Reasonable Value. Lenders move or change information that might be must also satisfy a subsequent VA of- considered detrimental to the subject prop- fice case review requirement in each erty, or VA’s interests, or to reach a pre- additional VA office location in which determined value for that property. Signature they desire to extend and utilize this of Staff Appraisal Reviewer. authority. Under this requirement, the (5) Other certifications required from lender must have first satisfied the ini- the lender will be specified with partial office case review requirement and ticularity in the separate instructions then must submit to the additional VA issued by the Secretary, as noted in office(s) the first case each staff ap- § 36.4344(b). praisal reviewer processes in the jurisdiction of that office. As provided (b) Instructions for LAPP Procedures. under the initial office case review re- The Secretary will publish separate in- quirement, VA office personnel will structions for processing appraisals issue a Certificate of Reasonable value under the Lenders Appraisal Proc- for this case and subsequently deter- essing Program. Compliance with these mine the acceptability of the lender’s regulations and the separate instruc- staff appraisal reviewer’s processing. If tions issued by the Secretary is deemed VA finds this first case to be accept- by VA to be the minimum exercise of able, the lender’s staff appraisal re- due diligence in processing LAPP viewer will be allowed to fully process cases. Due diligence is considered by subsequent cases in that additional VA VA to represent that care, as is to be office’s jurisdiction without prior sub- properly expected from, and ordinarily mission to VA. The initial and subse- exercised by, reasonable and prudent quent office case review requirements lenders who would be dependent on the may be expanded by VA if acceptable property as security to protect its in- performance has not been dem- vestment. onstrated. After satisfaction of the ini- (c) VA minimum property requirements. tial and subsequent office case review Lenders are responsible for deter- requirements, routine reviews of LAPP mining that the property meets VA cases will be made by VA staff based minimum property requirements. The upon quality control procedures estab- separate instructions issued by the lished by the Under Secretary for Bene- Secretary will set forth the lender’s fits. Such review will be made on a ran- ability to adjust, remove, or alter the dom sampling or performance related fee appraiser’s or fee compliance in- basis. During the probationary period a spector’s recommendations concerning high percentage of reviews will be VA minimum property requirements. made by VA staff. Condominiums, planned-unit develop- (4) The following certification by the ments and leasehold estates must have lender’s nominated staff appraisal re- been determined acceptable by VA. A viewer must be provided with the lend- condominium or planned-unit developer’s application for delegation of LAPP ment which is acceptable to the De- authority: partment of Housing and Urban Devel- I hereby acknowledge and represent that opment or the Department of Agri- by signing the Uniform Residential Ap- culture may also be acceptable to VA. praisal Report (URAR), FHLMC (Federal (d) Adjustment of value recommenda- Home Loan Mortgage Corporation) Form 70/ tions. The amount of authority to FNMA (Federal Notice Mortgage Associa- upwardly adjust the fee appraiser’s es- tion) Form 1004, I am certifying, in all cases, timated market value during the lend- that I have personally reviewed the appraisal report. In doing so I have considered and uti- er staff appraisal reviewer’s initial re- lized recognized professional appraisal tech- view of the appraisal report or to sub- niques, have found the appraisal report to sequently process an appeal of the have been prepared in compliance with appli- lender’s established reasonable value

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will be specified in the separate in- and reasonable by professional ap- structions issued by VA as noted in praisal standards and the lender’s staff § 36.4344(b). The amount specified must appraisal reviewer clearly and fully not in any way be considered an admin- justifies the reasoning and basis for the istrative adjustment figure which may increase in writing on the appraisal re- be applied indiscriminately and with- port form or an addendum. The staff out valid basis or justification with the appraisal reviewer must date and sign sole purpose of reaching an amount the written justification and must cite necessary to complete the sale or mort- within it the data used in arriving at gage transaction. the decision to make the increase. All (1) Adjustment during initial review. such data shall be attached to the ap- Any adjustment during the staff appraisal report form and any addendum. praisal reviewer’s initial review of the (e) Notification. It will be the respon- appraisal report must be fully and sibility of the lender to notify the vet- clearly justified in writing on the ap- eran borrower in writing of the deter- praisal report form or, if necessary, on mination of reasonable value and re- an addendum. The basis for the adjust- lated conditions specific to the prop- ment must be adequate and reasonable erty and to provide the veteran with a by professional appraisal standards. If copy of the appraisal report. Any delay real estate market or other valid data in processing the notification of value was utilized in arriving at the decision must be documented. Any delay of to make the adjustment, such data more than five work days between the must be attached to the appraisal re- date of the lender’s receipt of the fee port. All adjustments, comments, cor- appraiser’s report and date of the noti- rections, justifications, etc., to the ap- fication of value to the veteran, with- praisal report must be made in a con- out reasonable and documented extenu- trasting color, be clearly legible, and ating circumstances, will not be ac- signed and dated by the staff appraisal ceptable. A copy of the lender notifica- reviewer. tion letter to the veteran and the ap- (2) Processing appeals. The authority praisal report must be forwarded to the provided under 38 U.S.C. 3731(d) which VA office of jurisdiction at the same permits a lender to obtain a VA fee panel appraiser’s report which VA is time the veteran is notified. In addi- obligated to consider in an appeal of tion, the original appraisal report, re- the established reasonable value shall lated appraisal documentation, and a not apply to cases processed under the copy of the reasonable value deter- authority provided by this section. All mination notification to the veteran appeals of VA fee appraisers’ estimated must be submitted to the VA with the market values or lenders’ reasonable request for loan guaranty. value determinations above the (f) Indemnification. When the Sec- amount specified in the separate in- retary has incurred a loss as a result of structions issued by VA must be sub- a payment of claim under guaranty and mitted, along with the lender’s rec- in which the Secretary determines an ommendations, if any, to VA for proc- increase made by the lender under essing and final determination. Unless § 36.4344(d) or (f) was unwarranted, or otherwise authorized in the separate arbitrary and capricious, the lender instructions lenders must also submit shall indemnify the Secretary to the appeals, regardless of the amount, to extent the Secretary determines such VA in all cases where the staff ap- loss was caused, or increased, by the praisal reviewer has made an adjust- increase in value. ment during their initial review of the (g) Affiliations. A lender affiliated appraisal report to the fee appraiser’s with a real estate firm builder, land de- market value estimate. The fee ap- veloper or escrow agent as a subsidiary praiser’s estimated market value or division, investment or any other enti- lender’s reasonable value determina- ty in which it has a financial interest tion may be increased only when such or which it owns may not use this au- increase is clearly warranted and fully thority for any cases involving the af- supported by real estate market or filiate unless the lender demonstrates other valid data considered adequate to the Secretary’s satisfaction that the

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lender and its affiliate(s) are essen- lations, requirements, guidelines, in- tially separate entities that operate structions or applicable laws, or when independently of each other, free of all there is adequate evidence to support cross-influences (e.g., a formal cor- reasonable belief by VA that a par- porate agreement exists which specifi- ticular unacceptable act, practice, or cally sets forth this fact). performance by the lender or the lend- (h) Quality Control Plans. The lender er’s staff has occurred. Such acts, prac- must have an effective self-policing or tices or performance include, but are quality control system to ensure the not limited to: Demonstrated technical adequacy and quality of their LAPP incompetence (i.e., conduct which dem- staff appraisal reviewer’s processing onstrates an insufficient knowledge of and, that its activities do not deviate industry accepted appraisal principles, from high standards of integrity. The techniques and practices; or the lack of quality control system must include technical competence to review ap- frequent, periodic audits that specifi- praisal reports and make value deter- cally address the appraisal review ac- minations in accordance with those re- tivity. These audits may be performed quirements); substantive or repetitive by an independent party, or by the errors (i.e., any error(s) of a nature lender’s independent internal audit di- that would materially or significantly vision which reports directly to the affect the determination of reasonable firm’s chief executive officer. The lend- value or condition of the property; or a er must agree to furnish findings and number or series of errors that, consid- information under this system to VA ered individually, may not signifi- on demand. While the quality control cantly impact the determination of personnel need not be appraisers, they reasonable value or property condition, should have basic familiarity with ap- but which when considered in the ag- praisal theory and techniques and the gregate would establish that appraisal ability to prescribe appropriate correc- reviews or LAPP case processing are tive action(s) in the appraisal review being performed in a careless or neg- process when discrepancies or problems ligent manner), or continued instances are identified. The basic elements of of disregard for VA requirements after the system will be described in sepa- they have been called to the lender’s rate instructions issued by the Sec- attention. retary. Copies of the lender’s quality (1) Withdrawal of authority by the control plan or self-policing system ev- Loan Guaranty Officer may be either idencing appraisal related matters for an indefinite or a specified period of must be provided to the VA office of ju- time. For any withdrawal longer than risdiction with the lender’s application 90 days a reapplication for lender au- for LAPP authority. thority to process appraisals under (i) Fees. The Secretary may require these regulations will be required. mortgagees to pay an application fee Written notice will be provided at least and/or annual fees, including additional 30 days in advance of withdrawal unless fees for each branch office authorized the Government’s interests are exposed to process cases under the authority to immediate risk from the lender’s ac- delegated under this section, in such tivities in which case the withdrawal amounts and at such times as the Sec- will be effected immediately. The no- retary may require. tice will clearly and specifically set (j) Withdrawal of lender authority. The forth the basis and grounds for the ac- authority for a lender to determine tion. There is no right to a formal reasonable value may be withdrawn by hearing to contest the withdrawal of the Loan Guaranty Officer when proper LAPP processing privileges. However, cause exists. A lender’s authority to if within 15 days after receiving notice make reasonable value determinations the lender requests an opportunity to shall be withdrawn when the lender no contest the withdrawal, the lender may longer meets the basic requirements submit, in person, in writing, or for delegating the authority, or when it through a representative, information can be shown that the lender’s reason- and argument to the Loan Guaranty able value determinations have not Officer in opposition to the withdrawal. been made in accordance with VA regu- The Loan Guaranty Officer will make a

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recommendation to the Regional Office § 36.4344a Servicer appraisal proc- Director who shall make the deter- essing program (SAPP). mination as to whether the action (a) Delegation of authority to should be sustained, modified or re- servicers to review liquidation apprais- scinded. The lender will be informed in als and determine reasonable value. writing of the decision. Based on the reasonable value, the (2) The lender has the right to appeal servicer will be able to determine net the Regional Office Director’s decision value. to the Under Secretary for Benefits. In (1) To be eligible for delegation of au- the event of such an appeal, the Under thority to review VA liquidation ap- Secretary for Benefits will review all praisals and determine the reasonable relevant material concerning the mat- value for liquidation purposes on prop- ter and make a determination that erties secured by VA guaranteed or in- shall constitute final agency action. If sured loans, a lender must— the lender’s submission of opposition (i) Have automatic processing au- raises a genuine dispute over facts ma- thority under 38 U.S.C. 3702(d), and terial to the withdrawal of LAPP au- (ii) Employ one or more Staff Ap- thority, the lender will be afforded an praisal Reviewers (SAR) acceptable to opportunity to appear with a rep- the Secretary. resentative, submit documentary evi- (2) To qualify as a servicer’s staff ap- dence, present witnesses and confront praisal reviewer an applicant must be a any witness the Veterans Benefits Ad- full-time member of the servicer’s per- ministration presents. The Under Sec- manent staff and may not be employed retary for Benefits will appoint a hear- by, or perform services for, any other ing officer or panel to conduct the mortgagee. The individual must not hearing. When such additional pro- engage in any private pursuits in which ceedings are necessary, the Under Sec- there will be, or appear to be, any con- retary for Benefits shall base the deter- flict of interest between those pursuits mination on the facts as found, to- and his/her duties, responsibilities, and gether with any information and argu- performance as a SAPP staff appraisal ment submitted by the lender. reviewer. Three years of appraisal re- (3) In actions based upon a conviction lated experience is necessary to qualify or civil judgment, or in which there is as a servicer’s staff appraisal reviewer. no genuine dispute over material facts, That experience must demonstrate the Under Secretary for Benefits shall knowledge of, and the ability to apply make a decision on the basis of all the industry-accepted principles, methods, information in the administrative practices and techniques of appraising, record, including any submission made and the ability to competently deter- by the lender. mine the value of property. The indi- (4) Withdrawal of the LAPP author- vidual must demonstrate the ability to ity will require that VA make subse- review the work of others and to recog- quent determinations of reasonable nize deviations from accepted appraisal value for the lender. Consequently, VA principle, practices, and techniques, staff will review each appraisal report error in computations, and unjustifi- and issue a Certificate of Reasonable able and unsupportable conclusions. Value which can then be used by the (3) Servicers that have a staff ap- lender to close loans on either the prior praisal reviewer determined acceptable VA approval or automatic basis. to VA, will be authorized to review liq- (5) Withdrawal by VA of the lender’s uidation appraisals and make reason- LAPP authority does not prevent VA able value determinations for liquida- from also withdrawing automatic proc- tion purposes on properties that are essing authority or taking debarment the security for VA guaranteed or in- or suspension action based upon the sured loans. Additionally, servicers same conduct by the lender. must satisfy initial VA office case review requirements prior to being al- (Authority: 38 U.S.C. 3731) lowed to determine reasonable value (Approved by the Office of Management and without VA involvement. The initial Budget under control number 2900–0513) office case review requirement must be [55 FR 21019, May 22, 1990] satisfied in the VA regional loan center

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in whose jurisdiction the servicer’s by VA to be the minimum exercise of staff appraisal reviewer is located be- due diligence in processing SAPP fore the SAPP authority may be uti- cases. Due diligence is considered by lized by that servicer in any other VA VA to represent that care, as is to be office’s jurisdiction. To satisfy the ini- properly expected from, and ordinarily tial office case review requirement, the exercised by, a reasonable and prudent first five cases of each servicer staff ap- servicer who would be dependent on the praisal reviewer involving properties in property as security to protect its in- the regional office location where the vestment. staff appraisal reviewer is located will (c) Adjustment of value recommenda- be processed by him or her up to the tions. The amount of authority to point where he or she has made a rea- upwardly adjust the fee appraiser’s es- sonable value determination and fully timated market value during the drafted, but not issued, the servicer’s servicer staff appraisal reviewer’s ini- notice of value. At that point, and tial review of the appraisal report or to prior to loan termination, each of the subsequently process an appeal of the five cases will be submitted to the VA servicer’s established reasonable value regional loan center having jurisdic- will be specified in the separate in- tion over the property. After a staff re- structions issued by VA as noted in view of each case, VA will issue a no- § 36.4344a(b). The amount specified must tice of value which the servicer may not in any way be considered an admin- use to compute the net value of the istrative adjustment figure which may property for liquidation purposes. If be applied indiscriminately and with- these five cases are found to be accept- out valid basis or justification. able by VA, the servicer’s staff ap- (1) Adjustment during initial review. praisal reviewer will be allowed to Any adjustment during the staff ap- fully process subsequent appraisals for praisal reviewer’s initial review of the properties regardless of jurisdictional appraisal report must be fully and location without prior submission to clearly justified in writing on the ap- VA and issuance by VA of a notice of praisal report form or, if necessary, on value. Where the servicer’s reviewer an addendum. The basis for the adjust- cannot readily meet the jurisdictional ment must be adequate and reasonable review requirement, the SAR applicant by professional appraisal standards. If may request that VA expand the geo- real estate market or other valid data graphic area of consideration. VA will was utilized in arriving at the decision accommodate such requests if prac- to make the adjustment, such data ticable. The initial office case review must be attached to the appraisal re- requirement may be expanded by VA if port. All adjustments, comments, cor- acceptable performance has not been rections, justifications, etc., to the ap- demonstrated. After satisfaction of the praisal report must be made in a con- initial office case review requirement, trasting color, be clearly legible, and routine reviews of SAPP cases will be signed and dated by the staff appraisal made by VA staff based upon quality reviewer. control procedures established by the (2) Processing appeals. The authority Under Secretary for Benefits. Such re- provided under 38 U.S.C. 3731(d) which view will be made on a random sam- permits a lender to obtain a VA fee pling or performance related basis. panel appraiser’s report which VA is (4) Certifications required from the obligated to consider in an appeal of servicer will be specified with particu- the established reasonable value shall larity in the separate instructions not apply to cases processed under the issued by the Secretary, as noted in authority provided by this section. All paragraph (b) of this section. appeals of VA fee appraiser’s estimated (b) Instructions for SAPP Procedures. market values or servicer’s reasonable The Secretary will publish separate in- value determinations above the structions for processing appraisals amount specified in the separate in- under the Servicer Appraisal Proc- structions issued by VA must be sub- essing Program. Compliance with these mitted, along with the servicer’s rec- regulations and the separate instruc- ommendations, if any, to VA for proc- tions issued by the Secretary is deemed essing and final determination. Unless

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otherwise authorized in the separate from high standards of integrity. The instructions servicers must also submit quality control system must include appeals, regardless of the amount, to frequent, periodic audits that specifi- VA in all cases where the staff ap- cally address the appraisal review ac- praisal reviewer has made an adjust- tivity. These audits may be performed ment during their initial review of the by an independent party, or by the appraisal report to the fee appraiser’s servicer’s independent internal audit market value estimate. The fee ap- division which reports directly to the praiser’s estimated market value or firm’s chief executive officer. The servicer’s reasonable value determina- servicer must agree to furnish findings tion may be increased only when such and information under this system to increase is clearly warranted and fully VA on demand. While the quality con- supported by real estate market or trol personnel need not be appraisers, other valid data considered adequate they should have basic familiarity with and reasonable by professional ap- appraisal theory and techniques and praisal standards and the servicer’s the ability to prescribe appropriate staff appraisal reviewer clearly and corrective action(s) in the appraisal re- fully justifies the reasoning and basis view process when discrepancies or for the increase in writing on the ap- problems are identified. The basic ele- praisal report form or an addendum. ments of the system will be described The staff appraisal reviewer must date in separate instructions issued by the and sign the written justification and Secretary. Copies of the lender’s qual- must cite within it the data used in ar- ity control plan or self-policing system riving at the decision to make the in- evidencing appraisal related matters crease. All such data shall be attached must be provided to the VA office of ju- to the appraisal report form and any risdiction with the servicer’s applica- addendum. tion of SAPP authority. (d) Indemnification. When the Sec- (g) Fees. The Secretary will require retary has incurred a loss as a result of servicers to pay a $100.00 application a payment of claim under guaranty and fee for each SAR the servicer nomi- in which the Secretary determines an nates for approval. The application fee increase made by the servicer under will also apply if the SAR begins work paragraph (c) of this section was un- for another servicer. warranted, or arbitrary and capricious, (h) Withdrawal of servicer authority. the lender shall indemnify the Sec- The authority for a servicer to deter- retary to the extent the Secretary de- mine reasonable value may be with- termines such loss was caused or in- drawn by the Loan Guaranty Officer creased, by the increase in value. when proper cause exists. A servicer’s (e) Affiliations. A servicer affiliated authority to make reasonable value de- with a real estate firm, builder, land terminations shall be withdrawn when developer or escrow agent as a sub- the servicer no longer meets the basic sidiary division, or in any other entity requirements for delegating the au- in which it has a financial interest or thority, or when it can be shown that which it owns may not use the author- the servicer’s reasonable value deter- ity for any cases involving the affiliate minations have not been made in ac- unless the servicer demonstrates to the cordance with VA regulations, require- Secretary’s satisfaction that the ments, guidelines, instructions or ap- servicer and its affiliate(s) are essen- plicable laws, or when there is ade- tially separate entities that operate quate evidence to support reasonable independently of each other, free of all belief by VA that a particular unac- cross-influences (e.g., a formal cor- ceptable act, practice, or performance porate agreement exists which specifi- by the servicer or the servicer’s staff cally sets forth this fact). has occurred. Such acts, practices, or (f) Quality control plans. The servicer performance include, but are not lim- must have an effective self-policing or ited to: Demonstrated technical incom- quality control system to ensure the petence (i.e., conduct which dem- adequacy and quality of their SAPP onstrates an insufficient knowledge of staff appraisal reviewer’s processing industry accepted appraisal principles, and, that its activities do not deviate techniques and practices; or the lack of

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technical competence to review ap- mination that shall constitute final praisal reports and make value deter- agency action. If the servicer’s submis- minations in accordance with those re- sion of opposition raises a genuine dis- quirements); substantive or repetitive pute over facts material to the with- errors (i.e., any error(s) of a nature drawal of SAPP authority, the servicer that would materially or significantly will be afforded an opportunity to ap- affect the determination of reasonable pear with a representative, submit doc- value or condition of the property; or a umentary evidence, present witnesses number or series of errors that, consid- and confront any witness the Veterans ered individually, may not signifi- Benefits Administration presents. The cantly impact the determination of Under Secretary for Benefits will ap- reasonable value or property condition, point a hearing officer or panel to con- but which when considered in the ag- duct the hearing. When such additional gregate would establish that appraisal proceedings are necessary, the Under reviews or SAPP case processing are Secretary for Benefits shall base the being performed in a careless or neg- determination on the facts as found, ligent manner), or continued instances together with any information and ar- of disregard for VA requirements after gument submitted by the servicer. they have been called to the servicer’s (3) In actions based upon a conviction attention. or civil judgment, or in which there is (1) Withdrawal of authority by the no genuine dispute over material facts, Loan Guaranty Officer may be either for an indefinite or a specified period of the Under Secretary for Benefits shall time. For any withdrawal longer than make a decision on the basis of all the 90 days a reapplication for servicer au- information in the administrative thority to process appraisals under record, including any submission made these regulations will be required. by the servicer. Written notice will be provided at least (4) Withdrawal of the SAPP author- 30 days in advance of withdrawal unless ity will require that VA make subse- the Government’s interests are exposed quent determinations of reasonable to immediate risk from the servicer’s value for the servicer. Consequently, activities in which case the withdrawal VA staff will review each appraisal re- will be effected immediately. The no- port and issue a Notice of Value which tice will clearly and specifically set can then be used by the servicer to forth the basis and grounds for the ac- compute the net value of properties for tion. There is no right to a formal liquidation purposes. hearing to contest the withdrawal of (5) Withdrawal by VA of the SAPP processing privileges. However, servicer’s SAPP authority does not if within 15 days after receiving notice prevent VA from also withdrawing the servicer requests an opportunity to automatic processing authority or tak- contest the withdrawal, the servicer ing debarment or suspension action may submit, in person, in writing, or based upon the same conduct of the through a representative, information servicer. and argument to the Loan Guaranty Officer in opposition to the withdrawal. (Authority: 38 U.S.C. 3731) The Loan Guaranty Officer will make a [73 FR 6308, Feb. 1, 2008] recommendation to the Regional Loan Center Director who shall make the de- § 36.4345 Waivers, consents, and ap- termination as to whether the action provals; when effective. should be sustained, modified or re- No waiver, consent, or approval re- scinded. The servicer will be informed quired or authorized by the regulations in writing of the decision. concerning guaranty or insurance of (2) The servicer has the right to ap- loans to veterans shall be valid unless peal the Regional Loan Center Direc- in writing signed by the Secretary or tor’s decision to the Undersecretary for the subordinate officer to whom au- Benefits. In the event of such an ap- thority has been delegated by the Sec- peal, the Under Secretary for Benefits retary. will review all relevant material concerning the matter and make a deter- [13 FR 7281, Nov. 27, 1948]

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§ 36.4346 Servicing procedures for the treatment of payments during the holders. period of such transfer, and damages (a) Establishment of loan servicing pro- and costs for failure to comply with gram. The holder of a loan guaranteed these requirements shall be governed or insured by the Secretary shall de- by the pertinent provisions of the Real velop and maintain a loan servicing Estate Settlement Procedures Act as program which follows accepted indus- administered by the Department of try standards for servicing of similar Housing and Urban Development. type conventional loans. The loan serv- (e) Escrow accounts. A holder of a loan icing program established pursuant to guaranteed or insured by the Secretary this section may employ different serv- may collect periodic deposits from the icing approaches to fit individual bor- borrower for taxes and/or insurance on rower circumstances and avoid estab- the security and maintain a tax and in- lishing a fixed routine. However, it surance escrow account provided such must incorporate each of the provi- a requirement is authorized under the sions specified in paragraphs (b) terms of the security instruments. In through (l) of this section. maintaining such accounts, the holder (b) Procedures for providing informa- shall comply with the pertinent provi- tion. (1) Loan holders shall establish sions of the Real Estate Settlement procedures to provide loan information Procedures Act. to borrowers, arrange for individual (f) System for servicing delinquent loan consultations upon request and loans. In addition to the requirements maintain controls to assure prompt re- of the Real Estate Settlement Proce- sponses to inquiries. One or more of the dures Act, concerning the duties of the following means of making informa- loan servicer to respond to borrower in- tion readily available to borrowers is quiries, to protect the borrower’s cred- required. it rating during a payment dispute pe- (i) An office staffed with trained riod, and to pay damages and costs for servicing personnel with access to loan noncompliance, holders shall establish account information located within 200 a system for servicing delinquent loans miles of the property. which ensures that prompt action is (ii) Toll-free telephone service or ac- taken to collect amounts due from bor- ceptance of collect telephone calls at rowers and minimize the number of an office capable of providing needed loans in a default status. The holder’s information. servicing system must include the fol- (2) All borrowers must be informed of lowing: the system available for obtaining an- swers to loan inquiries, the office from (1) An accounting system which which the needed information may be promptly alerts servicing personnel obtained, and reminded of the system when a loan becomes delinquent; at least annually. (2) A collection staff which is trained (c) Statement for income tax purposes. in techniques of loan servicing and Within 60 days after the end of each counseling delinquent borrowers to ad- calendar year, the holder shall furnish vise borrowers how to cure delin- to the borrower a statement of the in- quencies, protect their equity and cred- terest paid and, if applicable, a state- it rating and, if the default is insol- ment of the taxes disbursed from the uble, pursue alternatives to fore- escrow account during the preceding closure; year. At the borrower’s request, the (3) Procedural guidelines for indi- holder shall furnish a statement of the vidual analysis of each delinquency; escrow account sufficient to enable the (4) Instructions and appropriate con- borrower to reconcile the account. trols for sending delinquent notices, as- (d) Change of servicing. Whenever sessing late charges, handling partial servicing of a loan guaranteed or in- payments, maintaining servicing his- sured by the Secretary is transferred tories and evaluating repayment pro- from one holder to another, notice of posals; such transfer by both the transferor (5) Management review procedures and transferee, the form and content of for evaluating efforts made to collect such notice, the timing of such notice, the delinquency and the response from

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the borrower before a decision is made nancial circumstances of the bor- to initiate action to liquidate a loan; rower(s) or established a reason for the (6) Procedures for reporting delin- default or obtained agreement to a re- quencies of 90 days or more and loan payment plan from the borrower(s), terminations to major consumer credit then a face-to-face interview with the bureaus as specified by the Secretary borrower(s) or a reasonable effort to ar- and for informing borrowers that such range such a meeting is required. action will be taken; and (2) The holder must provide a valid (7) Controls to ensure that all notices explanation of any failure to perform required to be given to the Secretary these collection actions when reporting on delinquent loans are provided time- loan defaults to the Secretary. A pat- ly and in such form as the Secretary tern of such failure may be a basis for shall require. sanctions under 2 CFR parts 180 and (g) Collection actions. (1) Holders shall 801. employ collection techniques which (h) Conducting interviews with delin- provide flexibility to adapt to the indi- quent borrowers. When personal contact vidual needs and circumstances of each with the borrower(s) is established, the borrower. A variety of collection tech- holder shall solicit sufficient informa- niques may be used based on the hold- tion to properly evaluate the prospects er’s determination of the most effec- for curing the default and whether the tive means of contact with borrowers granting of forbearance or other relief during various stages of delinquency. assistance would be appropriate. At a However, at a minimum the holder’s minimum, the holder must make a rea- collection procedures must include the sonable effort to establish the fol- following actions: lowing: (i) A written delinquency notice to (1) The reason for the default and the borrower(s) requesting immediate whether the reason is a temporary or payment if a loan installment has not permanent condition; been received within 17 days after the (2) The present income and employ- due date. This notice must be mailed ment of the borrower(s); no later than the 20th day of the delin- (3) The current monthly expenses of quency and state the amount of the the borrower(s) including household payment and of any late charges that and debt obligations; are due. (4) The current mailing address and (ii) An effort, concurrent with the telephone number of the borrower(s); written delinquency notice to establish and contact with the borrower(s) by tele- (5) A realistic and mutually satisfac- phone. When talking with the bor- tory arrangement for curing the de- rower(s), the holder should attempt to fault. determine why payment was not made (i) Property inspections. (1) The holder and emphasize the importance of re- shall make an inspection of the prop- mitting loan installments as they come erty securing the loan whenever it be- due. comes aware that the physical condi- (iii) A letter to the borrower(s) if tion of the security may be in jeop- payment has not been received within ardy. Unless a repayment agreement is 30 days after it is due and telephone in effect, a property inspection shall contact could not be made. This letter also be made at the following times: should emphasize the seriousness of the (i) Before the 60th day of delinquency delinquency and the importance of tak- or before initiating action to liquidate ing prompt action to resolve the de- a loan, whichever is earlier; and, fault. It should also notify the bor- (ii) At least once each month after rower(s) that the loan is in default, liquidation proceedings have been state the total amount due and advise started unless servicing information the borrower(s) how to contact the shows the property remains owner-oc- holder to make arrangements for cur- cupied. ing the default. (2) Whenever a holder obtains infor- (iv) In the event the holder has not mation which indicates that the prop- established contact with the bor- erty securing the loan is abandoned, it rower(s) and has not determined the fi- shall make appropriate arrangements

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to protect the property from vandalism with rates in reports published by the and the elements. Thereafter, the hold- industry, investors and others; and, er shall schedule inspections at least (3) Analyze significant variances be- monthly to prevent unnecessary dete- tween its foreclosure and delinquency rioration due to vandalism, or neglect. rates and those found in available re- With respect to any loan more than 30 ports and publications and take appro- days delinquent, a property abandon- priate corrective action. ment must be reported to the Sec- (m) Holders shall provide available retary and appropriate action initiated statistical data on delinquency and under § 36.4317(a) within 15 days after foreclosure rates and their analysis of the holder confirms the property is such data to the Secretary upon re- abandoned. quest. (j) Collection records. The holder shall (Approved by the Office of Management and maintain individual file records of col- Budget under Control Number 2900–0530) lection action on delinquent loans and [58 FR 29117, May 19, 1993, as amended at 61 make such records available to the FR 28058, June 4, 1996; 72 FR 30242, May 31, Secretary for inspection on request. 2007] Such collection records shall show: (1) The dates and content of letters § 36.4347 Minimum property and con- and notices which were mailed to the struction requirements. borrower(s); No loan for the purchase or construc- (2) Dated summaries of each personal tion of residential property shall be eli- servicing contact and the result of gible for guaranty or insurance unless same; such property complies or conforms (3) The indicated reason(s) for de- with those standards of planning, con- fault; and, struction, and general acceptability (4) The date and result of each prop- that may be applicable thereto and pre- erty inspection. scribed by the Secretary pursuant to 38 (k) Reporting to the Secretary. A sum- U.S.C. 3704(a). mary of collection efforts, the informa- [24 FR 2656, Apr. 7, 1959] tion obtained through such efforts and the holder’s evaluation of the reason § 36.4348 Authority to close loans on for the default and prospects for resolu- the automatic basis. tion of the default must be included in (a) Supervised lenders of the classes any notice provided to the Secretary described in 38 U.S.C. 3702(d) (1) and (2) pursuant to §§ 36.4315 and 36.4317. are authorized by statute to process (l) Quality control procedures. No later VA guaranteed home loans on the than 180 days after the effective date of automatic basis. This category of lend- this regulation, each loan holder shall ers includes any Federal land bank, na- establish internal controls to periodi- tional bank, State bank, private bank, cally assess the quality of the servicing building and loan association, insur- performed on loans guaranteed by the ance company, credit union or mort- Secretary and assure that all require- gage and loan company that is subject ments of this section are being met. to examination and supervision by an Those procedures must provide for a re- agency of the United States or of any view of the holder’s servicing activities State or by any State. at least annually and include an eval- (b) Non-supervised lenders of the uation of delinquency and foreclosure class described in 38 U.S.C. 3702(d)(3) rates on loans in its portfolio which are must apply to the Secretary for au- guaranteed by the Secretary. As part thority to process loans on the auto- of its evaluation of delinquency and matic basis. Each of the minimum re- foreclosure rates, the holder shall: quirements listed below must be met (1) Collect and maintain appropriate by applicant lenders. data on delinquency and foreclosure (1) Experience. The firm must meet rates to enable the holder to evaluate one of the following experience require- effectiveness of its collection efforts; ments: (2) Determine how its VA delin- (i) The firm must have been actively quency and foreclosure rates compare engaged in originating VA loans for at

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least two years, have a VA Lender ID one recent year of this experience must number and have originated and closed have included making underwriting de- a minimum of ten VA loans within the cisions on VA loans. (Recent is defined past two years, excluding interest rate as within the past three years.) A VA reduction refinance loans (IRRRLs), nomination and current resume, out- that have been properly documented lining the underwriter’s specific experi- and submitted in compliance with VA ence with VA loans, must be submitted requirements and procedures; or for each underwriter nominee. (ii) The firm must have a VA ID num- (ii) Alternatively, if an underwriter ber and, if active for less than two does not have the experience outlined years, have originated and closed at above, the underwriter must submit least 25 VA loans, excluding IRRRLs, documentation verifying that he or she that have been properly documented is a current Accredited Residential Un- and submitted in compliance with VA derwriter (ARU) as designated by the requirements and procedures; or Mortgage Bankers Association (MBA). (iii) Each principal officer of the (iii) If an underwriter is not located firm, who is actively involved in man- in the lender’s corporate office, then a aging origination functions, must have senior officer must certify that the un- a minimum of two recent years’ man- derwriter reports to and is supervised agement experience in the origination by an individual who is not a branch of VA loans. This experience may be manager or other person with produc- with the current or prior employer. For tion responsibilities. the purposes of this requirement, prin- (iv) All VA-approved underwriters cipal officer is defined as president or must attend a 1-day (eight-hour) train- vice president; or (iv) If the firm has been operating as ing course on underwriter responsibil- an agent for a non-supervised auto- ities, VA underwriting requirements, matic lender (sponsoring lender), the and VA administrative requirements, firm must submit documentation con- including the usage of VA forms, with- firming that it has a VA Lender ID in 90 days of approval (if VA is unable number and has originated a minimum to make such training available within of ten VA loans, excluding IRRRLs, 90 days, the underwriter must attend over the past two years. If active for the first available training). Imme- less than two years, the agent must diately upon approval of a VA under- have originated at least 25 VA loans. writer, the office of jurisdiction will The required documentation is a copy contact the underwriter to schedule of the VA letter approving the firm as this training at a VA regional office an agent for the sponsoring lender; a (VARO) of the underwriter’s choice. copy of the corporate resolution, de- This training is required for all newly scribing the functions the agent was to approved VA underwriters, including perform, submitted to VA by the spon- those who qualified for approval based soring lender; and a letter from a sen- on an ARU designation, as well as VA- ior officer of the sponsoring lender in- approved underwriters who have not dicating the number of VA loans sub- underwritten VA-guaranteed loans in mitted by the agent each year and that the past 24 months. Furthermore, and the loans have been properly docu- at the discretion of any VARO in whose mented and submitted in compliance jurisdiction the lender is originating with VA requirements and procedures. VA loans, VA-approved underwriters (2) Underwriter. A senior officer of the who consistently approve loans that do firm must nominate a full-time quali- not meet VA credit standards may be fied employee(s) to act in the firm’s be- required to retake this training. half as underwriter(s) to personally re- (3) Underwriter certification. The lend- view and make underwriting decisions er must certify that all underwriting on VA loans to be closed on the auto- decisions as to whether to accept or re- matic basis. ject a VA loan will be made by a VA- (i) Nominees for underwriter must approved underwriter. In addition each have a minimum of three years experi- VA-approved underwriter will be re- ence in processing, pre-underwriting or quired to certify on each VA loan that underwriting mortgage loans. At least he or she approves that the loan has

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been personally reviewed and approved or stockholders have a personal inter- by the underwriter. est, unrelated to their position as an (4) Financial requirements. Each appli- officer or stockholder. cation must include the most recent (C) Any investment in related enti- annual financial statement audited and ties in which the lender’s officers or certified by a certified public account- stockholders have a personal interest ant (CPA). If the date of the annual fi- unrelated to their position as an officer nancial statement precedes that of the or stockholder. application by more than six months, (D) That portion of an investment in the lender must also attach a copy of joint ventures, subsidiaries, affiliates its latest internal financial statement. and/or other related entities which is Lenders are required to meet either the carried at a value greater than equity, working capital or the minimum net as adjusted. ‘‘Equity as adjusted’’ worth financial requirement as defined means the book value of the related en- below. tity reduced by the amount of unac- (i) Working capital. A minimum of ceptable assets carried by the related $50,000 in working capital must be dem- entity. onstrated. (E) All intangibles, such as goodwill, (A) Working capital is a measure of a covenants not to compete, franchisee firm’s liquidity, or the ability to pay fees, organization costs, etc., except its short-term debts. Working capital unamortized servicing costs carried at is defined as the excess of current as- a value established by an arm’s-length sets over current liabilities. Current transaction and presented in accord- assets are defined as cash or other liq- ance with generally accepted account- uid assets convertible into cash within ing principles. a 1-year period. Current liabilities are (F) That portion of an asset not read- defined as debts that must be paid ily marketable and for which appraised within the same 1-year time frame. values are very subjective, carried at a (B) The VA determination of whether value in excess of a substantially dis- a lender has the required minimum counted appraised value. Assets such as working capital is based on the balance antiques, art work and gemstones are sheet of the lender’s annual audited fi- subject to this provision and should be nancial statement. Therefore, either carried at the lower of cost or market. the balance sheet must be classified to (G) Any asset that is principally used distinguish between current and fixed for the personal enjoyment of an offi- assets and between current and long- cer or stockholder and not for normal term liabilities or the information business purposes. Adjusted net worth must be provided in a footnote to the must be calculated by a CPA using an statement. audited and certified balance sheet (ii) Net worth. Lenders must show evi- from the lender’s latest financial state- dence of a minimum of $250,000 in ad- ments. ‘‘Personal interest’’ as used in justed net worth. Net worth is a meas- this section indicates a relationship be- ure of a firm’s solvency, or its ability tween the lender and a person or entity to exist in the long run, quantified by in which that specified person (e.g., the payment of long-term debts. Net spouse, parent, grandparent, child, worth as defined by generally accepted brother, sister, aunt, uncle or in-law) accounting principles (GAAP) is total has a financial interest in or is em- assets minus total liabilities. Adjusted ployed in a management position by net worth for VA purposes is the same the lender. as the adjusted net worth required by (5) Lines of credit. The lender appli- the Department of Housing and Urban cant must have one or more lines of Development (HUD), net worth less credit aggregating at least $1 million. certain unacceptable assets including: The identity of the source(s) of ware- (A) Any assets of the lender pledged house lines of credit must be submitted to secure obligations of another person to VA and the applicant must agree or entity. that VA may contact the named (B) Any asset due from either officers source(s) for the purpose of verifying or stockholders of the lender or related the information. A line of credit must entities, in which the lender’s officers be unrestricted, that is, funds are

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available upon demand to close loans (ii) Corrective measures. The system and are not dependent on prior investor should ensure that effective corrective approval. A letter from the com- measures are taken promptly when de- pany(ies) verifying the unrestricted ficiencies in loan origination’s are line(s) of credit must be submitted identified by either the lender or VA. with the application for automatic au- Any cases involving major discrep- thority. ancies which are discovered under the (6) Permanent investors. If the lender system must be reported to VA. customarily sells loans it originates, it (iii) System integrity. The quality con- must have a minimum of two perma- trol system should be independent of nent investors. The names, addresses the mortgage loan production function. and telephone numbers of the perma- (iv) Scope. The review of underwriting nent investors must be submitted with decisions and certifications must in- the application. clude compliance with VA under- (7) Liaison. The lender applicant must writing requirements, sufficiency of designate an employee and an alter- documentation and soundness of under- nate to be the primary liaison with VA. writing judgments. The liaison officers should be thor- (v) Appraisal quality. For lenders ap- oughly familiar with the lender’s en- proved for the Lender Appraisal Proc- tire operation and be able to respond to essing Program (LAPP), the quality any query from VA concerning a par- control system must specifically con- ticular VA loan or the firm’s auto- tain provisions concerning the ade- matic authority. quacy and quality of real property appraisals. While the lender’s quality (8) Other considerations. All applica- control personnel need not be apprais- tions will also be reviewed in light of ers, they should have basic familiarity the following considerations: with appraisal theory and techniques (i) There must be no factors that in- so that they can select appropriate dicate that the firm would not exercise cases for review if discretionary sam- the care and diligence required of a pling is used, and prescribe appropriate lender originating and closing VA corrective action(s) in the appraisal re- loans on the automatic basis; and view process when discrepancies or (ii) In the event the firm, any mem- problems are identified. Copies of the ber of the board of directors, or any lender’s quality control plan or self-po- principal officer has ever been debarred licing system evidencing appraisal re- or suspended by any Federal agency or lated matters must be provided to the department, or any of its directors or VA office of jurisdiction. officers has been a director or officer of (10) Courtesy closing. The lender-appli- any other lender or corporation that cant must certify to VA that it will not was so debarred or suspended, or if the close loans on an automatic basis as a lender applicant ever had a servicing courtesy or accommodation for other contract with an investor terminated mortgage lenders, whether or not such for cause, a statement of the facts lenders are themselves approved to must be submitted with the application close on an automatic basis without for automatic authority. the express approval of VA. However, a (9) Quality control system. In order to lender with automatic authority may be approved as a non-supervised lender close loans for which information and for automatic-processing authority, supporting credit data have been devel- the lender must implement a written oped on its behalf by a duly authorized quality control system which ensures agent. compliance with VA requirements. The (11) Probation. Lenders meeting these lender must agree to furnish findings requirements will be approved to close under its systems to VA on demand. VA loans on an automatic basis for a 1- The elements of the quality control year period. At the end of this period, system must include the following: the lender’s quality of underwriting, (i) Underwriting policies. Each office of the completeness of loan submissions, the lender shall maintain copies of VA compliance with VA requirements and credit standards and all available VA procedures, and the delinquency and underwriting guidelines. foreclosure rates will be reviewed.

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(12) Extensions of automatic authority. formed. Any such acts, errors or omis- When a lender wants its automatic au- sions will be treated as those of the thority extended to another State, the lender and appropriate sanctions may request must be submitted, with the be imposed against the lender and its fee designated in paragraph (e)(5) of agent. Lenders requesting an agent this section, to the VA regional office must submit the following documenta- having jurisdiction in the State where tion to the VA regional office having the lender’s corporate office is located. jurisdiction for the lender’s corporate (i) When a lender wants its automatic office: authority to include loans involving a (i) A corporate resolution certifying real estate brokerage and/or a residen- that the lender takes full responsi- tial builder or developer in which it has bility for all acts, errors and omissions a financial interest, owns, is owned by, of the agent that it is requesting. The or with which it is affiliated, the fol- corporate resolution must also identify lowing documentation must be sub- the agent’s name and address, and the mitted: geographic area in which the agent will (A) A corporate resolution from the be originating and/or closing VA loans; lender and each affiliate indicating whether the agent is authorized to that they are separate entities oper- issue interest rate lock-in agreements ating independently of each other. The on behalf of the lender; and outline the lender’s corporate resolution must in- functions the agent is to perform. Al- dicate that it will not give more favor- ternatively, the lender may submit a able underwriting consideration to its blanket corporate resolution which affiliate’s loans, and the affiliate’s cor- sets forth the functions of any and all porate resolution must indicate that it agents and identifies individual agents will not seek to influence the lender to by name, address, and geographic area give their loans more favorable under- in separate letters which refer to the writing consideration. blanket resolution. (B) Letters from permanent investors (ii) When the VA regional office hav- indicating the percentage of all VA ing jurisdiction for the lender’s cor- loans based on the affiliate’s produc- porate office acknowledges receipt of tion originated by the lender over a 1- the lender’s request in writing, the year period that are past due 90 days or agent is thereby authorized to origi- more. This delinquency ratio must be nate VA loans on the lender’s behalf. no higher than the national average for (Authority: 38 U.S.C. 501(a), 3702(d)) the same period for all mortgage loans. (ii) When a lender wants its auto- (c) A lender approved to close loans matic authority extended to additional on the automatic basis who subse- States, the lender must indicate how it quently fails to meet the requirements plans to originate VA loans in those of this section must report to VA the States. Unless a lender proposes a tele- circumstances surrounding the defi- marketing plan, VA requires that a ciency and the remedial action to be lender have a presence in the State, taken to cure it. Failure to advise VA that is, a branch office, an agent rela- in a timely manner could result in a tionship, or that it is a reasonable dis- lender’s loss of its approval to close VA tance from one of its offices in an adja- loans on the automatic basis. cent State, i.e., 50 miles. If the request is based on an agency relationship, the (Authority: 38 U.S.C. 501(a), 3702(d)) documentation outlined in paragraph (d) Annual recertification. Non-super- (b)(13) must be submitted with the revised lenders of the class described in quest for extension. 38 U.S.C. 3702(d)(3) must be recertified (13) Use of agents. A lender using an annually for authority to process loans agent to perform a portion of the work on the automatic basis. The following involved in originating and closing a minimum annual recertification re- VA-guaranteed loan on an automatic quirements must be met by each lender basis must take full responsibility by approved for automatic authority: certification for all acts, errors and (1) Financial requirements. A lender omissions of the agent or other entity must submit, within 120 days following and its employees for the work per- the end of its fiscal year, an audited

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and certified financial statement with § 36.4349 Withdrawal of authority to a classified balance sheet or a separate close loans on the automatic basis. footnote for adjusted net worth to VA (a)(1) As provided in 38 U.S.C. 3702(e), Central Office (264) for review. The the authority of any lender to close same minimum financial requirements loans on the automatic basis may be described in § 36.4348(b)(5) must be withdrawn by the Secretary at any maintained and verified annually in time upon 30 days notice. The auto- order to be recertified for automatic matic processing authority of both su- authority. pervised and nonsupervised lenders (2) Processing annual lender data. The may be withdrawn for engaging in VA regional office having jurisdiction practices which are imprudent from a for the lender’s corporate office will lending standpoint or which are preju- mail an annual notice to the lender re- dicial to the interests of veterans or questing current information on the the Government but are of a lesser de- lender’s personnel and operation. The gree than would warrant complete sus- lender is required to complete the form pension or debarment of the lender and return it with the appropriate an- from participation in the program. nual renewal fees to the VA regional (2) Automatic-processing authority office. may be withdrawn at any time for failure to meet basic qualifying and/or an- (Authority: 38 U.S.C. 501(a), 3702(d)) nual recertification criteria. (i) Non-supervised lenders. (A) Auto- (e) Lender fees. To participate as a VA matic authority may be withdrawn for automatic lender, non-supervised lend- lack of a VA-approved underwriter, ers of the class described in 38 U.S.C. failure to maintain $50,000 in working 3702(d)(3) shall pay fees as follows: capital or $250,000 in adjusted net (1) $500 for new applications; worth, or failure to file required finan- (2) $200 for reinstatement of lapsed or cial information. terminated automatic authority; (B) During the 1-year probationary (3) $100 for each underwriter ap- period for newly approved lenders, proval; automatic authority may be tempo- (4) $100 for each agent approval; rarily or permanently withdrawn for (5) A minimum fee of $100 for any any of the reasons set forth in this sec- other VA administrative action per- tion regardless of whether deficiencies taining to a lender’s status as an auto- previously have been brought to the at- matic lender; tention of the probationary lender. (6) $200 annually for certification of (ii) Supervised lenders. Automatic au- home offices; and thority will be withdrawn for loss of (7) $100 annually for each agent re- status as an entity subject to examina- newal. tion and supervision by a Federal or (f) Supervised lenders of the classes State supervisory agency as required described in paragraphs (d)(1) and (d)(2) by 38 U.S.C. 3702(d). of 38 U.S. Code 3702 participating in VA’s Loan Guaranty Program shall pay (Authority: 38 U.S.C. 501(a), 3702(d)) fees as follows: (3) Automatic processing authority (1) $100 fee for each agent approval; may also be withdrawn for any of the and causes for debarment set forth in 2 (2) $100 annually for each agent re- CFR parts 180 and 801. newal. (b) Authority to close loans on the automatic basis may also be tempo- (Authority: 38 U.S.C. 501(a) and 3703(c)(1)) rarily withdrawn for a period of time under the following schedule. (g) Lenders participating in VA’s (1) Withdrawal for 60 days: Lender Appraisal Processing Program (i) Automatic loan submissions show shall pay a fee of $100 for approval of deficiencies in credit underwriting, each staff appraisal reviewer. such as use of unstable sources of in- [56 FR 40561, Aug. 15, 1991, as amended at 57 come to qualify the borrower, ignoring FR 829, Jan. 9, 1992; 57 FR 40616, Sept. 4, 1992; significant adverse credit items affect- 63 FR 12004, Mar. 12, 1998] ing the applicant’s creditworthiness,

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etc., after such deficiencies have been entitlement (e.g., knowingly permit- repeatedly called to the lender’s atten- ting the veteran to violate occupancy tion; requirements, lender involvement in (ii) Employment or deposit sale of veteran’s entitlement, etc.). verifications are handcarried by appli- (4) A continuation of actions that cants or otherwise improperly per- have led to previous withdrawal of mitted to pass through the hands of a automatic authority justifies with- third party; drawal of automatic authority for the (iii) Automatic loan submissions are next longer period of time. consistently incomplete after such de- (5) Withdrawal of automatic proc- ficiencies have been repeatedly called essing authority does not prevent a to the lender’s attention by VA; or lender from processing VA guaranteed (iv) There are continued instances of loans on the prior approval basis. disregard of VA requirements after (6) Action by VA to remove a lender’s they have been called to the lender’s automatic authority does not prevent attention. VA from also taking debarment or sus- (2) Withdrawal for 180 days: pension action based on the same con- (i) Loans are closed automatically duct by the lender. which conflict with VA credit stand- (7) VA field facilities are authorized ards and which would not have been to withdraw automatic privileges for 60 made by a lender acting prudently; days, based on any of the violations set (ii) The lender fails to disclose to VA forth in paragraphs (b)(1) through (b)(3) significant obligations or other information so material to the veteran’s of this section, for nonsupervised lend- ability to repay the loan that undue ers without operations in other sta- risk to the Government results; tions’ jurisdictions. All determinations (iii) Employment or deposit regarding withdrawal of automatic au- verifications are allowed to be thority for longer periods of time or handcarried by applicant or otherwise multi-jurisdictional lenders must be mishandled, resulting in the submis- made in Central Office. sion of significant misinformation to (c) VA will provide 30 days notice of VA; a withdrawal of automatic authority in (iv) Substantiated complaints are re- order to enable the lender to either ceived that the lender misrepresented close or obtain prior approval for a VA requirements to veterans to the loan on which processing has begun. detriment of their interests (e.g., vet- There is no right to a formal hearing to eran was dissuaded from seeking a contest the withdrawal of automatic lower interest rate based on lender’s processing privileges. However, if with- incorrect advice that such options were in 15 days after receiving notice the precluded by VA requirements); lender requests an opportunity to con- (v) Closing documentation shows in- test the withdrawal, the lender may stances of improper charges to the vet- submit in person, in writing, or eran after the impropriety of such through a representative, information charges has been called to the lender’s and argument in opposition to the attention by VA, or refusal to refund withdrawal. such charges after notification by VA; (d) If the lender’s submission in oppo- or sition raises a dispute over facts mate- (vi) There are other instances of lend- rial to the withdrawal of automatic au- er actions which are prejudicial to the thority, the lender will be afforded an interests of veterans such as deliberate opportunity to appear with a rep- delays in scheduling loan closings. resentative, submit documentary evi- (3) Withdrawal for a period of from dence, present witnesses, and confront one year to three years: any witnesses VA presents. The Under (i) The lender fails to properly dis- Secretary for Benefits will appoint a burse loans (e.g., loan disbursement hearing officer or panel to conduct the checks returned due to insufficient hearing. funds); (e) A transcribed record of the pro- (ii) There is involvement by the lend- ceedings shall be made available at er in the improper use of a veteran’s cost to the lender, upon request, unless

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the requirement for a transcript is ment for free assignability is adhered waived by mutual agreement. to and, (iii) that the assignability and (f) In actions based upon a conviction other provisions applicable to the or civil judgment, or in which there is leasehold estate are sufficient to pro- no genuine dispute over material facts, tect the interests of the veteran and the Under Secretary for Benefits shall the Government and are otherwise ac- make a decision on the basis of all the ceptable; or information in the administrative (3) A life estate, provided that the re- record, including any submission made mainder and reversionary interests are by the lender. subjected to the lien; or (g) In actions in which additional (4) A beneficial interest in a rev- proceedings are necessary to determine ocable Family Living Trust that en- disputed material facts, written find- sures that the veteran, or veteran and ings of fact will be prepared by the spouse, have an equitable life estate, hearing officer or panel. The Under provided the lien attaches to any re- Secretary for Benefits shall base the mainder interest and the trust arrange- decision on the facts as found, together ment is valid under State law. with any information and argument The title to such estate shall be such submitted by the lender and any other as is acceptable to informed buyers, information in the administrative title companies, and attorneys, gen- record. erally, in the community in which the property is situated, except as modified (Authority: 38 U.S.C. 501, 1803(c)(1)) by paragraph (b) of this section. (The information collection requirements in (b) Any such property or estate will this section have been approved by the Office not fail to comply with the require- of Management and Budget under control ments of paragraph (a) of this section numbers 2900–0574) by reason of the following: [56 FR 40562, Aug. 15, 1991, as amended at 61 (1) Encroachments; FR 28059, June 4, 1996; 63 FR 12007, Mar. 12, (2) Easements; 1998; 72 FR 30243, May 31, 2007] (3) Servitudes; (4) Reservations for water, timber, or § 36.4350 Estate of veteran in real subsurface rights; property. (5) Sale and lease restrictions: (a) The estate in the realty acquired (i) Except as to condominiums, the by the veteran, wholly or partly with right in any grantor or cotenant in the the proceeds of a guaranteed or insured chain of title, or a successor of either, loan, or owned by him and on which to purchase for cash, which right was construction, or repairs, or alterations established by an instrument recorded or improvements are to be made, shall prior to December 1, 1976, and by the be not less than: terms thereof is exercisable only if: (1) A fee simple estate therein, legal (A) An owner elects to sell, or equitable; or (B) The option price is not less than (2) A leasehold estate running or re- the price at which the then owner is newable at the option of the lessee for willing to sell to another, and a period of not less than 14 years from (C) Exercised within 30 days after no- the maturity of the loan, or to any ear- tice is mailed by registered mail to the lier date at which the fee simple title address of optionee last known to the will vest in the lessee, which is assign- then owner of the then owner’s election able or transferable, if the same be sub- to sell, stating the price and the iden- jected to the lien; however, a leasehold tity of the proposed vendee; estate which is not freely assignable (ii) A condominium estate estab- and transferable will be considered an lished by the filing for record of the acceptable estate if it is determined by Master Deed, or other enabling docu- the Under Secretary for Benefits, or ment before December 1, 1976 will not the Director, Loan Guaranty Service, fail to comply with the requirements of (i) that such type of leasehold is cus- paragraph (a) of this section by reason tomary in the area where the property of: is located, (ii) that a veteran or vet- (A) Prohibition against leasing a unit erans will be prejudiced if the require- for a period of less than 6 months.

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(B) The existence of a right of first chase is exercised within 90 days after option to purchase or right to provide notice by the purchaser to the agency a substitute buyer reserved to the con- of intention to sell; dominium association provided such (2) If the property is resold within a option or right is exercisable only if: time period as established by local law (1) An owner elects to sell, or ordinance after the purchaser ac- (2) The option price is not less than quires title, a governmental agency the price at which the then owner is may specify a maximum price which willing to sell to another, the veteran may receive for the prop- (3) The terms and conditions under erty upon resale; or which the option price is to be paid are (3) Such other restriction approved identical to or are not less favorable by the Secretary designed to insure ei- to the owner than the terms and condi- ther that a property acquired under tions under which the owner was will- such program again be made available ing to sell to the owner’s prospective to low- or moderate-income purchasers, buyer, and or to prevent a private purchaser from (4) Notice of the association’s deci- obtaining a windfall profit on the re- sion to exercise the option must be sale of such property, while assuring mailed to the owner by registered or that the purchaser has a reasonable op- certified mail within 30 days after no- portunity to dispose of the property tice is mailed by registered or certified without undue difficulty at a reason- mail to the address of the association able price. last known to the owner of the owner’s The sale price of a property under any election to sell, stating the price, of the restrictions of paragraph terms of sale, and the identity of the (b)(5)(iv)(A) of this section shall not be proposed vendee; less than the lowest of the following: (iii) Any property subject to a re- The price designated by the owner as striction on the owner’s right to con- the asking price; the appraised value of vey to any party of the owner’s choice, the property; or the original purchase which restriction is established by a price of the property, increased by a document recorded on or after Decem- factor reflecting all or a reasonable ber 1, 1976, will not qualify as security portion of the increased costs of hous- for a guaranteed or insured loan. A pro- ing or the percentage increase in me- hibition or restriction on leasing an indian income in the area between the dividual unit in a condominium will date of original purchase and resale, not cause the condominium estate to plus the reasonable value or actual fail to qualify as security for such loan, costs of any capital improvements provided the restriction is in accord- made by the owner plus a reasonable ance with § 36.4358(c); real estate commission less the cost of (iv) Notwithstanding the provisions necessary repairs required to place the of paragraphs (b)(5) (i), (ii), and (iii) of property in saleable condition; or other this section, a property shall not be reasonable formula approved by the considered ineligible pursuant to para- Secretary. The veteran must be fully graph (a) of this section if: informed and consent in writing to the (A) The veteran obtained the prop- housing restrictions. A copy of the vet- erty under a State or local political eran’s consent statement must be for- subdivision program designed to assist warded with the application for home low- or moderate-income purchasers, loan guaranty or the report of a home and as a condition the purchaser must loan processed on the automatic basis; agree to one or more of the following or restrictions: (1) If the property is resold within a (Authority: 38 U.S.C. 3703(c)) time period as established by local law (B) A recorded restriction on title de- or ordinance, after the purchaser ac- signed to provide housing for older per- quires title, the purchaser must first sons, provided that the restriction is offer the property to the government acceptable under the provisions of the housing agency, or a low- or moderate- Fair Housing Act, title VIII of the Civil income purchaser designated by such Rights Act of 1968, as amended by the agency, provided the option to pur- Fair Housing Amendments Act of 1988,

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42 U.S.C. 3601 et seq. The veteran must existed for more than 1 year, are not be fully informed and consent in writ- the subject of pending or threatened ing to the restrictions. A copy of the litigation, and which do not provide for veteran’s consent statement must be a reversion or termination of title, or forwarded with the application for condemnation by municipal authori- home loan guaranty or the report of a ties, or, a lien for liquidated damages home loan processed on the automatic which may be superior to the lien of basis; the guaranteed or insured mortgage. (Authority: 38 U.S.C. 501, 3703(c)(1)) (4) Easements. (i) Easements for public utilities along one or more of the (6) Building and use restrictions property lines and easements for drain- whether or not enforceable by a re- age or irrigation ditches, provided the verter clause if there has been no exercise of the rights thereof do not breach of the conditions affording a interfere with the use of any of the right to an exercise of the reverter; buildings or improvements located on (7) Any other covenant, condition, restriction, or limitation approved by the the subject property. Secretary in the particular case. Such (ii) Mutual easements for joint drive- approval shall be a condition precedent ways located partly on the subject to the guaranty or insurance of the property and partly on adjoining prop- loan; erty, provided the agreement is re- Provided, That the limitations on the corded in the public records. quantum or quality of the estate or (iii) Easements for underground con- property that are indicated in this duits which are in place and which do paragraph, insofar as they may materi- not extend under any buildings in the ally affect the value of the property for subject property. the purpose for which it is used, are (5) Encroachments. (i) On the subject taken into account in the appraisal of property by improvements on the ad- reasonable value required by 38 U.S.C. joining property where such encroach- chapter 37. ments do not exceed 1 foot within the (c) The following limitations on the subject boundaries, provided such en- quantum or quality of the estate or croachments do not touch any build- property shall be deemed for the pur- ings or interfere with the use or enjoy- poses of paragraph (b) of this section to ment of any building or improvement have been taken into account in the on the subject property. appraisal of residential property and determined by the Secretary as not (ii) By hedges or removable fences be- materially affecting the reasonable longing to subject or adjoining prop- value of such property: erty. (1) Building or use restrictions. Pro- (iii) Not exceeding 1 foot on adjoining vided, (i) no violation exists, (ii) the property by driveways belonging to proposed use by a veteran does not subject property, provided there exists presage a violation of a condition af- a clearance of at least 8 feet between fording a right of reverter, and (iii) any the buildings on the subject property right of future modification contained and the property line affected by the in the building or use restrictions is encroachment. not exercisable, by its own terms, until (6) Variations of lot lines. Variations at least 10 years following the date of between the length of the subject prop- the loan. erty lines as shown on the plot plan or (2) Violations of racial and creed re- other exhibits submitted to Depart- strictions. Violations of a restriction ment of Veterans Affairs and as shown based on race, color, creed, or national by the record or possession lines, pro- origin, whether or not such restriction vided such variations do not interfere provides for reversion or forfeiture of with the current use of any of the im- title or a lien for liquidated damages in the event of a breach. provements on the subject property (3) Violations of building or use restric- and do not involve a deficiency of more tions of record. Violations of building or than 2 percent with respect to the use restrictions of record which have length of the front line or more than 5

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percent with respect to the length of such entity for the homeowner’s share any other line. of the costs of the management, operation, or maintenance of property, (Authority: 38 U.S.C. 501, 3703(c), 3712(g)) services or programs within and for the [15 FR 4550, July 18, 1950, as amended at 24 benefit of the development or commu- FR 2656, Apr. 7, 1959; 33 FR 18026, Dec. 4, 1968; nity in which the veteran’s realty is lo- 34 FR 11095, July 1, 1969; 41 FR 44039, Oct. 6, cated, if the Secretary determines that 1976; 44 FR 47338, Aug. 13, 1979; 45 FR 55720, the interests of the veteran-borrower Aug. 21, 1980; 47 FR 49394, Nov. 1, 1982; 55 FR and of the Government will not be prej- 25976, June 26, 1990; 61 FR 28059, June 4, 1996] udiced by the operation of such cov- § 36.4351 Loans, first, second, or unse- enant. In respect to any such superior cured. lien to be created after June 6, 1969, the Secretary’s determination must have Loans for the purchase of real prop- been made prior to the recordation of erty or a leasehold estate as limited in the covenant. the regulations concerning guaranty or insurance of loans to veterans, or for [40 FR 34594, Aug. 18, 1975, as amended at 61 the alteration, improvement, or repair FR 28059, June 4, 1996] thereof, and for more than $1,500 and more than 40 percent of the reasonable § 36.4353 Combination residential and business property. value of such property or estate prior thereto shall be secured by a first lien If otherwise eligible, a loan for the on the property or estate. Loans for purchase or construction of a combina- such alteration, improvement, or re- tion of residential property and busi- pairs for more than $1,500 but 40 per- ness property which the veteran pro- cent or less of the prior reasonable poses to occupy in part as a home will value of the property shall be secured be eligible under 38 U.S.C. 3710, if the by a lien reasonable and customary in property is primarily for residential the community for the type of alter- purposes and no more than one busi- ation, improvement, or repair financed. ness unit is included in the property. Those for $1,500 or less need not be se- [40 FR 34594, Aug. 18, 1975] cured, and in lieu of the title examination the lender may accept a statement § 36.4354 [Reserved] from the borrower that he or she has an interest in the property not less § 36.4355 Supplemental loans. than that prescribed in § 36.4350(a). (a) Any loan for the alteration, re- [43 FR 51016, Nov. 2, 1978] pair, improvement, extension, replacement, or expansion of a home, with re- § 36.4352 Tax, special assessment and spect to which a guaranteed or insured other liens. obligation of the borrower is currently Tax liens, special assessment liens, outstanding, may be reported for guar- and ground rents shall be disregarded anty or insurance coverage, if such with respect to any requirement that loan is made by the holder of the cur- loans shall be secured by a lien of spec- rently outstanding obligation, notwith- ified dignity. With the prior approval standing the fact no guaranty entitle- of the Secretary, Under Secretary for ment remains available to the bor- Benefits, or Director, Loan Guaranty rower; Service, liens retained by nongovern- Provided, That if no entitlement re- mental entities to secure assessments mains available the maximum amount or charges for municipal type services payable on the revised guaranty shall and facilities clearly within the public not exceed the amount payable on the purpose doctrine may be disregarded. original guaranty on the date of clos- In determining whether a loan for the ing the supplemental loan, and the per- purchase or construction of a home is centage of guaranty shall be based secured by a first lien the Secretary upon the proportion the said maximum may also disregard a superior lien cre- amount bears to the aggregate indebt- ated by a duly recorded covenant run- edness, or, in the case of an insured ning with the realty in favor of a pri- loan, no additional credit to the hold- vate entity to secure an obligation to er’s insurance account may be made:

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Provided further, That the prior ap- chase a one-family residential unit in a proval of the Secretary shall be re- condominium housing development or quired if project shall be eligible for guaranty or (1) The loan will be made by a lender insurance to the same extent and on who is not the holder of the currently the same terms as other loans under 38 guaranteed or insured obligation; or U.S.C. 3710 provided the loan conforms (2) The loan will be made by a lender to the provisions of chapter 37, title 38 not of a class specified in 38 U.S.C. U.S.C., except for sections 1811 (direct 3702(d); or loans), and 1827 (structural defects). (3) An obligor liable on the currently The loan must also conform to the oth- outstanding obligation will be released erwise applicable provisions of the reg- from personal liability. ulations concerning the guaranty or in- In any case in which the unpaid bal- surance of loans to veterans. Sections ance of the prior loan currently out- 36.4353, 36.4355, and 36.4364 shall not be standing is combined or consolidated applicable. with the amount of the supplemental (b) Definitions. On and after July 1, loan, the entire aggregate indebtedness 1979, the following definitions shall be shall be repayable in full within the applicable to each condominium loan maximum maturity currently pre- entitled to be guaranteed or insured, scribed by statute for the original loan. and shall be applicable to such loans No supplemental loan for the repair, al- previously guaranteed or insured to the teration, or improvement of residential extent that no legal rights vested property will be eligible for guaranty thereunder are impaired. Whenever or insurance unless such repair, alter- used in 38 U.S.C. chapter 37 or the ation, or improvement substantially § 36.4300 series, unless the context oth- protects or improves the basic liv- erwise requires, the terms defined in ability or utility of the property in- this paragraph shall have the meaning volved. stated. (b) Such loans shall be secured as re- (1) Affiliate of declarant. Affiliate of quired in § 36.4351: Provided, That a lien declarant means any person or entity of lesser dignity than therein specified which controls, is controlled by, or is will suffice if the lien obtained is im- under common control with, a declar- mediately junior to the lien of the ant. original guaranteed or insured obliga- (i) A person or entity shall be consid- tion: Provided further, The liens of suc- ered to control a declarant if that per- cessive supplemental loans may be of son or entity is a general partner, offi- lesser dignity so long as they are im- cer, director, or employee of the de- mediately junior to the lien of the last clarant who: previous guaranteed or insured obliga- (a) Directly or indirectly or acting in tion having a lien of required dignity. concert with one or more persons, or (c) Upon providing or extending guar- through one or more subsidiaries, anty or insurance coverage in respect owns, controls, or holds with power to to any such supplemental loan, the vote, or holds proxies representing, rights of the Secretary to the proceeds more than 20 percent of the voting of the sale of security shall be subordi- shares of the declarant; nate to the right of the holder to sat- (b) Controls in any manner the elec- isfy therefrom the indebtedness out- tion of a majority of the directors of standing on the original and supple- the declarant; or mental loans. (c) Has contributed more than 20 per- [13 FR 7742, Dec. 15, 1948, as amended at 19 cent of the capital of the declarant. FR 4003, July 1, 1954; 21 FR 5015, July 6, 1956; (ii) A person or entity shall be con- 24 FR 2656, Apr. 7, 1959; 40 FR 34594, Aug. 18, sidered to be controlled by a declarant 1975] if the declarant is a general partner, officer, director, or employee of that per- § 36.4356 Condominium loans—gen- son or entity who: eral. (a) Directly or indirectly or acting in (a) Authority—applicability of other concert with one or more persons or loan guaranty regulations, 38 CFR Part through one or more subsidiaries, 36. A loan to an eligible veteran to pur- owns, controls, or holds with power to

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vote, or holds proxies representing, and the declarant is no longer in con- more than 20 percent of the voting trol of the owners’ association and /or shares of that person or entity; marketing units for initial transfer to (b) Controls in any manner the elec- individual unit owners. tion of a majority of the directors of (7) Expandable condominium. A project that person or entity; or which may be increased in size by the (c) Has contributed more than 20 per- declarant. An expandable condominium cent of the capital of that person or en- is constructed in phases (or stages). tity. After each phase is completed and con- (2) Condominium. Unless otherwise stituted, the common estates are provided by State law, a condominium merged. Each unit owner, thereby, is a form of ownership in which the gains an individual interest in all of buyer receives title to a three dimen- the facilities of the common estate. sional air space containing the indi- (8) Foreclosure. Foreclosure shall vidual living unit together with an un- mean the termination of a lien by ei- divided interest or share in the owner- ther judicial or nonjudicial procedures ship of common elements (restatement in accordance with local law or the vol- of § 36.4301, Condominium). untary transfer of property by a deed- (3) Conversion condominium. Condo- in-lieu of foreclosure or similar proce- minium projects not originally built dures. and sold as condominiums but subse- (9) High rise condominium. A condo- quently converted to the condominium minium project which is a multi-story form of ownership. elevator building. (4) Declarant. Any person who has ex- (10) Horizontal condominium. A condo- ecuted a declaration or an amendment minium project in which generally no to a declaration to add additional real part of a living unit extends over or estate to the project or any successors under another living unit. or assigns of the declarant who offers (11) Low rise condominium. A condo- to sell or sells units in the condominium project in which all or a part minium project and who assumes de- of a living unit extends over or under clarant rights in the project including another living unit, e.g., garden apart- the right to: Add, convert or withdraw ment or walk-up project. real estate from the condominium (12) Proposed condominium. A condo- project; maintain sales offices, man- minium project that is to be con- agement offices and rental units; exer- structed or is under construction. In cise easements through the common the case of a condominium conversion, elements for the purpose of making im- the declarant proposes to convert a provements within the condominium; building or buildings to the condo- or exercise control of the owner’s asso- minium form of ownership, or the de- ciation. Declarant is further defined as clarant is in the process of converting any sponsor of a project or affiliate of the building or buildings to the condo- the declarant who is acting on behalf of minium form of ownership. or exercising the rights of the declar- (13) Series condominium. A number of ant. adjoining but separately constituted (5) Existing—declarant in control or condominiums. An association of own- marketing units. A condominium in ers is established for each project, and which all onsite or offsite improve- each association is responsible for ments were completed or the conver- maintenance and upkeep of the com- sion was completed prior to appraisal mon elements in its own project. Cross- by the Department of Veterans Affairs, easements between the separate con- but the declarant is in control of the dominiums may be created to permit owners’ association and/or is currently members of the separate condomin- marketing units for initial transfer to iums to use the common areas of the individual unit owners. other condominiums. (6) Existing—resale. A condominium in (c) Project approval. Prior to Depart- which all onsite or offsite improvement of Veterans Affairs guaranty of ments were completed, or the conver- an individual unit loan in a condo- sion was completed prior to appraisal minium, the legal documentation es- by the Department of Veterans Affairs, tablishing the condominium project or

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development must be approved by the other laws which apply to the condo- Secretary. minium. (2) Recordation. The declaration and (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) all amendments or modifications [44 FR 47338, Aug. 13, 1979, as amended at 50 thereof shall be placed of record in the FR 5978, Feb. 13, 1985] manner prescribed by the appropriate jurisdiction. If recording of plats, § 36.4357 Acceptable ownership ar- plans, or bylaws or equivalent docu- rangements and documentation. ments and all amendments or modi- (a) Types of condominium ownership. fications thereof is the prevailing prac- The following types of basic ownership tice or is required by law within the ju- arrangements are generally acceptable risdiction where the project is located, provided they are established in com- then such documents shall be placed of pliance with the applicable condo- record. If the bylaws are not recorded, minium law of the jurisdiction(s) in then covenants, restrictions and other which the condominium is located: matters requiring record notice should (1) Ownership of units by individual be contained in the declaration or owners coupled with an undivided in- equivalent document. terest in all common elements. (3) Availability. The owner’s associa- (2) Ownership of units by individual tion shall be required to make avail- owners coupled with an undivided in- able to unit owners, lenders and the terest in general common elements and holders, insurers and guarantors of the specified limited common elements. first mortgage on any unit, current (3) Individual ownership of units cou- copies of the declaration, bylaws and pled with an undivided interest in the other rules governing the condo- general common elements and/or lim- minium, and other books, records and ited common elements, with title to financial statements of the owners’ as- additional property for common use sociation. The owners’ association also vested in an association of unit owners, shall be required to make available to with mandatory membership by unit prospective purchasers current copies owners or owners’ associations. Any of the declaration, bylaws, other rules such arrangement must not be pre- governing the condominium, and the cluded by applicable State law. most recent annual audited financial statement, if such is prepared. ‘‘Avail- (Authority: 38 U.S.C. 501, 3710(a)(6)) able’’ as used in this paragraph (c)(3) (b) Estate of unit owner. The legal es- shall at least mean available for in- tate of each unit owner must comply spection, upon request, during normal with the provisions of § 36.4350. The dec- business hours or under other reason- laration or equivalent document shall able circumstances. allocate an undivided interest in the (4) Amendments to documents after De- common elements to each unit. Such partment of Veterans Affairs project ap- interest may be allocated equally to proval. While the declarant is in con- each unit, may be proportionate to trol of the owners’ association, amend- that unit’s relative size or value, or ments to the declaration, bylaws or may be allocated according to any other enabling documentation must be other specified criteria provided that approved by the Secretary. The declar- the method chosen is equitable and ant should have proposed amendments reasonable for that condominium. reviewed prior to recordation. This provision does not apply to amendments (Authority: 38 U.S.C. 501(1), 1803(c)(1), (d)(3), which annex additional phases to the 1810(a)(6)) condominium regime in accordance (c) Condominium documentation—(1) with a general plan of development Compliance with applicable law. The dec- (§§ 36.4360(a)(3) and 36.4360a(b)(6)). laration, bylaws and other enabling documentation shall conform to the (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) laws governing the establishment and (d) Real property descriptions in the maintenance of condominium regimes declaration—(1) Clarity—conformity with within the jurisdiction in which the the law of the jurisdiction. The descrip- condominium is located, and to all tion of the units, common elements,

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any recreational facilities and other § 36.4358 Rights and restrictions. related amenities, and any limited (a) Declarant’s rights and restrictions— common elements shall be clear and in (1) Disclosure and reasonableness of re- conformity with the law of the juris- served rights. Any right reserved by the diction where the project is located. declarant must be reasonable and set Responsibility for maintenance and re- forth in the declaration. pair of all portions of the condominium (2) Examples of reserved rights of de- shall be set forth clearly. clarant, sponsor, or affiliate of declarant (2) Developmental plan—proposed con- which are usually unacceptable. Binding dominiums. The declaration or other le- the owners’ association either directly gally enforceable and binding docu- or indirectly to any of the following ment must state in a reasonable man- agreements is not acceptable unless ner the overall development plan of the the owner’s association shall have a condominium, including building right of termination thereof which is types, architectural style and the size exercisable without penalty at any of the units for those phases of the con- time after transfer of control, upon not dominium which are required to be more than 90 days’ notice to the other built. Under the applicable provisions party thereto: of the declaration or such other legally (i) Any management contract, em- enforceable and binding document, the ployment contract or lease of rec- development of the required portion of reational or parking areas or facilities; the condominium must be consistent (ii) Any contract or lease, including with the overall plan, except that the franchises and licenses, to which a de- declarant may reserve the right to clarant is a party. change the overall plan or decide not The requirements of paragraphs to construct planned units or improve- (a)(2)(i) and (ii) of this section do not ments to the common elements if the apply to acceptable ground leases. declaration sets forth the conditions (3) Examples of reserved rights which required to be satisfied prior to the ex- are usually acceptable. The following ercise of that right the time within rights in the common elements may which the right may be exercised, and usually be reserved by the declarant any other limitations and criteria that for a reasonable period of time, subject would be necessary or appropriate to a concomitant obligation to restore: under the particular circumstances. (i) Easement over and upon the com- Such conditions, time restraints and mon elements and upon lands appur- other limitations must be reasonable tenant to the condominium for the pur- in light of the overall plan for the con- pose of completing improvements for dominium. In an expandable project, which provision is made in the declara- additional phases which are not re- tion, but only if access thereto is oth- quired to be built may be described in erwise not reasonably available. the development plan in very general (ii) Easement over and upon the com- terms, or the declaration may provide mon elements for the purpose of mak- that the declarant makes no assuring repairs required pursuant to the ances concerning the construction, declaration or contracts of sale made building types, architectural style and with unit purchasers. size of the units, etc. of these phases. (iii) Right to maintain facilities in However, the minimum number of the common areas which are identified units to be built should be that which in the declaration and which are rea- would be adequate to reasonably sup- sonably necessary to market the units. port the common elements. (See These may include sales and manage- § 36.4360(a)(6).) ment offices, model units, parking (Approved by the Office of Management and areas, and advertising signs. Budget under control number 2900–0448) (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) (b) Owners’ association’s rights and re- [44 FR 47339, Aug. 13, 1979, as amended at 50 strictions—(1) Right of entry upon units FR 5979, Feb. 13, 1985; 50 FR 26359, June 26, and limited common elements. The own- 1985] ers’ association shall be granted a right

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of entry upon unit premises and any project operations equal to at least a 2 limited common elements to effect months’ estimated common area emergency repairs, and a reasonable charge for each unit. right of entry thereupon to effect other (iii) Priority of lien. Any assessment repairs, improvements, replacement or lien must be subordinate to any De- maintenance as necessary. partment of Veterans Affairs guaran- (2) Power to grant rights and restric- teed mortgage except as provided in tions in common elements. The owners’ § 36.4352. A lien for common expense association should be granted other charges and assessments shall not be rights, such as the right to grant util- affected by any sale or transfer of a ity easements under, through or over unit except that a sale or transfer pur- the common elements, which are rea- suant to a foreclosure of a first mort- sonably necessary to the ongoing de- gage shall extinguish a subordinate velopment and operation of the project. lien for common expense charges and (3) Responsibility for damage to common assessments which became payable elements and units. A provision may be prior to such sale or transfer. Any such made in the declaration or bylaws for sale or transfer pursuant to a fore- allocation of responsibility for dam- closure shall not relieve the purchaser ages resulting from the exercise of any or transferee of a unit from liability of the above rights. for, nor the unit so sold or transferred (4) Assessments—(i) Levy and collec- from the lien of, any common expense tion. The declaration or its equivalent charges thereafter becoming due. shall describe the authority of the owners’ association to levy and enforce the (Authority: 38 U.S.C. 501, 3703(c)(1), (d)(3), collection of general and special assess- 3710(a)(6)) ments for common expenses and shall describe adequate remedies for failure (c) Unit owners’ rights and restric- to pay such common expenses. The tions—(1) Obligation to pay expenses. The common expenses assessed against any declaration or equivalent document unit, with interest, late charges, costs shall establish a duty on each unit and a reasonable attorney’s fee shall be owner, including the declarant, to pay a lien upon such unit in accordance a proportionate share of common ex- with applicable law. Each such assess- penses upon being assessed therefor by ment, together with interest, late the owners’ association. Such share charges, costs, and attorney’s fee, shall may be allocated equally to each unit, also be the personal obligation of the may be proportionate to that unit’s person who was the owner of such unit common element interest, relative size at the time the assessment fell due. or value, or may be allocated according The personal obligation for delinquent to any other specified criteria provided assessments shall not pass to succes- that the method chosen is equitable sors in title or interest unless assumed and reasonable for that condominium. by them, or required by applicable law. (2) Voting rights. The declaration or Common expenses as used in this sub- equivalent document shall allocate a division shall mean expenditures made portion of the votes in the association or liabilities incurred by or on behalf of to each unit. Such portion may be allo- the owners’ association, together with cated equally to each unit, may be pro- any assessments for the creation and portionate to that unit’s common ex- maintenance of reserves. pense liability, common element inter- (ii) Reserves and working capital. est, relative size or value, or may be al- There shall be in new or proposed con- located according to any other speci- dominium projects (including conver- fied criteria provided that the method sions) a provision for an adequate re- is equitable and reasonable for that serve fund for the periodic mainte- condominium. The declaration may nance, repair and replacement of the provide different criteria for alloca- common elements, which fund shall be tions of votes to the units on par- maintained out of regular assessments ticular specified matters and may also for common expenses. Additionally, a provide different percentages of re- working capital fund must be estab- quired unit owner approvals for such lished for the initial months of the particular specified matters.

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(3) Ingress and egress of unit owners. ance to low- and moderate-income pur- There may not be any restriction upon chasers shall be governed by any unit owner’s right of ingress and § 36.4350(b)(5)(iv). egress to his or her unit. (4) Encroachments—units and common (Authority: 38 U.S.C. 3703(c)) elements—(i) Easements for encroach- (6) Leasing restrictions. Except as pro- ments. In the event any portion of the vided in this paragraph, there shall be common elements encroaches upon any no prohibition or restriction on a con- unit or any unit encroaches upon the dominium unit owner’s right to lease common elements or another unit as a his or her unit. The following restric- result of the construction, reconstruc- tions are acceptable: tion, repair, shifting, settlement, or (i) A requirement that leases have a movement of any portion of the im- minimum initial term of up to 1 year, provements, a valid easement for the or encroachment and for the maintenance of the same shall exist so long as the (ii) Age restrictions or restrictions encroachment exists. The declaration imposed by State or local housing au- may provide, however, reasonable lim- thorities which are allowable under its on the extent of any easement cre- § 36.4308(e) or § 36.4350(b)(5)(iv). ated by the overlap of units, common (d) Rights of action. The owners’ asso- elements, and limited common ele- ciation and any aggrieved unit owner ments resulting from such encroach- should be granted a right of action ments; or against unit owners for failure to com- (ii) Monuments as boundaries. If per- ply with the provisions of the declara- mitted by the governing law within the tion, bylaws, or equivalent documents, jurisdiction where the project is lo- or with decisions of the owners’ asso- cated, the existing physical boundaries ciation which are made pursuant to au- of a unit or a common element or the thority granted the owners’ association physical boundaries of a unit or a com- in such documents. Unit owners should mon element reconstructed in substan- have similar rights of action against tial accordance with the original plats the owners’ association. and plans thereof become its boundaries rather than the metes and bounds (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) expressed in the deed, plat or plan, re- [44 FR 47339, Aug. 13, 1979, as amended at 47 gardless of settling or lateral move- FR 49394, Nov. 1, 1982; 50 FR 5979, Feb. 13, ment of the building, or minor variance 1985] between boundaries shown on the plats, plans or in the deed and those of the § 36.4359 Miscellaneous legal requirements. building. The declaration should provide reasonable limits on the extent of (a) Declarant transfer of control of any such revised boundary(ies) created owners’ association—(1) Standards for by the overlap of units, common ele- transfer of control. The declarant shall ments, and limited common elements relinquish all special rights, expressed resulting from such encroachments. or implied, through which the declar- (5) Right of first refusal. The right of a ant may directly or indirectly control, unit owner to sell, transfer, or other- direct, modify, or veto any action of wise convey his or her unit in a condo- the owners’ association, its executive minium shall not be subject to any board, or a majority of unit owners, right of first refusal or similar restric- and control of the owners’ association tion if the declaration or similar docu- shall pass to the owners of units within ment is recorded on or after December the project, not later than the earlier 1, 1976. If the declaration was recorded of the following: prior to December 1, 1976, the right of (i) 120 days after the date by which 75 first refusal must comply with percent of the units have been con- § 36.4350(b)(5)(ii); Provided, however, re- veyed to unit purchasers, or strictions on the basis of age or restric- (ii) The last date of a specified period tions established by a State, Terri- of time following the first conveyance torial, or local government agency as to a unit purchaser; such period of time part of a program for providing assist- is to be reasonable for the particular

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project. The maximum acceptable pe- (2) Fidelity bond coverage. The secur- riod usually will be from 3 to 5 years ing of appropriate fidelity bond cov- for single-phased condominium regimes erage is recommended but not required, and 5 to 7 years for expandable con- for any person or entity handling funds dominiums. of the owners’ association, including, (iii) On a case basis, modifications or but not limited to, employees of the variations of the requirements of para- professional managers. Such fidelity graphs (a)(1)(i) and (ii) of this section bonds should name the association as will be acceptable, particularly in cir- an obligee, and be written in an cumstances involving very large condo- amount equal to at least the estimated minium developments. maximum of funds, including reserve (2) Declarant’s unit votes after transfer funds, in the custody of the owners’ as- of control. The requirements of para- sociation or the management agent at graph (a)(1) of this section shall not af- any given time during the term of the fect the declarant’s rights, as a unit fidelity bond. However, the bond should owner, to exercise the votes allocated not be less than a sum equal to 3 to units which declarant owns. months’ aggregate assessments on all (3) Unit owners’ participation in man- units plus reserve funds. agement. Declarants should provide for (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) and foster early participation of unit owners in the management of the [44 FR 47340, Aug. 13, 1979, as amended at 50 FR 5979, Feb. 13, 1985] project. (b) Taxes. Unless otherwise provided § 36.4360 Documentation and related by State law, real estate taxes must be requirements—flexible condomin- assessed and be lienable only against iums and condominiums with off- the individual units, together with site facilities. their undivided interests in the com- (a) Expandable condominiums. The fol- mon elements, and not against the lowing policies apply to condominium multifamily structure. The owners’ as- regimes which may be increased in size sociation usually owns no real estate, by the declarant: so it has no obligation concerning ad (1) The declarant’s right to expand valorem taxes. Unless taxes are as- the regime must be fully described in sessed only against the individual the declaration. The declaration must units, a tax lien could amount to more contain provisions adequate to ensure than the value of any particular unit in that future improvements to the con- the structure. dominium will be consistent with ini- (c) [Reserved] tial improvements in terms of quality (d) Policies for bylaws. The bylaws of of construction. The declarant must the condominium should be suffi- build each phase in accordance with an ciently detailed for the successful gov- approved general plan for the total de- ernance of the condominium by unit velopment (§ 36.4357(d)(2)) supported by owners. Among other things, such doc- detailed plats and plans of each phase uments should contain adequate provi- prior to the construction of the par- sions for the election and removal of ticular phase. directors and officers. (2) The reservation of a right to ex- (e) Insurance and related require- pand the condominium regime, the ments—(1) Insurance. The holder shall method of expansion and the result of require hazard and flood insurance an expansion must not affect the statu- policies to be procured and maintained tory validity of the condominium rein accordance with § 36.4326. Because of gime or the validity of title to the the nature of condominiums, addi- units. tional types of insurance coverages— (3) The declaration or equivalent doc- such as tort liability insurance for in- ument must contain a convenant that juries sustained on the premises, per- the condominium regime may not be sonal liability insurance for directors amended or merged with a successor and officers managing association af- condominium regime without prior fairs, boiler insurance, etc.—should be written approval of the Secretary. The considered in appropriate cir- declarant may have the proposed legal cumstances. documentation to accomplish the

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merger reviewed prior to recordation. stated in the declaration or equivalent However, the Secretary’s final approval document. of the merger will not be granted until (7) The declaration or equivalent doc- the successor condominium has been ument shall set forth clearly the basis legally established and construction for reallocation of unit owner’s owner- completed. The declarant may add ship interests, common expense liabil- phases to an expandable condominium ities and voting rights in the event the regime without the prior approval of number of units in the condominium is the Secretary if the phasing imple- increased. Such reallocation shall be ments a previously approved general according to the applicable criteria set plan for the total development. A copy forth in §§ 36.4357(b) and 36.4358(c)(1) and of the amendment to the declaration or (2). other annexation document which adds (8) The declarant’s right to expand each phase must be submitted to the the condominium must be for a reason- Secretary in accordance with able period of time with a specific end- § 36.4360a(b)(6). ing date. The maximum acceptable pe- (4) Liens arising in connection with riod will usually be from 5 to 7 years the declarant’s ownership of, and con- after the date of recording the declara- struction of improvements upon, the tion. On a case basic, longer periods of property to be added must not ad- expansion rights will be acceptable, versely affect the rights of existing particularly in circumstances involv- unit owners, or the priority of first ing sizable condominium develop- mortgages on units in the existing con- ments. dominium property. All taxes, assess- (b) Series projects. (1) Each phase in ments, mechanic’s liens, and other the series approach is to be considered charges affecting such property, cov- as a separate project. A separate set of ering any period prior to the addition legal documents must be filed for each of the property, must be paid or other- phase or project that relates to the wise satisfactorily provided for by the condominium within its own boundary. declarant. The declaration for each phase must (5) The declarant must purchase (at describe the particular project as a declarant’s own expense) a general li- part of the whole development area, ability insurance policy in an amount but subject only the one phase to the not less than $1 million for each occur- condominium regime. A separate unit rence, to cover any liability which ratio must be established that would owners of previously sold units are ex- relate each unit to all units of the par- posed to as a result of further condo- ticular condominium for purposes of minium project development. ownership in the common areas, voting (6) Each expandable project shall rights and assessment liability. A sepa- have a specified maximum number of rate association may be created to gov- units which will give each unit owner a ern the affairs of each condominium. minimum percentage of interest in the Each phase is subject to a separate common elements. Each project shall presale requirement. also have a specified minimum number (2) In the case of proposed projects, of units which will give each unit or projects under construction, the dec- owner a maximum percentage of inter- laration should state the number of est in the common elements. The min- total units that the developer intends imum number of units to be built to build on other sections of the devel- should be that which would be ade- opment area. quate to reasonably support the com- (c) Other flexible condominiums. Con- mon elements. The maximum number dominiums containing withdrawable of units to be built should be that real estate (contractable condomin- which would not overload the capacity iums) and condominiums containing of the common facilities. The max- convertible real estate (portions of the imum possible percentage(s) and the condominium within which additional minimum possible percentage(s) of un- units or limited common elements, or divided interest in the common ele- both, may be created) will be consid- ments for each type of unit must be ered acceptable provided the flexible

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condominium complies with the must be appraised in accordance with § 36.4300 series. paragraph (a) of this section. (2) Horizontal condominiums. Depart- (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) ment of Veterans Affairs policies and (Approved by the Office of Management and procedures applicable to single-family Budget under control number 2900–0448) residential construction shall also [44 FR 47341, Aug. 13, 1979, as amended at 50 apply to horizontal condominiums. FR 5980, Feb. 13, 1985; 50 FR 26359, June 26, Proposed or existing (declarant in con- 1985] trol or marketing units) horizontal condominium conversions shall comply § 36.4360a Appraisal requirements. with current local building codes for alterations and improvements or re- (a) Existing resale condominiums. Upon pairs made to convert the building to acceptance by the local office of the or- the condominium form of ownership ganizational documents, the project unless local authorities require total and unit(s) proposed as security for code compliance on the entire struc- guaranteed financing shall be ap- ture when a building is being converted praised to ensure that they meet to the condominium form of ownership. MPR’s (Minimum Property Require- In those areas where local standards ments) and are safe, sanitary, and are nonexistent, inferior to, or in con- structurally sound. The Department of flict with Department of Veterans Af- Veterans Affairs MPR’s for existing fairs objectives, a certification will be construction apply to all existing re- required from a professional architect sale condominiums including conver- and/or registered engineer certifying sions, except that water, heating, ven- that the plans and specifications con- tilating, air conditioning and sewer form to one of the national building service may be supplied from a central codes which is typical of similar con- source. struction methods and standards for condominiums used in the area. Those (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6), portions of the condominium conver- (b)(5)) sion which are not being altered, im- (b) Proposed condominiums or existing proved or repaired must be appraised in condominiums with declarant in control accordance with paragraph (a) of this or marketing units—(1) Low rise and high section. rise condominiums. Low rise and high rise condominiums shall comply with (Authority: 38 U.S.C. 501, 3703(c)(1)) local building codes. Only the alter- (3) Unit completion. All units in the ations, improvements, or repairs to low individual project or phase must be rise and high rise buildings proposed to substantially completed except for cus- be converted to the condominium form tomer preference items, such as inte- of ownership must comply with current rior finishes, appliances or equipment. local building codes, unless local au- (4) Common element completion. All thorities require total code compliance amenities of the condominium (to in- on the entire structure when a building clude offsite community facilities), is being converted to the condominium that are to be considered in the unit form of ownership. In those areas value, must be bound legally to the where local standards are nonexistent, condominium regime. All such amen- inferior to, or in conflict with Depart- ities as well as the common elements ment of Veterans Affairs objectives, a of the project, must be substantially certification will be required from a completed and available for use by the registered professional architect and/or unit owners. In large multi-phase registered engineer certifying that the projects, the declarant should con- plans and specifications conform to one struct common elements in a manner of the national building codes which is consistent with the addition of units to typical of similar construction meth- support the entire development. The ods and standards for condominiums Secretary, in appropriate cases, may used in the area. Those portions of the approve the placement of adequate condominium conversion which are not funds by the declarant in an escrow or being altered, improved or repaired otherwise earmarked account or accept

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a letter of credit or surety bond to as- (6) Evidence of proper phasing. In an sure completion of amenities and allow expandable or flexible condominium, closing of VA-guaranteed (or insured) evidence of the addition of each phase loans. Such funds must be adequate to in accordance with a previously ap- assure completion of the amenities free proved general plan of development and clear of all liens. must be submitted to the Secretary prior to the guaranty of the first loan (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) in the added area. (7) Additional condominum conversion (5) Information brochure/public offering requirements. (i) The declarant of a con- statement. When units are being sold by dominium project, which is (A) pro- the declarant (not applicable to re- posed, (B) under construction, or (C) an sales), an information brochure/public existing project with a declarant in offering statement must be given to control or marketing units not pre- veteran buyers prior to the time a viously occupied, must furnish struc- downpayment is received and an agree- tural and mechanical common element ment is signed, unless State law au- component statements on the present thorized receipt of the downpayment condition of all accessible structural and delivery of the information bro- and mechanical components material chure followed by a period in which to the use and enjoyment of the condo- purchasers may cancel the purchase minium. These statements must be agreement without penalty for a speci- completed by a registered professional fied number of days. Information bro- engineer and/or architect prior to the chures must be written in simple terms guaranty of the first unit loan in the to inform buyers that the association project. Each statement must also give does not provide owner’s contents and an estimate of the expected useful life personal liability policies which are of the roof, elevators, heating and cool- the owner’s responsibility. In the event ing, plumbing and electrical systems the development is expandable, series, assuming normal maintenance. A min- etc., there must be full disclosure of imum of 10 years estimated remaining the impact of the total development useful life is required on all structural plan. In expandable, series or other and mechanical components. In the al- projects with more than one phase, the ternative, the declarant may con- information brochure must disclose tribute an amount of funds to the con- fully later development rights, and the dominium reserve fund equal to a min- general plans of the declarant for addi- imum of 1⁄10 (one-tenth) of the esti- tional phases. If the declarant makes mated costs of replacement of a major no assurance concerning phases which structural or mechanical component are not required to be built, the declar- (as determined by an independent reg- ant should state that no assurances are istered professional architect or engi- given concerning construction, unit neer) for each year of estimated re- sizes, building types, architectural maining useful life less than 10 years, styles, etc. In condominium conver- e.g. 7 years remaining useful life equals sions, the information brochure must a 3⁄10 required declarant contribution to list the major structural and mechan- the reserve fund of the component’s es- ical components and the estimated re- timated replacement cost. The noted maining useful life of the components. statements and remaining useful life A brief explanation must be furnished requirement are not applicable to ex- in the brochure explaining that certain isting resale conversion projects when major structural or mechanical compo- the declarant is no longer marketing nents may require replacement within units and/or in control of the associa- a specified time period. If the declarant tion. Expandable or series condo- has elected to place funds into a condominium conversions require engineer- minium reserve fund for replacement ing and architectural statements on of a major component under the provi- each stage or phase. sions of § 36.4360a(b)(7), the amount of (ii) In declarant controlled projects, the contribution into the reserve fund a statement(s) by the local author- must be specified in the information ity(ies) of the adequacy of offsite utili- brochure. ties servicing the site (e.g., sanitary or

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water) is required. If a local author- the builder, seller, or the real party in ity(ies) declines to issue such a state- interest in the transaction shall deliver ment(s), a statement(s) may be ob- to the veteran purchasing the dwelling tained from a registered professional unit with the aid of a guaranteed or in- engineer. If local authority(ies) de- sured loan a warranty against defects clines to issue such a statement(s), a for the unit and common elements. The statement(s) may be obtained from a unit shall be warranted for 1 year from registered professional engineer. the date of settlement or the date of (c) Presale requirements—(1) Proposed occupancy (whichever first occurs). construction or existing declarant in con- The common elements shall be war- trol. Bona fide agreements of sale must ranted for 2 years from the date each of have been executed by purchasers other the common elements is completed and than the declarant (who are obligated available for use by the unit owners, or contractually to complete the pur- 2 years from the date the first unit is chase) of 70 percent of the total number conveyed to a unit owner other than of units in the project. Lenders shall the declarant, whichever is later, in certify as to satisfaction of the presale the particular phase of the condo- requirement prior to VA guaranty of minium containing the common ele- the first unit loan. When a declarant ment. For these purposes, defects shall can demonstrate that a lower percent- be those items reasonably requiring age would be justified, the Secretary, the repair, renovation, restoration, or on an individual case basis, may ap- replacement of any of the components prove a presale requirement of less constituting the unit or common ele- than 70 percent. Reduction of the 70 ments. Items of maintenance relating percent presale requirement will be to the unit or common elements are considered when: not covered by the warranty. No cer- (i) Strong initial sales demonstrate a tificate of guaranty or insurance credit ready market, or shall be issued unless a copy of such (ii) The declarant will provide cash warranty, duly receipted by the pur- assests or acceptable bonds for pay- chaser, is submitted with the loan pa- ment of full common area assessments pers. to the owners’ association until such (e) Ownership and operation of offsite assessments are assumed by unit pur- facilities—(1) Title requirements. Evi- chasers, or dence must be presented that the off- (iii) Subsequent phases of an overall site facility owned by an owners’ asso- development are being undertaken in a ciation with mandatory membership by proven market area, or condominium unit owners or condo- (iv) Previous experience in similar minium unit owners’ associations has projects in the same market area indi- been completed and conveyed free of cates strong market acceptance, or encumbrances by the declarant for the (v) The development is in a market benefit of the unit owners with title in- area that has repeatedly indicated ac- sured by an owner’s title policy or ceptance of such projects. other acceptable title evidence. Offsite (2) Multiphase—proposed or existing de- facilities conveyed to a nonprofit cor- clarant in control. The requirements of poration are the preferred method of paragraph (c)(1) of this section shall offsite facilities ownership; however, apply to each individual phase of a the Secretary will consider other forms multiphase development, taking into of ownership on an individual case consideration that each individual basis. phase must be capable of self-support (2) Mandatory membership. The dec- in the event that the developer does laration of the condominium (each con- not complete all planned phases. dominium in a series development) and (d) Warranty. Except in condominium the legal documentation of the cor- conversion projects, each CRV (Certifi- poration or association which owns the cate of Reasonable Value) issued by the offsite facility must provide the fol- Secretary relating to a proposed or ex- lowing: isting not previously occupied dwelling (i) The owner of a condominium unit unit in a condominium project shall be is automatically a member of the off- subject to the express condition that site facility corporation or association

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and that upon the sale of the unit, month after the first unit is conveyed membership is transferred automati- to a homeowner in the first phase. If cally to the new owner/purchaser. It is this balance is not paid, it must be- also acceptable if each condominium come a lien against those parcels of owners’ association (in lieu of each in- land in the development area which are dividual unit owner) is automatically a owned by the declarant. The collection member of the offsite facility corpora- of such debt and enforcement of such tion or association coupled with use lien may be by foreclosure or such rights for each of the unit owners or other remedies afforded the corpora- residents. If membership in an offsite tion or association under local law. owners’ association is voluntary, no (f) Professional management. Many credit in the CRV valuation may be condominiums are small enough and given for such offsite amenities. their common areas so minimal that (ii) Each member of the offsite facil- professional management is not nec- ity corporation or association must be essary. VA does not have a require- entitled to a representative vote at ment for professional management of meetings of the offsite facility corpora- condominiums. The powers given to tion or association. If the individual the owners’ association by the declara- condominium owners’ association is a tion and bylaws are fundamentally for member of the offsite facility corpora- ‘‘use control’’ and maintenance of the tion or association, each condominium undivided interest all of the owners owners’ association must be entitled to have in the common areas. These pow- a representative vote at meetings of ers normally include management the offsite facility corporation or asso- which may, if desired, be delegated to a ciation. professional manager. However, if the (iii) Each member must agree by ac- board of directors wants professional ceptance of the unit deed to pay a management, the management agree- share of the expenses of the offsite fa- ment must be terminable for cause cility corporation or association as as- upon 30 days’ notice, and run for a rea- sessed by the corporation or associa- sonable period of from 1 to 3 years and tion for upkeep, insurance, reserve be renewable for consent of the associa- fund for replacements, maintenance tion and the management. (Manage- and operation of the offsite facility. ment contracts negotiated by the de- The share of said expenses shall be declarant should not exceed 2 years.) termined equitably. Failure to pay (g) Commercial areas. With respect to such assessment must result in a lien existing and proposed condominiums, against the individual unit in the same commercial areas within condominium manner as unpaid assessments by the developments are acceptable, but such association of owners of the condo- interests will be considered in value. minium. If each condominium owners’ association is a member of the offsite (Authority: 38 U.S.C. 501, 3703(c)(1), 3710(a)(6)) facility in lieu of individual unit owners, failure of the condominium own- (Approved by the Office of Management and ers’ association to pay its equitable as- Budget under control number 2900–0448) sessment to the offsite facility must [44 FR 47342, Aug. 13, 1979, as amended at 50 result in an enforceable lien. FR 5980, Feb. 13, 1985; 50 FR 26359, June 26, (3) Declarant payment of offsite facility 1985; 55 FR 34913, Aug. 27, 1990] in a series project. Until the declarant has completed all of the intended con- § 36.4362 Requirement of construction dominium phases in a total condo- warranty. minium development or established Each certificate of reasonable value each condominium regime by filing a issued by the Secretary relating to a separate declaration in a series devel- proposed or newly constructed dwelling opment, the balance of the total sum of unit, except those covering one-family the expenses of the offsite facility not residential units in condominium hous- covered by the assessment against the ing developments or projects within unit owners should be assessed against the purview of §§ 36.4356 through and be payable by the declarant com- 36.4360a, shall be subject to the express mencing on the first day of the first condition that the builder, seller, or

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the real party in interest in the trans- ther it nor anyone authorized to act for action shall deliver to the veteran con- it will decline to sell any property in- structing or purchasing such dwelling cluded in such request to a prospective with the aid of a guaranteed or insured purchaser because of his or her race, loan a warranty, in the form prescribed color, religion, sex or national origin. by the Secretary, that the property has Site and subdivision analysis will not been completed in substantial con- be commenced by the Department of formity with the plans and specifica- Veterans Affairs prior to receipt of tions upon which the Secretary based such certification. the valuation of the property, includ- (d) No commitment shall be issued ing any modifications thereof, or and no loan shall be guaranteed or in- changes or variations therein, approved sured under 38 U.S.C. Chapter 37 unless in writing by the Secretary, and no the veteran certifies, in such form as certificate of guaranty or insurance the Secretary shall prescribe, that credit shall be issued unless a copy of (1) Neither he/she, nor anyone au- such warranty duly receipted by the thorized to act for him/her, will refuse purchaser is submitted with the loan to sell or rent, after the making of a papers. bona fide offer, or refuse to negotiate for the sale or rental of, or otherwise [40 FR 34595, Aug. 18, 1975, as amended at 44 FR 47343, Aug. 13, 1979] make unavailable or deny the dwelling or property covered by this loan to any § 36.4363 Nondiscrimination and equal person because of race, color, religion, opportunity in housing certification sex, or national origin; requirements. (2) He/she recognizes that any restric- (a) Any request for a master certifi- tive covenant on the property relating cate of reasonable value on proposed or to race, color, religion, sex or national existing construction, and any request origin is illegal and void and any such for appraisal of individual existing covenant is specifically disclaimed; and housing not previously occupied, which (3) He/she understands that civil ac- is received on or after November 21, tion for preventive relief may be 1962, will not be assigned for appraisal brought by the Attorney General of the prior to receipt of a certification from United States in any appropriate U.S. the builder, sponsor or other seller, in District Court against any person re- the form prescribed by the Secretary, sponsible for a violation of the applica- that neither it nor anyone authorized ble law. to act for it will decline to sell any [28 FR 7673, July 27, 1963, as amended at 36 property included in such request to a FR 13032, July 13, 1971; 40 FR 34595, Aug. 18, prospective purchaser because of his or 1975] her race, color, religion, sex or national origin. § 36.4364 Correction of structural de- (b) On requests for appraisal of indi- fects. vidual proposed construction received (a) The purpose of this section is to on or after November 21, 1962, the pre- specify the types of assistance that the scribed nondiscrimination certification Secretary may render pursuant to 38 will be required if the builder is to sell U.S.C. 1827 to an eligible borrower who the veteran the lot on which the dwell- has been unable to secure satisfactory ing is to be constructed, but will not be correction of structural defects in a required if: dwelling encumbered by a mortgage se- (1) The veteran owns the lot; or curing a guaranteed, insured or direct (2) The lot is being acquired by the loan, and the terms and conditions veteran from a seller other than the under which such assistance will be builder and there is no identity of in- rendered. terest between the builder and the sell- (b) A written application for assist- er of the lot. ance in the correction of structural de- (c) Each builder, sponsor or other fects shall be filed by a borrower under seller requesting approval of site and a guaranteed, insured or direct loan subdivision planning shall be required with the Director of the Department of to furnish a certification, in the form Veterans Affairs office having loan ju- prescribed by the Secretary, that nei- risdiction over the area in which the

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dwelling is located. The application (3) Acquire title to the property upon must be filed not later than 4 years terms acceptable to the borrower and after the date on which the first direct, the holder of the guaranteed or insured guaranteed or insured mortgage loan loan. on the dwelling was made, guaranteed (e) To the extent of any expenditure or insured by the Secretary. A bor- made by the Secretary pursuant to rower under a direct, guaranteed or in- paragraph (d) of this section the Sec- sured mortgage loan on the same retary shall be subrogated to any legal dwelling which was made, guaranteed rights the borrower or applicant de- or insured subsequent to the first such scribed in paragraph (c)(2) of this sec- loan shall be entitled to file an application may have against the builder, sell- tion if it is filed within 4 years of the er, or other persons arising out of the date on which such first loan was structural defect or defects. made, guaranteed or insured by the (f) The borrower shall not be entitled, Secretary. as a matter of right, to receive the as- (c) An applicant for assistance under sistance in the correction of structural this section must establish that: defects provided in this section. Any (1) The applicant is the owner of a determination made by the Secretary one- to four-family dwelling which was in connection with a borrower’s appli- inspected during construction by the cation for assistance shall be final and Department of Veterans Affairs or the Federal Housing Administration. conclusive and shall not be subject to judicial or other review. Authority to (2) The applicant is an original veteran-borrower on an outstanding guar- act for the Secretary under this section anteed, insured or direct loan secured is delegated to the Under Secretary for by a mortgage on such dwelling which Benefits. was made, guaranteed or insured on or (g) For the purpose of this section, after May 8, 1968. The Secretary may, the term ‘‘structural defects seriously however, recognize an applicant who is affecting livability’’ shall in no event not the original veteran-borrower but be deemed to include (1) defects of any who contracted to assume such bor- nature in a dwelling in respect to rower’s personal obligation thereunder, which the applicant for assistance if the Secretary determines that such under this section was the builder or recognition would be in the best inter- general contractor, or (2) structural ests of the Government in the par- features, improvements, amenities, or ticular case. equipment which were not taken into (3) There exists in such dwelling a account in the Secretary’s determina- structural defect, not the result of fire, tion of reasonable value. earthquake, flood, windstorm, or waste, which seriously affects the liv- [33 FR 16088, Nov. 1, 1968, as amended at 36 ability of the dwelling. FR 321, Jan. 9, 1971; 40 FR 34595, Aug. 18, 1975; 61 FR 28059, June 4, 1996] (4) The applicant has made reasonable efforts to obtain correction of § 36.4365 Advertising and Solicitation such structural defect by the builder, Requirements. seller, or other person or firm responsible for the construction of the dwell- Any advertisement or solicitation in ing. any form (e.g., written, electronic, (d) In those instances in which the oral) from a private lender concerning Secretary determines that assistance housing loans to be guaranteed or in- under this section is appropriate and sured by the Secretary: necessary the Secretary may take any (a) Must not include information of the following actions: falsely stating or implying that it was (1) Pay such amount as is reasonably issued by or at the direction of VA or necessary to correct the defect, or any other department or agency of the (2) Pay the claim of the borrower for United States, and reimbursement of the borrower’s ex- (b) Must not include information penses for correcting or obtaining cor- falsely stating or implying that the rection of the defect, or

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lender has an exclusive right to make percentage credited to the insurance loans guaranteed or insured by VA. account in respect to each loan being transferred applied to the unpaid bal- (Authority: 38 U.S.C. 3703, 3704) ance of such loans, or to the purchase [67 FR 9402, Mar. 1, 2002] price, whichever is the lesser. (b) Transfers between insurance ac- LOANS UNDER 38 U.S.C. 3703 counts in a manner or under conditions not provided in paragraph (a) of this SOURCE: Sections 36.4370 through 36.4375 ap- section must have the prior approval of pear at 13 FR 7281, Nov. 27, 1948, unless other- the Secretary. wise noted. (c) Where loans are transferred with § 36.4370 Insured loan and insurance recourse or under a guaranty or repur- account. chase agreement no insurance credit will be transferred or insurance ac- (a) Loans otherwise eligible may be count affected and no reports will be insured when purchased by a lender eli- required. gible under 38 U.S.C. 3703(a) if the pur- (d) In all cases of transfer of loans chaser (lender) submits with the loan from one insured financial institution report evidence of an agreement, gen- to another insured institution, except eral or special, made prior to the clos- as provided in paragraph (c) of this sec- ing of the loan, to purchase such loan tion, a report on a prescribed form exe- subject to its being insured. cuted by the parties and showing their (b) A current account shall be main- agreement with regard to the transfer tained in the name of each insured of insurance credits shall be made to lender or purchaser. The account shall the Secretary. be credited with the appropriate amounts available for the payment of § 36.4373 Debits and credits to insur- losses on insured loans made or pur- ance account under § 36.4318. chased. The account shall be debited In the event that an insured loan is with appropriate amounts on account transferred under the provisions of of transfers, purchases under § 36.4318, § 36.4318, there shall be charged to the or payment of losses. The Secretary insurance account of the transferor a may on 6 months’ notice close any sum equal to the amount paid trans- lender’s insurance account. Such ac- feror on account of the indebtedness count after expiration of the 6-month less the current market value of the period shall be available only as to property transferred as security there- loans embraced therein. for as determined by an appraiser des- (c) Amounts received or recovered by ignated by the Secretary, or the the Secretary or the holder with re- amount chargeable to such insurance spect to a loan after payment of an in- account in the event of a transfer sured claim thereon will not restore under § 36.4372, whichever sum is the any amount to the holder’s insurance greater. The credit to the insurance ac- account. count of the transferee will be com- [13 FR 7281, Nov. 27, 1948, as amended at 24 puted in accordance with § 36.4372(a). FR 2657, Apr. 7, 1959] § 36.4374 Payment of insurance. § 36.4372 Transfer of insured loans. (a) Upon the continuance of a default (a) In cases involving the transfer for the period specified in § 36.4316, the from one insured financial institution holder may proceed to establish the net to another insured institution of loans loss, after giving the notice prescribed which are transferred without rein § 36.4317 if security is available. The course, guaranty, or repurchase agree- net loss shall be reported to the Sec- ment, if no payment on any loan in- retary with proper claim, whereupon cluded in the transfer is past due more the holder shall be entitled to payment than one calendar month at the time of of the claim within the amount then transfer there shall be transferred from available for such payment under the the insurance account of the transferor payee’s related insurance account. Sub- to the insurance account of the trans- ject to the provisions of the paragraph feree an amount equal to the original (b) of this section and to § 36.4370(b) a

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supplemental claim for any balance of to eligible veterans with financing an insurance loss may be filed at any which is to be guaranteed or insured or time within 5 years after the date of made under the provisions of 38 U.S.C. the original claim. chapter 37, or the builder, sponsor or (b) The basis of the claim for an in- developer of housing to be constructed sured loss shall consist in the unreal- for sale to eligible veterans with fi- ized principal or the amount paid for nancing which is to be guaranteed or the obligation, if less, plus unrealized insured or made under the provisions of interest to the date of claim or the 38 U.S.C. chapter 37. date of sale whichever is earlier, and (b) The provisions of Executive Or- those expenses, if any, allowable under ders 11246 and 11375 and the rules and § 36.4313, but subject to proper credits regulations of the Secretary of Labor because of payments, set-off, proceeds are applicable to: of security or otherwise, provided that (1) Each Master Certificate of Rea- if there is no liquidation of security sonable Value or extension or modi- the claim shall not include an accrual fication thereof relating to proposed of interest for a period in excess of 6 construction issued on or after July 22, months from the date of the first 1963; uncured default. (2) Each individual Certificate of [13 FR 7742, Dec. 15, 1948] Reasonable Value or extension or modification thereof relating to pro- § 36.4375 Reports of insured institu- posed construction issued on or after tions. July 22, 1963, except as provided in An insured financial institution shall paragraph (c)(2) of this section; make such reports respecting its insur- (3) Each Special Conditions Letter or ance accounts as the Secretary may modification thereof issued on or after from time to time require, not more July 22, 1963, in respect to site approval frequently than semiannually. of land to be improved by a builder, sponsor or developer for the construc- FEDERALLY ASSISTED CONSTRUCTION tion of housing thereon; CONTRACTS—NONDISCRIMINATION IN (4) Each direct loan fund reservation EMPLOYMENT—EXECUTIVE ORDERS commitment or extension thereof 11246 AND 11375 issued to builders on or after July 22, 1963; AUTHORITY: Sections 36.4390 to 36.4393 (c) The provisions of Executive Or- issued under 72 Stat. 1114 (38 U.S.C. 501). ders 11246 and 11375 and the rules and regulations of the Secretary of Labor § 36.4390 Purpose. are not applicable to: Sections 36.4390 through 36.4393 are (1) Grants under chapter 21, title 38, promulgated to achieve the aims of the U.S.C.; applicable provisions of Executive Or- (2) Individual Certificates of Reason- ders 11246 and 11375 and the regulations able Value issued on or after July 22, of the Secretary of Labor with respect 1963, if: to federally assisted construction con- (i) The certificate relates to existing tracts. properties, either previously occupied [40 FR 34595, Aug. 18, 1975] or unoccupied; or (ii) The certificate relates to pro- § 36.4391 Applicability. posed construction and (a) For the purposes of the home loan (a) A veteran was named in the re- guaranty and insurance and direct loan quest for appraisal, or programs of the Department of Vet- (b) A veteran contracted for the con- erans Affairs, the term ‘‘applicant for struction or purchase of the home prior Federal assistance’’ or ‘‘applicant’’ in to issuance of the certificate, or Part III of Executive Order 11246, shall (c) The property was listed in the mean the builder, sponsor or developer Schedule of Reasonable Values on an of land to be improved by such builder, outstanding Master Certificate of Rea- sponsor or developer for the purpose of sonable Value issued prior to July 22, constructing housing thereon for sale 1963;

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(3) Any contract or subcontract for tices to be provided setting forth the provi- construction work not exceeding sions of this nondiscrimination clause. $10,000; (2) The contractor will, in all solicitations (4) Any other contract or subcontract or advertisements for employees placed by or which is exempted or excepted by the on behalf of the contractor, state that all regulations of the Secretary of Labor. qualified applicants will receive consideration for employment without regard to [29 FR 2862, Feb. 29, 1964, as amended at 31 race, color, religion, sex or national origin. FR 8745, June 24, 1966; 40 FR 34595, Aug. 18, (3) The contractor will send to each labor 1975] union or representative of workers with which he has a collective bargaining agree- § 36.4392 Certification requirements. ment or other contract or understanding, a In any case in which §§ 36.4390 notice to be provided advising the said labor through 36.4393 are applicable, as set union or workers’ representative of the con- forth in § 36.4391, no action will be tractor’s commitments under section 202 of Executive Order 11246 of September 24, 1965, taken by the Department of Veterans and shall post copies of the notice in con- Affairs on any request for appraisal re- spicuous places available to employees and lating to proposed construction, site applicants for employment. approval of land to be improved by a (4) The contractor will comply with all builder, sponsor or developer for the provisions of Executive Order 11246 of Sep- construction of housing thereon, or for tember 24, 1965, and of the rules, regulations a direct loan fund reservation commit- and relevant orders of the Secretary of ment unless the builder, sponsor or de- Labor. veloper has furnished the Department (5) The contractor will furnish all informa- of Veterans Affairs a signed certifi- tion and reports required by Executive Order cation in form as follows: 11246 of September 24, 1965, and by the rules, regulations and orders of the Secretary of To induce the Department of Veterans Af- Labor, or pursuant thereto, and will permit fairs to act on any request submitted by or access to his books, records and accounts by on behalf of the undersigned for site approval the administering agency and the Secretary of land to be improved for the construction of Labor for purposes of investigation to as- of housing thereon to be financed with loans certain compliance with such rules, regula- guaranteed, insured or made by the Depart- tions and orders. ment of Veterans Affairs, or for establish- (6) In the event of the contractor’s non- ment by the Department of Veterans Affairs compliance with the nondiscrimination of reasonable value relating to proposed con- clauses of this contract or with any of the struction or for direct loan fund reservation said rules, regulations or orders, this con- commitments, the undersigned hereby tract may be canceled, terminated or sus- agrees that it will incorporate or cause to be pended in whole or in part and the con- incorporated into any contract for construc- tractor may be declared ineligible for further tion work or modification thereof, as defined Government contracts or federally assisted in the rules and regulations of the Secretary construction contracts in accordance with of Labor relating to the land or housing in- procedures authorized in Executive Order cluded in its request to the Department of 11246 of September 24, 1965, and such other Veterans Affairs the following equal oppor- sanctions may be imposed and remedies in- tunity clause: voked as provided in Executive Order 11246 of During the performance of this contract the contractor agrees as follows: September 24, 1965, or by rule, regulation or (1) The contractor will not discriminate order of the Secretary of Labor, or as other- against any employee or applicant for em- wise provided by law. ployment because of race, color, religion, sex (7) The contractor will include the provi- or national origin. The contractor will take sions of paragraphs (1) through (7) in every affirmative action to ensure that applicants subcontract or purchase order unless ex- are employed, and that employees are treat- empted by rules, regulations or orders of the ed during employment without regard to Secretary of Labor issued pursuant to sec- their race, color, religion, sex or national or- tion 204 of Executive Order 11246 of Sep- igin. Such action shall include, but not be tember 24, 1965, so that such provisions will limited to the following: Employment, up- be binding upon each subcontractor or ven- grading, demotion or transfer; recruitment dor. The contractor will take such action or recruitment advertising; layoff or termi- with respect to any subcontract or purchase nation; rates of pay or other forms of com- order as the administering agency may di- pensation; and selection for training, includ- rect as a means of enforcing such provisions, ing apprenticeship. The contractor agrees to including sanctions for noncompliance: Pro- post in conspicuous places, available to em- vided, however, That in the event a con- ployees and applicants for employment, no- tractor becomes involved in, or is threatened

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with, litigation with a subcontractor or ven- referral of the case to the Department of dor as a result of such direction by the agen- Justice for appropriate legal proceedings. cy, the contractor may request the United [31 FR 8745, June 24, 1966, as amended at 40 States to enter into such litigation to pro- FR 34596, Aug. 18, 1975] tect the interests of the United States. Except in special cases and in subcontracts § 36.4393 Complaint and hearing pro- for the performance of construction work at cedure. the site of construction, the clause is not required to be inserted in subcontracts below (a) Upon receipt of a written com- the second tier. Subcontracts may incor- plaint signed by the complainant to porate by reference the equal opportunity the effect that any person, firm or enti- clause. ty has violated the undertakings re- The undersigned further agrees that it will ferred to in § 36.4392, such person, firm be bound by the above equal opportunity or other entity shall be invited to dis- clause in any federally assisted construction cuss the matter in an informal hearing work which it performs itself other than with the Director of the Department of through the permanent work force directly Veterans Affairs regional office or cen- employed by an agency of Government. ter. The undersigned agrees that it will cooper- (b) If the existence of a violation is ate actively with the administering agency denied by the person, firm or other en- and the Secretary of Labor in obtaining the tity against which a complaint has compliance of contractors and subcontrac- been made, the Director or designee tors with the equal opportunity clause and shall conduct such inquiries and hear- the rules, regulations and relevant orders of ings as may be deemed appropriate for the Secretary of Labor, that it will furnish the administering agency and the Secretary the purpose of ascertaining the facts. of Labor such information as they may re- (c) If it is found that the person, firm quire for the supervision of such compliance, or other entity against which a com- and that it will otherwise assist the admin- plaint has been made has not violated istering agency in the discharge of the agen- the undertakings referred to in cy’s primary responsibility for securing com- § 36.4392, the parties shall be so noti- pliance. The undersigned further agrees that fied. it will refrain from entering into any con- (d) If it is found that there has been tract or contract modification subject to Ex- a violation of the undertakings re- ecutive Order 11246 with a contractor ferred to in § 36.4392, the person, firm or debarred from, or who has not demonstrated other entity in violation shall be re- eligibility for, Government contracts and quested to attend a conference for the federally assisted construction contracts purpose of discussing the matter. Fail- pursuant to Part II, Subpart D of Executive ure or refusal to attend such a con- Order 11246 and will carry out such sanctions and penalties for violation of the equal op- ference shall be proper basis for the ap- portunity clause as may be imposed upon the plication of sanctions. contractors and subcontractors by the ad- (e) The conference arranged for dis- ministering agency or the Secretary of cussing a violation shall be conducted Labor pursuant to Part II, Subpart D of Ex- in an informal manner and shall have ecutive Order 11246. as its primary objective the elimi- In addition, the undersigned agrees that if nation of the violation. If the violation it fails or refuses to comply with these un- is eliminated and satisfactory assur- dertakings such failure or refusal shall be a ances are received that the person, proper basis for cancellation by the Depart- firm or other entity in violation will ment of Veterans Affairs of any outstanding comply with the undertakings pursu- master certificates of reasonable value or in- ant to § 36.4392 in the future, the parties dividual certificates of reasonable value re- concerned shall be so notified. lating to proposed construction, except in re- (f) Failure or refusal to comply and spect to cases in which an eligible veteran has contracted to purchase a property in- give satisfactory assurances of future cluded on such certificates, and for the rejec- compliance with the equal employment tion of future requests submitted by the un- opportunity requirements shall be dersigned or on his or her behalf for site ap- proper basis for applying sanctions. proval, appraisal services, and direct loan The sanctions shall be applied in ac- fund reservation commitments until satis- cordance with the provisions of Execu- factory assurance of future compliance has tive Order 11246 as amended and the been received from the undersigned, and for regulations of the Secretary of Labor.

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(g) Upon written application, a com- (b) Chapter 21: chapter 21 of title 38, plainant or a person, firm or other en- U.S.C. tity against which a complaint has (c) Movable facilities: Such exercising been filed may apply to the Under Sec- equipment and other aids as may be al- retary for Benefits for a review of the lowed or required by the Chief Medical action taken by a Director. Upon re- Director or designee. ceiving such application, the Under (d) Necessary land: Any plot of land Secretary for Benefits may designate a the cost and area of which are not dis- representative or representatives to proportionate to the type of improve- conduct an informal hearing and to ments thereon and which is in keeping make a report of findings. The Under with the locality. Secretary for Benefits may, after a re- (e) Special fixtures and necessary adap- view of such report, modify or reverse tations. Construction features which an action taken by a Director. are specially designed to overcome the (h) Reinstatement of restricted per- physical limitations of the individual sons, firms or other entities shall be beneficiary and which are allowed or within the discretion of the Under Sec- required by the Chief Medical Director retary for Benefits and under such or designee as necessary by nature of terms as the Under Secretary for Bene- the qualifying disability. fits may prescribe. (f) Housing unit: A family dwelling or [29 FR 2862, Feb. 29, 1964, as amended at 40 unit approved by the Veterans Health FR 34596, Aug. 18, 1975; 61 FR 28059, June 4, Services and Research Administration 1996] as medically feasible for occupancy as a home by the individual beneficiary, Subpart C—Assistance to Certain including the land, improvements, and Disabled Veterans in Acquir- all appurtenances, together with such ing Specially Adapted Hous- movable facilities or special features as are authorized under the definitions of ing those terms in §§ 36.4401 through 36.4410.

NOTE: Those requirements, conditions, or (g) Remodeling: Any alterations, re- limitations expressly set forth in 38 U.S.C. pairs, or improvements necessary or Chapter 21 and not restated herein must be desirable to the housing unit, as de- taken into consideration in conjunction with fined in §§ 36.4401 through 36.4410. the regulations in §§ 36.4401 to 36.4410. (h) Veteran’s family. Persons related [24 FR 2657, Apr. 7, 1959] by blood, marriage, or adoption. (Authority: 38 U.S.C. 2101(b)) § 36.4400 Applicability. [24 FR 2657, Apr. 7, 1959, as amended at 46 FR References in the regulations per- 43673, Aug. 31, 1981] taining to assistance to certain disabled veterans in acquiring specially § 36.4402 Eligibility. adapted housing to 38 U.S.C. chapters 21 and 37, shall where applicable, be (a) Eligibility, housing grants. No bene- deemed to refer also to the prior cor- ficiary shall be eligible for assistance responding provision of the law. under section 2101(a) of Chapter 21 for the purpose of reimbursing the veteran [24 FR 2657, Apr. 7, 1959] for the cost of an existing structure acquired by the veteran prior to applying § 36.4401 Definitions. for assistance or for constructing or re- Wherever used in 38 U.S.C. Chapter 21 modeling a dwelling or for otherwise or §§ 36.4401 through 36.4410, unless the acquiring a suitable housing unit, un- context otherwise requires, the terms less it is determined pursuant to defined in this section shall have the §§ 36.4401 through 36.4410 that: meaning herein stated; namely: (1) It is medically feasible for such (a) Secretary: The Secretary of Vet- beneficiary to reside in the existing or erans Affairs or any employee of the proposed housing unit and in the local- Department of Veterans Affairs au- ity where such is or will be situated; thorized to act in the Secretary’s (2) The nature and condition of the stead. proposed housing unit are such as to be

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suitable to the veteran’s needs for agement Agency as having special dwelling purposes; flood hazards and in which flood insur- (3) Such unit bears a proper relation ance has been made available under the to the veteran’s present and antici- National Flood Insurance Act, as pated income and expenses; amended, is or will be covered by flood (4) The veteran has or will acquire an insurance. The amount of flood insur- interest in the housing unit which is: ance must be at least equal to the less- (i) A fee simple estate, or er of the full insurable value of the (ii) A leasehold estate, the unexpired property or the maximum limit of cov- term of which, including renewals at erage available for the particular type the option of the lessee, is not less of property under the National Flood than 50 years, or Insurance Act, as amended. The Sec- (iii) An interest in a residential unit retary cannot approve any financial as- in a cooperative or a condominium sistance for the acquisition or con- type development which in the judg- struction of property located in an area ment of the Under Secretary for Bene- identified by the Federal Emergency fits or the Director, Loan Guaranty Management Agency as having special Service, provides a right of occupancy flood hazards unless the community in for a period of not less than 50 years, or which such area is situated is then par- (iv) A beneficial interest in a rev- ticipating in the National Flood Insur- ocable Family Living Trust that en- ance Program. sures that the veteran, or veteran and spouse, have an equitable life estate, (Authority: 42 U.S.C. 4012a, 4106(a)) provided the trust arrangement is valid under State law; (b) Eligibility, adaptations grants. No beneficiary shall be eligible for assist- Provided, The title to such estate or in- ance under section 2101(b) of chapter 21, terest is or shall be such as is accept- for the cost of reasonably necessary ad- able to prudent lending institutions, aptations to an existing structure or informed buyers, title companies, and for the inclusion of such adaptations in attorneys, generally, in the commu- proposed construction or for the pur- nity; chase of a structure already including (5) The veteran has certified, in such such adaptations unless it is deter- form as the Secretary shall prescribe, mined pursuant to §§ 36.4401 through that 36.4410 of this part that: (i) Neither the veteran, nor anyone (1) The veteran has not been declared authorized to act for the veteran, will eligible for assistance under section refuse to sell or rent, after the making 2101(a) of chapter 21; of a bona fide offer, or refuse to negotiate for the sale or rental of, or other- (2) The veteran has not been provided wise make unavailable or deny the the particular type of adaptation, im- dwelling or property acquired by this provement, or structural alteration benefit to any person because of race, under section 1712(a) of title 38 U.S.C.; color, religion, sex, or national origin; (3) The veteran is or will be residing (ii) The veteran recognizes that any in and reasonably intends to continue restrictive covenant on the property residing in a residence owned by such relating to race, color, religion, sex, or veteran or by a member of such vet- national origin is illegal and void and eran’s family; any such covenant is specifically dis- (4) The adaptations are reasonably claimed; necessary because of the veteran’s dis- (iii) The veteran understands that ability; and civil action for preventive relief may (5) If the veteran is the owner or be brought by the Attorney General of part-owner of the housing unit, the the United States in any appropriate veteran must comply with paragraphs U.S. District Court against any person (a)(5) and (6) of this section. responsible for a violation of the applicable law; and (Authority: 38 U.S.C. 2101(b), 2104) (6) The housing unit, if it is located [46 FR 43673, Aug. 31, 1981, as amended at 56 or becomes located in an area identi- FR 9862, Mar. 8, 1991; 61 FR 28059, June 4, fied by the Federal Emergency Man- 1996; 62 FR 5531, Feb. 6, 1997]

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§ 36.4403 Joint ownership of housing are normally required to be paid by a unit. lienor or a purchaser. The construction or remodeling of a (b) Computation of cost of adaptations. Under section 2101(b) of Chapter 21, for housing unit, or reimbursement to a the purpose of computing the amount veteran who has acquired a suitable of benefits payable to a veteran-bene- unit at the veteran’s own expense pur- ficiary, the assistance is limited to the suant to section 2101(a) of chapter 21, lesser of: shall be permissible notwithstanding (1) The actual cost, or in the case of that title to the home is or will be a veteran acquiring a residence already vested in an eligible veteran and adapted with special features, the fair spouse. If an undivided interest is or market value of the adaptations, in- will be owned by a person other than cluding installation costs, determined the spouse of the veteran the cost of to be reasonably necessary, or the unit to the veteran shall be com- (2) $10,000. puted to be such part of the total cost of the unit as is proportionate to the (Authority: 38 U.S. C. 2102) undivided interest of the veteran in the [46 FR 43674, Aug. 31, 1981, as amended at 50 entire property, and the percentages FR 13021, Apr. 2, 1985; 56 FR 9862, Mar. 8, 1991; and amounts prescribed in section 61 FR 28059, June 4, 1996; 68 FR 6627, Feb. 10, 2101(a) of chapter 21 shall be calculated 2003; 70 FR 3893, Jan. 27, 2005] only upon such cost to the veteran. § 36.4405 Submission of proof to the [46 FR 43674, Aug. 31, 1981] Secretary. As a condition precedent to the grant § 36.4404 Computation of cost. the Secretary may require submission (a) Computation of cost of housing unit. of such proof of costs and other mat- Under section 2101(a) of chapter 21, for ters as the Secretary may deem nec- the purpose of computing the amount essary. of benefits payable to a veteran-bene- [13 FR 7282, Nov. 27, 1948, as amended at 46 ficiary, there may be included in the FR 43674, Aug. 31, 1981] total cost to the veteran the following amount, not to exceed $50,000. § 36.4406 Disbursement of benefit au- (1) The cost of the necessary land and thorized. the grading, landscaping, and improve- After approval of an application for a ment thereof for use for residential grant, the Secretary shall decide upon purposes. a method of disbursement which in the (2) The cost of the improvement Secretary’s opinion is appropriate and erected thereon and the appurtenances advisable in the interest of the veteran thereto, including such heating, cook- and the Government and disburse the ing, laundry, and refrigeration equip- benefit payable accordingly. Disburse- ment as may be suitable to equip a ments may be made to the veteran or housing unit for residential use. to third parties who have contracted (3) The cost of remodeling a housing with the veteran, or to an escrow agent unit. under conditions imposed by the Sec- (4) The cost of movable facilities and retary. special fixtures. [14 FR 5780, Sept. 22, 1949, as amended at 46 (5) Reasonable architects’ and attor- FR 43674, Aug. 31, 1981] neys’ fees for services rendered to the veteran which are necessary to and are § 36.4407 Supplementary administra- in connection with the transaction. tive action. (6) Any charges for the customary Notwithstanding any requirement, necessary connections to or extensions condition, or limitation stated in or of public facilities and improvements. imposed by §§ 36.4401 through 36.4410, (7) Such other reasonable costs or ex- the Secretary, within the limitations penses incurred in closing a loan or fi- and conditions prescribed in 38 U.S.C. nancing the aquisition of the housing chapters 3 and 21, may take such ac- and land, including unpaid taxes, tion as may be necessary or appro- ground rents, or assessments, which priate to relieve undue prejudice to a

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veteran or a third party contracting or quired by the Secretary to be utilized dealing with such veteran which might as the Secretary deems advisable for otherwise result. payment of any of the following costs [24 FR 2657, Apr. 7, 1959] or debts which are obligations of the veteran before any part of the grant § 36.4408 Delegation of authority. may be paid to the veteran directly: (a) Except as hereinafter provided, (a) Cost of necessary land, each employee of the Department of (b) Cost of constructing, adapting, or Veterans Affairs heretofore or here- remodeling a housing unit. after appointed to, or lawfully filling, (c) Delinquent taxes secured by a lien any position designated in paragraph on the housing unit, (b) of this section is hereby delegated (d) Reduction or retirement of any authority, within the limitations and indebtedness incurred in connection conditions prescribed by law, to exer- with the purchase, construction, or re- cise the powers and functions of the modeling of a housing unit on which Secretary with respect to assisting eli- the grant is made. gible veterans to acquire specially adapted housing. [13 FR 7283, Nov. 27, 1948, as amended at 46 (b) Designated positions: FR 43674, Aug. 31, 1981] Under Secretary for Benefits. Director, Loan Guaranty Service. § 36.4411 Geographical limits. Assistant Director for Construction and Any real property purchased, con- Valuation. structed, altered, improved, repaired, Chief, Specially Adapted Housing Unit, Loan or specially adapted, in whole or in Guaranty Service. Director, Medical and Regional Office Cen- part, with the proceeds of any specially ter. adapted housing grant, shall be situ- Director, VA Regional Office and Insurance ated in the United States, which, for Center. purposes of 38 U.S.C. chapter 21, is de- Director, VA Regional Office. fined as the several States, Territories, Loan Guaranty Officer. Assistant Loan Guaranty Officer. and possessions, including the District of Columbia, the Commonwealth of (c) Nothing in this section shall be Puerto Rico, Guam, American Samoa, construed to authorize any employee the Commonwealth of the Northern designated in paragraph (b) of this section to determine basic eligibility or Mariana Islands, and any other area medical feasibility, except as otherwise over which the United States may, at authorized. some future date, acquire sovereignty. [13 FR 7282, Nov. 27, 1948, as amended at 19 (Authority: 38 U.S.C. 501, 2101 (a) and (b)) FR 3225, June 2, 1954; 46 FR 43674, Aug. 31, [47 FR 29231, July 6, 1982] 1981; 61 FR 28059, June 4, 1996]

§ 36.4409 Guaranteed or insured loans Subpart D—Direct Loans under 38 U.S.C. chapter 37. In any case where, in addition to the NOTE: Those requirements, conditions, or benefits of chapter 21, the veteran will limitations which are expressly set forth in 38 U.S.C. chapter 37 are not restated herein utilize the veteran’s entitlement to the and must be taken into consideration in the loan guaranty or insurance benefits of interpretation or application of the regula- 38 U.S.C. chapter 37, the complete tions concerning direct loans to veterans. transaction must be in accord with applicable regulations promulgated [24 FR 2658, Apr. 7, 1959] thereunder excepting § 36.4306 thereof. § 36.4500 Applicability. [24 FR 2657, Apr. 7, 1959, as amended at 46 FR 43674, Aug. 31, 1981] (a) The regulations concerning direct loans to veterans shall be applicable to § 36.4410 Allocation of the funds of the loans made by Department of Veterans grant. Affairs pursuant to 38 U.S.C. 3711. Any amount payable as a grant under (b) Sections 36.4501, 36.4512, and section 2101(a), chapter 21 may be re- 36.4527, which concern direct loans to

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Native American veterans shall be ap- Improvement means any addition or plicable to loans made by the Sec- alteration which enhances the utility retary pursuant to 38 U.S.C. 3761 of the property for residential pur- through 3764. poses. Indebtedness means the unpaid prin- (Authority: 42 U.S.C. 4012a) cipal and interest plus any other sums (c) Title 38, U.S.C. chapter 37 is a a borrower is obligated to pay Depart- continuation and restatement of the ment of Veterans Affairs under the provisions of title III of the Service- terms of the loan instruments or of the men’s Readjustment Act of 1944, and regulations concerning direct loans to may be considered to be an amendment veterans. to such title III. References in the reg- Loan means a loan made to a veteran ulations concerning direct loans to vet- by Department of Veterans Affairs pur- erans to the sections or chapters of suant to the provisions of 38 U.S.C. 3711 title 38, United States Code, shall, or 3762 and the regulations concerning where applicable, be deemed to refer to direct loans to veterans. the prior corresponding provisions of Meaningful interest means a leasehold the law. estate or other interest in trust land and any improvements thereon which [24 FR 2658, Apr. 7, 1959, as amended at 58 FR permits the use, occupancy and enjoy- 59660, Nov. 10, 1993; 62 FR 5531, Feb. 6, 1997] ment of that land and any improve- § 36.4501 Definitions. ments by the grantee. This interest must be capable of being conveyed (1) Wherever used in 38 U.S.C. 3711, 3762 as security for a loan made under 38 or the regulations concerning direct CFR 36.4527, (2) by the grantee to a loans to veterans, unless the context third party subject to the approval of otherwise requires, the terms defined the tribal organization and the Sec- in this section shall have the meaning retary or designee, and (3) by the Sec- herein stated, namely: retary or other foreclosing mortgagee, Cost means the entire consideration subject to the provisions of a memo- paid or payable for or on account of the randum of understanding entered into application of materials and labor to by the Secretary or designee, the tribal tangible property. organization, and the Bureau of Indian Default means failure of a borrower Affairs. to comply with the terms of a loan Native American means: agreement. (1) An Indian, as defined in section Dwelling means a building designed 4(d) of the Indian Self-Determination primarily for use as a home, consisting and Education Assistance Act (25 of one residential unit only and not U.S.C. 450b(d)); containing any business unit. Energy conservation improvement. An (2) A native Hawaiian, as defined in improvement to an existing dwelling’or section 201(a)(7) of the Hawaiian Homes farm residence through the installation Commission Act of 1920, (Public Law of a solar heating system, a solar heat- 67–34, 42 Stat. 108); ing and cooling system, or a combined (3) An Alaska Native within the solar heating and cooling system, or meaning provided for the term ’Native’ through application of a residential en- in section 3(b) of the Alaska Native ergy conservation measure as pre- Claims Settlement Act (43 U.S.C. scribed in 38 U.S.C. 3710(d) or by the 1602(b)); and Secretary. (4) A Pacific Islander, within the Farm residence means a dwelling lo- meaning of the Native American Pro- cated on a farm which is to be occupied grams Act of 1974 (42 U.S.C. 2991 et seq.) by the veteran as the veteran’s home. Native American veteran means any Guaranty means the obligation of the veteran who is a Native American. United States, incurred pursuant to 38 Period of more than 180 days means 181 U.S.C. chapter 37, to repay a specified or more calendar days of continuous percentage of a loan upon the default active duty. of the primary debtor. Purchase price means the entire legal Home means a place of residence. consideration paid or payable upon or

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on account of the sale of property, ex- § 36.4502 Use of guaranty entitlement. clusive of acquisition costs, or for the The guaranty entitlement of the vet- cost of materials and labor to be ap- eran obtaining a direct loan which is plied thereto. closed on or after February 1, 1988, Reasonable value means that figure shall be charged with the lessor of the which represents the amount a rep- loan amount or an amount which bears utable and qualified appraiser, unaf- the same ratio to $36,000 as the amount fected by personal interest, bias, or of the loan bears to $33,000. The charge prejudice, would recommend to a pro- against entitlement of a veteran who spective purchaser as proper price or obtained a direct loan which was closed cost in the light of prevailing condi- prior to the aforesaid date, shall be the tions. amount which would have been charged Repairs means any alteration of ex- had the loan been closed subsequent to isting realty which is necessary or ad- such date. visable for protective, safety, or restorative purposes. (Authority: 38 U.S.C. 3711(d)(2)(A)) Secretary means the Secretary of Vet- [55 FR 40657, Oct. 4, 1990] erans Affairs, or any employee of the Department of Veterans Affairs au- § 36.4503 Amount and amortization. thorized to act in the Secretary’s (a) The original principal amount of stead. any loan made on or after February 1, Tribal organization has the same 1988, shall not exceed an amount which meaning given in section 4(l) of the In- bears the same ratio to $33,000 as the dian Self-Determination and Education amount of the guaranty to which the Assistance Act (25 U.S.C. 450b(1)) and veterans is entitled under 38 U.S.C. 3710 includes the Department of Hawaiian at the time the loan is made bears to Homelands, in the case of native Ha- $36,000. This limitation shall not pre- waiians, and such other organizations clude the making of advances, other- as the Secretary may prescribe. wise proper, subsequent to the making Trust land means any land that: of the loan pursuant to the provisions (1) Is held in trust by the United of § 36.4511. Except as to home improve- States for Native Americans; ment loans, loans made by VA shall (2) Is subject to restrictions on alien- near interest at the rate of 71⁄2 percent ation imposed by the United States on per annum. Loans solely for the pur- Indian lands (including native Hawai- poses of energy conservation improve- ian homelands); ments or other alterations, improve- (3) Is owned by a Regional Corpora- ments, or repairs shall bear interest at tion or a Village Corporation, as such the rate of 9 percent per annum. terms are defined in section 3(g) and 3(j) of the Alaska Native Claims Settle- (Authority: 38 U.S.C. 3711(d)(2)(A)) ment Act, respectively (43 U.S.C. (b) Each loan shall be repayable on 1602(g), (j)); or the basis of approximately equal (4) Is on any island in the Pacific monthly installments; except that in Ocean if such land is, by cultural tradi- the case of loans made for any of the tion, communally-owned land, as deter- purposes described in clause (2), (3), or mined by the Secretary. (4) of subsection (a) of 38 U.S.C. 3710, Department of Veterans Affairs means such loans may provide for repayment the Secretary of Veterans Affairs, or in quarterly, semiannual, or annual in- any employee of the Department of stallments, provided that such plan of Veterans Affairs authorized to act in repayment corresponds to the present the Secretary’s stead. and anticipated income of the veteran. (c) The first installment payment on (Authority: 38 U.S.C. 3761–3764) a loan to construct, alter or improve a farm residence or other dwelling may [24 FR 2658, Apr. 7, 1959, as amended at 31 FR be postponed for a period not exceeding 16713, Dec. 30, 1966; 35 FR 17180, Nov. 7, 1970; 40 FR 4143, Jan. 28, 1975; 41 FR 32218, Aug. 2, 12 months from the date of the loan in- 1976; 41 FR 44859, Oct. 13, 1976; 45 FR 20472, struments. The first installment pay- Mar. 28, 1980; 46 FR 43674, Aug. 31, 1981; 58 FR ment for a loan for the purchase of a 59660, Nov. 10, 1993] dwelling or farm on which there is a

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farm residence may not be postponed proceeds as the construction or other more than 60 days from the date of work progresses, the charge to the vet- loan closing: Provided, That if the loan eran-borrower shall be two percent is repayable in quarterly, semi-annual (2%) of the loan amount, but not less or annual installments, the first in- than $50 in any event. stallment payment date may be post- (2)(i) A loan fee of one percent of the poned for not more than 12 months total loan amount. All or part of such from the date of the loan instruments. fee may be paid in cash at loan closing (d) The final installment on any loan or all or part of the fee may be in- shall not be in excess of two times the cluded in the loan without regard to average of the preceding installments, the reasonable value of the property. In except that on a construction loan the computing the fee, the Department of final installment may be for an amount Veterans Affairs will disregard any not in excess of 5 percent of the origi- amount included in the loan to enable nal principal amount of the loan. The the borrower to pay such fee. If all or limitations imposed by this paragraph part of the fee is included in the loan, on the amount of the final installment the amount of the loan as increased shall not apply in the case of any loan may not exceed $33,000. extended or recast pursuant to § 36.4505 or 36.4506. (Authority: 38 U.S.C. 3729(a))

(Authority: 38 U.S.C. 501, 3703(c)(1), 3711(d)(1), (ii) The fee described in paragraph 3712 (f) and (g)) (b)(2)(i) of this section shall not be col- [15 FR 6288, Sept. 20, 1950, as amended at 24 lected from a veteran who is receiving FR 2658, Apr. 7, 1959; 52 FR 12382, Apr. 16, compensation (or who but for the re- 1987; 52 FR 18357, May 15, 1987; 53 FR 18983, ceipt of retirement pay would be enti- May 26, 1988; 53 FR 44401, Nov. 3, 1988; 53 FR tled to receive compensation) or from a 51551, Dec. 22, 1988; 54 FR 24557, June 8, 1989; surviving spouse described in section 54 FR 30384, July 20, 1989; 55 FR 6983, Feb. 28, 3701(b)(2) of title 38 U.S.C. 1990; 55 FR 40657, Oct. 4, 1990; 57 FR 37713, Aug. 20, 1992] (Authority: 38 U.S.C. 3729(b)) § 36.4504 Loan closing expenses. (iii) Collection of the loan fee de- (a) Department of Veterans Affairs scribed in this paragraph (b)(2) of this will designate a loan closer to rep- section shall not apply to loans closed resent the Department of Veterans Af- prior to August 17, 1984, or to loans fairs at the closing and in advance closed after September 30, 1987. thereof will agree with the loan closer upon the fee to be paid by the Depart- (Authority: 38 U.S.C. 3729(d)) ment of Veterans Affairs for preparing (3) Costs or expenses normally paid the loan closing instruments and at- by a purchaser or lienor incident to tending at the closing of the loan. The loan closing including but not limited loan closer as such is neither an agent to the following: nor employee of the Department of Veterans Affairs. (i) Fee of Department of Veterans Af- (b) With respect to a loan made to a fairs designated compliance inspector; veteran-borrower pursuant to an appli- (ii) Recording fees and recording cation (VA Form 26-1802a, received by taxes or other charges incident to rec- the Department of Veterans Affairs on ordation; or after March 3, 1966, the borrower (iii) That portion of taxes, assess- shall pay the Department of Veterans ments, and other similar items for the Affairs the following: current year chargeable to the bor- (1) $50, or one percent (1%) of the rower and the initial deposit (lump- loan amount, whichever is greater, sum payment) for the tax and insur- which charge shall be in lieu of the ance account; loan closer’s fee, credit report, and cost (iv) Hazard insurance as required by of appraisal: Provided, That if the loan § 36.4512, is to finance the cost of construction, (v) Survey, if any; repairs, alterations, or improvements (vi) Title examination and title evi- necessitating disbursements of the loan dence.

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Charges or costs payable by the vet- (c) Nothing in this section shall pre- eran-borrower, except as to the pay- clude extension of the loan pursuant to ment of the loan fee described in para- the provisions of § 36.4506. graph (b)(2)(i) of this section, shall be (Authority: 38 U.S.C. 3703 (c)(1), (d)(1)) paid in cash and may not be paid out of [46 FR 43675, Aug. 31, 1981] the proceeds of the loan. No service or brokerage fee shall be charged against § 36.4506 Recasting. the veteran-borrower by any third In the event of default or to avoid party for procuring a direct loan or in imminent default, the Department of connection therewith. Veterans Affairs may at any time enter (c) With respect to a loan to con- into an agreement with the borrower struct, repair, alter, or improve a farm which will permit the latter tempo- residence or other dwelling, the De- rarily to repay the obligation on a partment of Veterans Affairs may re- basis appropriate to the borrower’s ap- quire the veteran to deposit with the parent current ability to pay or may Department of Veterans Affairs, or in enter into an appropriate recasting or an escrow satisfactory to the Depart- extension agreement: Provided, That no ment of Veterans Affairs, 10 percent of such agreement shall extend the ulti- the estimated cost thereof or such al- mate repayment of a loan beyond the ternative sum, in cash or its equiva- expiration of 30 years and 32 days from lent, as the Department of Veterans the date of the loan. Provided further, Affairs may determine to be necessary That nothing in this section shall be in order to afford adequate assurance deemed to limit the forbearance or in- that sufficient funds will be available, dulgence which the Secretary may ex- from the proceeds of the loan or from tend in an individual case pursuant to other sources, to assure completion of the provisions of 38 U.S.C. 3720(f). the construction, repair, alteration, or [46 FR 43675, Aug. 31, 1981] improvement in accordance with the plans and specifications upon which § 36.4507 Refinancing of mortgage or other lien indebtedness. the Department of Veterans Affairs based its loan commitment. (a) Loans may be made for the purpose of refinancing (38 U.S.C. 3710(a)(5)) (Authority: 38 U.S.C. 501, 3724, and 3729) an existing mortgage loan or other indebtedness secured by a lien of record [15 FR 6288, Sept. 20, 1950, as amended at 23 on a dwelling or farm residence owned FR 2339, Apr. 10, 1958; 33 FR 6976, May 9, 1968; and occupied by an eligible veteran as 35 FR 17180, Nov. 7, 1970; 41 FR 32218, Aug. 2, the veteran’s home, provided that: 1976; 47 FR 46700, Oct. 20, 1982; 50 FR 5755, (1) The amount of the loan does not Feb. 12, 1985] exceed the sum due the holder of the § 36.4505 Maturity of loan. mortgage or other lien indebtedness on such dwelling or farm residence, and (a) The maturity of a loan shall not also is not more than the reasonable exceed 25 years and 32 days. If the De- value of the dwelling or farm residence, partment of Veterans Affairs deter- and mines the income and expenses of a (2) The loan is otherwise eligible. veteran-applicant under customary (b) A refinancing loan for an amount credit standards would prevent the vet- which exceeds the sum due the holder eran from making the required loan of the mortgage or other lien indebted- payments for a loan which matures in ness (the excess proceeds to be paid to 25 years and 32 days, but the veteran the veteran) may also be made, Pro- would be able to make the loan pay- vided, That: ments over a longer period of time, the (1) The loan is otherwise eligible, and loan may be made with a maturity not (2) The issuance of a commitment to in excess of 30 years and 32 days. make any such loan for an amount (b) Every loan shall be repayable which exceeds eighty (80) percent of the reasonable value of the veteran’s dwell- within the estimated economic life of ing or farm residence shall require, un- the property securing the loan. less the Under Secretary for Benefits

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otherwise directs, the approval of the larger in height than other sizes, minor Director, Loan Guaranty Service. deviations in size will be permitted (c) Nothing shall preclude making a based on commercially available type loan pursuant to the provisions of 38 sizes nearest to 21⁄2 times the size of the U.S.C. 3710(a)(5) to an eligible veteran print on the document. having home loan guaranty entitle- (2) The instrument securing a direct ment to refinance a loan previously loan for which a commitment is made guaranteed insured or made by the Sec- on or after March 1, 1988, shall include: retary which is outstanding on the (i) A provision that the Department dwelling or farm residence owned and of Veterans Affairs or other holder may occupied or to be reoccupied after the declare the loan immediately due and completion of major alterations, repayable upon transfer of the property pairs, or improvements to the prop- securing such loan to any transferee erty, by the veteran as the veteran’s unless the acceptability of the assump- home. tion of the loan is established pursuant to section 3714. This option may not be (Authority: 38 U.S.C. 3711) exercised if the transfer is the result (d) A refinancing loan may include of: contractual prepayment penalties, if (A) The creation of a lien or other en- any, due the holder of the mortgage or cumbrance subordinate to the lender’s other lien indebtedness to be refi- security instrument which does not re- nanced. late to a transfer of rights of occu- (e) Nothing in this section shall pre- pancy in the property; clude the refinancing of the balance (B) The creation of a purchase money due for the purchase of land on which security interest for household appli- new construction is to be financed ances; through the proceeds of the loan, or (C) A transfer by devise, descent, or the refinancing of the balance due on operation of law on the death of a joint an existing land sale contract relating tenant or tenant by the entirety; to a veteran’s dwelling or farm resi- (D) The granting of a leasehold inter- dence. est of three years or less not con- [35 FR 18872, Dec. 11, 1970, as amended at 46 taining an option to purchase; FR 43675, Aug. 31, 1981; 49 FR 42571, Oct. 23, (E) A transfer to a relative resulting 1984; 61 FR 28059, June 4, 1996] from the death of a borrower; (F) A transfer where the spouse or § 36.4508 Transfer of property by bor- children of the borrower become a joint rower. owner of the property with the bor- (a) Direct loans for which commit- rower; ments are made on or after March 1, (G) A transfer resulting from a decree 1988, are not assumable without the of a dissolution of marriage, legal sepa- prior approval of the Department of ration agreement, or from an inci- Veterans Affairs or its authorized dental property settlement agreement agent. The following shall apply: by which the spouse of the borrower be- (1) The Department of Veterans Af- comes the sole owner of the property. fairs shall include in the mortgage or In such a case the borrower shall have deed of trust and the promissory note the option of applying directly to the or bond on any loan for which a com- Department of Veterans Affairs re- mitment was made on or after March 1, gional office of jurisdiction for a re- 1988, the following warning in a con- lease of liability under 1813(a); or spicuous position in capital letters on (H) A transfer into an inter vivos the first page of the document in type trust in which the borrower is and re- at least 21⁄2 times larger than the reg- mains a beneficiary and which does not ular type on such page: ‘‘THIS LOAN relate to a transfer of rights of occu- IS NOT ASSUMABLE WITHOUT THE pancy in the property. APPROVAL OF THE DEPARTMENT (ii) A provision that a funding fee OF VETERANS AFFAIRS OR ITS AU- equal to one-half of one percent of the THORIZED AGENT’’. Due to the dif- loan balance as of the date of transfer ficulty in obtaining some commercial shall be payable to the Department of type sizes which are exactly 21⁄2 times Veterans Affairs or its authorized

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agent. Furthermore, this provision (3) The transferee who is liable to the shall provide that if this fee is not paid Secretary is found to have been a satis- it shall constitute an additional debt factory credit risk at the time the to that already secured by the instru- transferee acquired the property. ment; and, (iii) A provision authorizing an as- (Approved by the Office of Management and Budget under control number 2900–0516) sumption processing charge, not to exceed the lesser of $300 and the actual [15 FR 6289, Sept. 29, 1950, as amended at 33 cost of a credit report or any maximum FR 5362, Apr. 4, 1968; 37 FR 24034, Nov. 11, prescribed by applicable State law. 1972; 46 FR 43675, Aug. 31, 1981; 55 FR 37477, Sept. 12, 1990] (Authority: 38 U.S.C. 3714) § 36.4509 Joint loans. (b) Whenever any veteran disposes of (a) No loan will be made unless an el- residential property securing a direct igible veteran is the sole principal obli- loan obtained under 38 U.S.C. chapter gor, or such veteran and spouse or eli- 37, the Department of Veterans Affairs, gible veteran co-applicant are the prin- upon application made by such bor- cipal obligors thereon, nor unless such rower, shall issue to the borrower a re- veteran alone, or together with a lease relieving the borrower of all fur- spouse or eligible veteran co-applicant, ther liability to the Department of acquire the entire fee simple or other Veterans Affairs on account of such permissible estate in the realty for the loan (including liability for any loss re- acquisition of which the loan was ob- sulting from any default of the trans- tained. Nothing in this section shall feree or any subsequent purchaser of preclude other parties from becoming such property) if the Department of liable as comaker, endorser, guarantor, Veterans Affairs has determined, after or surety. such investigation as it deems appro- (b) Notwithstanding that an appli- priate, that there has been compliance cant and spouse or other co-applicant with the conditions prescribed in 38 are both eligible veterans and will be U.S.C. 3713(a) or 1814, as appropriate. jointly and severally liable as bor- The assumption of full liability for re- rowers, the original principal amount payment of the loan by the transferee of the loan may not exceed the max- of the property must be evidenced by imum permissible under § 36.4503(a). In an agreement in writing in such form any event the loan may not exceed as the Department of Veterans Affairs $33,000. may require. Any release of liability granted to a veteran by the Depart- (Authority: 38 U.S.C. 3711(d)(2)(A) and (3)) ment of Veterans Affairs shall inure to the spouse of such veteran. [43 FR 60460, Dec. 28, 1978] (c) If, on or after July 1, 1972, any veteran disposes of the property secur- § 36.4510 Prepayment, acceleration, ing a direct loan obtained under 38 and liquidation. U.S.C. chapter 37, without receiving a (a) Any credit on the loan not pre- release from liability with respect to viously applied in satisfaction of ma- such loan under 38 U.S.C. 3713(a) and a tured installments, other than the gra- default subsequently occurs which re- tuity credit required by prior provi- sults in liability of the veteran to the sions of law to be credited to principal, Secretary on account of the loan, the may be reapplied by the Department of Secretary may relieve the veteran of Veterans Affairs at the request of the such liability if the Secretary deter- borrower for the purpose of curing or mines that: preventing a default. (1) A transferee either immediate or (b) The Department of Veterans Af- remote is legally liable to the Sec- fairs shall include in the instruments retary for the debt of the original vet- evidencing or securing the indebted- eran-borrower established after the ter- ness provisions relating to the fol- mination of the loan, and lowing: (2) The original loan was current at (1) The right of the borrower to pre- the time such transferee acquired the pay at any time without premium or property, and fee, the entire indebtedness or any part

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thereof: Provided, That any such pre- ratably and on a parity with the prin- payment, other than payment in full, cipal indebtedness, or otherwise se- may not be made in any amount less cured. The sum so advanced shall be than the amount of one installment, or evidenced by a supplemental note or $100, whichever is less: And provided otherwise as may be required by De- further, That any prepayment made on partment of Veterans Affairs. other than an installment due date will (c) Department of Veterans Affairs not be credited until the next following may pay and charge against the indebt- installment due date, but not later edness, or against the proceeds of the than 30 days after such prepayment. sale of any security therefor, any ex- (2) The right of the Department of pense which is reasonably necessary for Veterans Affairs to accelerate the ma- collection of the debt, protection, re- turity of the entire indebtedness in the possession, preservation, or liquidation event of default. of the security or of the lien thereon, (3) The right of the Department of including a reasonable amount for Veterans Affairs to foreclose or other- trustees’ and legal fees. wise proceed toliquidate or acquire (d) The Department of Veterans Af- property which is the security for the fairs may treat as an advance and add loan in the event of the borrower’s de- to the mortgage balance the one-half of linquency in the repayment of the obli- one percent funding fee due on a trans- gation or in the event of default in any fer under 38 U.S.C. 3714 when this is not other provisions of the loan contract. paid at the time of transfer. (c) The Department of Veterans Af- fairs shall have the right to accelerate (Authority: 38 U.S.C. 3714) the entire indebtedness and to fore- [15 FR 6289, Sept. 20, 1950, as amended at 38 close or otherwise proceed to liquidate, FR 33772, Dec. 7, 1973; 41 FR 44859, Oct. 13, or acquire the security for the loan, in 1976; 55 FR 37478, Sept. 12, 1990] the event the veteran is adjudged a § 36.4512 Taxes and insurance. bankrupt, or if the property has been abandoned by the borrower or sub- (a) In addition to the monthly in- jected to waste or hazard, or in the stallment payments of principal and event conditions exist which warrant interest payable under the terms of the the appointment of a receiver by court. loan agreement, the borrower will be required to make payments monthly to [15 FR 6289, Sept. 20, 1950, as amended at 20 the Secretary in such amounts as may FR 6260, Aug. 26, 1955; 24 FR 2658, Apr. 7, 1959; 41 FR 44859, Oct. 13, 1976; 61 FR 28059, June 4, be determined by the Secretary from 1996] time to time to be necessary for the purpose of accumulating funds suffi- § 36.4511 Advances after loan closing. cient for the payment of taxes and as- (a) The Department of Veterans Af- sessments, ground rents, insurance pre- fairs may at any time advance any sum miums, and similar levies or charges or sums as are reasonably necessary on the security property. The borrower and proper for the maintenance, repair, at loan closing shall pay in cash to the alteration, or improvement of the secu- Secretary such sum as it estimates rity for a loan or for the payment of may be necessary as the initial deposit taxes, assessments, ground or water to the borrower’s tax and insurance re- rights, or casualty insurance thereon: serve account. Provided, That no advance shall be made for alterations or improvements (Authority: 38 U.S.C. 3720) which are not necessary for the main- (b) The borrower shall procure and tenance or repair of the security if maintain insurance of a type or types such advance will increase the indebt- and in such amounts as may be re- edness to an amount in excess of quired by the Secretary to protect the $33,000. security against fire and other hazards. (b) All sums disbursed incident to the The Secretary cannot make a loan for making of advances under this section the acquisition or construction of prop- shall be added to the indebtedness. De- erty located in an area identified by partment of Veterans Affairs may re- the Federal Emergency Management quire any such advances to be secured Agency as having special flood hazards

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unless the community in which such ligors, or such lesser amount as may be area is situated is then participating in agreed upon between the obligors and the National Flood Insurance Program. the Department of Veterans Affairs. The Secretary shall not make, in- [23 FR 2340, Apr. 10, 1958] crease, extend, or renew a loan secured by a building or manufactured home § 36.4514 Eligibility requirements. that is located or to be located in an area identified by the Federal Emer- Prior to making a loan, or a commit- gency Management Agency as having ment therefor, the Department of Vet- special flood hazards and in which flood erans Affairs shall determine that: insurance has been made available (a) The applicant is an eligible vet- under the National Flood Insurance eran. Act, as amended, unless the building or (b) The applicant has full capacity manufactured home and any personal under local law to enter into binding property securing the loan is covered contracts. by flood insurance for the term of the (c) The applicant is a satisfactory loan. The amount of flood insurance credit risk and has the ability to repay must be at least equal to the lesser of the obligation proposed to be incurred the outstanding principal balance of and that the proposed payments on the loan or the maximum limit of cov- such obligation bear a proper relation- erage available for the particular type ship to present and anticipated income of property under the National Flood and expenses as determined by use of Insurance Act, as amended. The re- the credit standards in § 36.4337 of this quirements of 38 CFR 36.4700 through part. 36.4709 shall apply to direct loans made pursuant to 38 U.S.C. 3711 and 3761 (Authority: 38 U.S.C. 501) through 3764. All hazard and flood in- (d) Private capital is not available in surance shall be carried with a com- the area at an interest rate not in ex- pany or companies satisfactory to the cess of the rate authorized for guaran- Secretary and the policies and renew- teed home loans for a loan for which als thereof shall be held in the posses- the veteran is qualified under 38 U.S.C. sion of the Secretary and contain a 3710. mortgagee loss payable clause in favor (e) The applicant is unable to obtain of and in a form satisfactory to the a loan for such purpose from the Sec- Secretary. retary of Agriculture, under the Bankhead-Jones Farm Tenant Act, as (Authority: 42 U.S.C. 4012a, 4106(a)) amended, or under the Housing Act of [62 FR 5531, Feb. 6, 1997] 1949. (f) In respect to a loan application re- § 36.4513 Foreclosure and liquidation. ceived on or after September 15, 1956, In the event of a foreclosure sale or there has been compliance by the ap- other liquidation of the security for a plicant with the certification require- loan, the Department of Veterans Af- ments prescribed in 38 U.S.C. 3704(c). fairs shall credit upon the indebtedness (g) The applicant has certified, in the greater of: such form as the Secretary shall pre- (a) The net proceeds of the sale, or scribe, that (b) The current market value of the (1) Neither the applicant nor anyone property as determined by the Depart- authorized to act for the applicant, will ment of Veterans Affairs, less the costs refuse to sell or rent, after the making and expenses of liquidation. of a bonafide offer, or refuse to nego- In no event shall the credit pursuant to tiate for the sale or rental of, or other- paragraph (b) of this section exceed the wise make unavailable or deny the amount of the gross indebtedness, nor dwelling or property covered by this shall such credit be less than the loan to any person because of race, amount legally required to be credited color, religion, sex, handicap, familial to the indebtedness under local law. If status, or national origin; a deed in lieu of foreclosure is accept- (2) The applicant recognizes that any ed, the consideration will be a full and restrictive convenant on the property complete release of liability of the ob- relating to race, color, religion, sex,

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handicap, familial status, or national (4) A beneficial interest in a rev- origin is illegal and void and any such ocable Family Living Trust that en- covenant is specifically disclaimed; and sures that the veteran, or veteran and (3) The applicant understands that spouse, have an equitable life estate, civil action for preventive relief may provided the lien attaches to any re- be brought by the Attorney General of mainder interest and the trust arrange- the United States in any appropriate ment is valid under State law. U.S. District Court against any person (b) Any such property or estate will responsible for a violation of the appli- not fail to comply with the require- cable law. ments in paragraph (a) of this section by reason of the following: [15 FR 6290, Sept. 20, 1950, as amended at 20 FR 6260, Aug. 26, 1955; 24 FR 2658, Apr. 7, 1959; (1) Encroachments; 36 FR 13032, July 13, 1971; 56 FR 9862, Mar. 8, (2) Easements; 1991] (3) Servitudes; (4) Reservations for water, timber, or § 36.4515 Estate of veteran in real subsurface rights; property. (5) Right in any grantor or cotenant (a) The estate in the realty acquired in the chain of title, or a successor of by the veteran, wholly or partly with either, to purchase for cash, which the proceeds of a loan hereunder, or right by the terms thereof is exer- owned by the veteran and on which im- cisable only if: provements on a farmhouse are to be (i) An owner elects to sell, financed by such loan, shall be not less (ii) The option price is not less than than: the price at which the then owner is (1) A fee simple estate therein, legal willing to sell to another, and or equitable; or (iii) Exercised within 30 days after (2) A leasehold estate running or re- notice is mailed by registered mail to newable at the option of the lessee for the address of optionee last known to a period of not less than 14 years from the then owner, of the then owner’s the maturity of the loan, or to any ear- election to sell, stating the price and lier date at which the fee simple title the identity of the proposed vendee; will vest in the lessee, which is assign- (6) Building and use restrictions able or transferable, if the same be sub- whether or not enforceable by a rejected to the lien; however, a leasehold verter clause if there has been no estate which is not freely assignable breach of the conditions affording a and transferable will be considered an right to an exercise of the reverter; acceptable estate if it is determined by (7) Any other covenant, condition, re- the Under Secretary for Benefits, or striction, or limitation approved by the the Director, Loan Guaranty Service, Department of Veterans Affairs in the (i) that such type of leasehold is cus- particular case. tomary in the area where the property The limitations on the quantum or is located; (ii) that a veteran or vet- quality of the estate or property that erans will be prejudiced if the require- are indicated in this paragraph, insofar ment for free assignability is adhered as they may materially affect the to and (iii) that the assignability and value of the property for the purpose other provisions applicable to the for which it is used, shall be taken into leasehold estate are sufficient to pro- account in the appraisal of reasonable tect the interests of the veteran and value. the Government and are otherwise ac- [15 FR 6290, Sept. 20, 1950, as amended at 24 ceptable; or FR 2658, Apr. 7, 1959; 28 FR 11506, Oct. 29, 1963; (3) A life estate, provided that the re- 33 FR 18027, Dec. 4, 1968; 34 FR 11095, July 1, mainder and reversionary interests are 1969; 45 FR 20472, Mar. 28, 1980; 56 FR 9862, subjected to the lien. The title to such Mar. 8, 1991; 61 FR 28059, June 4, 1996] estate shall be such as is acceptable to informed buyers, title companies, and § 36.4516 Lien requirements. attorneys, generally, in the community (a) Loans for the purchase of a dwell- in which the property is situated, ex- ing or for the purchase of a farm on cept as modified by paragraph (b) of which there is a farm residence shall be this section; or secured by a first lien on the property

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or estate. Loans for the construction of or community in which the veteran’s a farm residence or other dwelling realty is located, if the Secretary de- shall also be secured by a first lien. termines that the interests of the vet- (b) Loans solely for the purpose of en- eran-borrower and of the Government ergy conservation improvements or will not be prejudiced by the operation other alterations, improvements, or re- of such covenant. In respect to any pairs shall be secured in the following such superior lien to be created after manner: June 6, 1969, the Secretary’s determina- (1) Loans for $1,500 or less need not be tion must have been made prior to the secured, and in lieu of the title exam- recordation of the covenant. ination a statement may be accepted from the borrower that he or she has [20 FR 6261, Aug. 26, 1955, as amended at 20 an interest in the property not less FR 9180, Dec. 10, 1955; 23 FR 2340, Apr. 10, than that prescribed in § 36.4515(a). 1958; 34 FR 9561, June 18, 1969; 45 FR 20472, (2) Loans for more than $1,500 but 40 Mar. 28, 1980; 61 FR 28059, June 4, 1996] percent or less of the prior to the improved reasonable value of the property § 36.4517 Incorporation by reference. shall be secured by a lien reasonable The regulations concerning direct and customary in the community for loans to veterans in effect on the date the type of alteration, improvement, or a loan is closed shall govern the rights, repair financed. duties, and liabilities of the parties to (3) Loans for more than $1,500 and for such loan during the period the Depart- more than 40 percent of the prior to the ment of Veterans Affairs is the holder improved reasonable value of such thereof, and any provisions of the loan property shall be secured by a first lien instruments inconsistent with such on the property or estate. However, regulations are hereby amended and such a home improvement loan may be supplemented to conform thereto. secured by a lien immediately subordinate to the lien securing the previous [15 FR 6290, Sept. 20, 1950] loan extended by the Secretary, if the Department of Veterans Affairs is the § 36.4518 Supplementary administra- holder of all liens of superior priority tive action. on the property. Notwithstanding any requirement condition, or limitation stated in or (Authority: 38 U.S.C. 3711(d)(1)) imposed by the regulations in this part (c) Tax liens, special assessment concerning direct loans to veterans, liens, and ground rent shall be dis- the Under Secretary for Benefits, or regarded with respect to any require- the Director, Loan Guaranty Service, ment that loans shall be secured by a within the limitations and conditions lien of specified dignity. With the prior prescribed by the Secretary, may take approval of the Secretary, Under Sec- such action as may be necessary or ap- retary for Benefits, or Director, Loan propriate to relieve any undue preju- Guaranty Service, liens retained by dice to a debtor, or other person, which nongovernmental entities to secure as- might otherwise result, provided such sessments or charges for municipal action shall not impair the vested type services and facilities clearly rights of any person affected thereby. within the public purpose doctrine may If such requirement, condition, or limi- be disregarded. In determining whether tation is of an administrative or proce- a loan for the purchase or construction dural nature, such action may be taken of a home is secured by a first lien the by any employee authorized to act Secretary may also disregard a supe- under § 36.4520. rior lien created by a duly recorded covenant running with the realty in [23 FR 2340, Apr. 10, 1958, as amended at 61 favor of a private entity to secure an FR 28059, June 4, 1996] obligation to such entity for the homeowner’s share of the costs of the man- § 36.4519 Eligible purposes and reason- agement, operation, or maintenance of able value requirements. property, services or programs within (a) A loan may be made only for the and for the benefit of the development purpose hereinafter set forth in this

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paragraph, and the loan may not ex- uidate a prior lien against the prop- ceed the reasonable value of the property. erty as established by the Department (c) No direct loan may be made for of Veterans Affairs: the purpose of an interest rate reduc- (1) To purchase or construct a dwell- tion refinancing loan pursuant to 38 ing to be owned and occupied by the U.S.C. 3710(a)(8). veteran as a home; (2) To purchase a farm on which (Authority: 38 U.S.C. 3711(b)) there is a farm residence to be occupied [20 FR 6261, Aug. 26, 1955, as amended at 43 by the veteran as a home; FR 60461, Dec. 28, 1978; 46 FR 43675, Aug. 31, (3) To construct on land owned by the 1981; 49 FR 42571, Oct. 23, 1984] veteran a farm residence to be occupied § 36.4520 Delegation of authority. by the veteran as a home; (4) To repair, alter, or improve a farm (a) Except as hereinafter provided, residence or other dwelling owned and each employee of the Department of occupied or to be reoccupied after the Veterans Affairs heretofore or here- completion of major alterations, re- after appointed to, or otherwise law- pairs, or improvements to the prop- fully filling, any position designated in erty, by the veteran as his or her home; paragraph (b) of this section is hereby delegated authority, within the limita- (5) To make energy conservation im- tions and conditions prescribed by law, provements to a dwelling owned and to exercise the powers and functions of occupied or to be occupied after the the Secretary with respect to the mak- completion of major alterations, re- ing of loans and the rights and liabil- pairs, or improvements to the prop- ities arising therefrom, including but erty, by the veteran as his or her home; not limited to the collection or com- (6) To refinance (38 U.S.C. 3710(a)(5)) promise of amounts due, in money or existing mortgage loans or other lines other property, the extension, rear- which are secured of record on a dwell- rangement, or sale of loans, the man- ing or farm residence owned and occu- agement and disposition of secured or pied or to be reoccupied after the com- unsecured notes and other property. In pletion of major alterations, repairs or connection with direct loans made and improvements to the property, by the held by the Department of Veterans Af- veteran as the veteran’s home; fairs, such designated employees may Provided, The veteran certifies, in such take any action which they are author- form as the Secretary may prescribe, ized to consent to or approve in respect that he or she has paid in cash from his to guaranteed or insured loans under or her own resources on account of the regulations prescribed therefor by such purchase, construction, alter- the Secretary. Incidental to the exer- ation, repair, or improvement a sum cise and performance of the powers and equal to the difference, if any, between functions hereby delegated, each such the purchase price or cost of the prop- employee is authorized to execute and erty and its reasonable value. deliver (with or without acknowledg- (b) In the case of a loan for the con- ment) for, and on behalf of, the Sec- struction of a farm residence or other retary evidence of guaranty and such dwelling on land owned by the veteran, certificates, forms, conveyances, and a portion of the loan proceeds may be other instruments as may be appro- expended to liquidate an indebtedness priate in connection with the acquisi- secured by a lien against such land, but tion, ownership, management, sale, only if the reasonable value of the land transfer, assignment, encumbrance, is equal to or in excess of the amount rental, or other disposition of real or of the indebtedness secured by such personal property or of any right, title, lien and if the liquidation of such in- or interest therein, including, but not debtedness will permit the loan to be limited to, contracts of sale, install- secured by a first lien. Except as pro- ment contracts, deeds, leases, bills of vided in § 36.4507, no portion of the pro- sale, assignments, and releases; and to ceeds of a loan for repairs, alterations approve disbursements to be made for or improvements to a farm residence or any purpose authorized by 38 U.S.C. other dwelling may be expended to liq- chapter 37.

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(b) Designated positions: § 36.4522 Waivers, consents, and approvals. Under Secretary for Benefits Director, Loan Guaranty Service No waiver, consent, or approval re- Director, Medical and Regional Office Center quired or authorized by the regulations Director, VA Regional Office and Insurance concerning direct loans to veterans Center shall be valid unless in writing signed Director, Regional Office by Department of Veterans Affairs. Loan Guaranty Officer Assistant Loan Guaranty Officer [15 FR 6291, Sept. 20, 1950]

The authority hereby delegated to em- § 36.4523 Geographical limits. ployees of the positions designated in Any real property purchased, con- this paragraph may, with the approval structed, or improved with the proof the Under Secretary for Benefits, be ceeds of a loan under 38 U.S.C. 3711 redelegated. shall be situated in the United States, (c) Nothing in this section shall be which for purposes of 38 U.S.C. Chapter construed to authorize any such em- 37 is here defined as the several States, ployee to exercise the authority vested Territories, and possessions, and the in the Secretary under 38 U.S.C. 501 or District of Columbia, the Common- 3703(a)(2) or to sue or enter appearance for and on behalf of the Secretary or wealth of Puerto Rico, and the Com- confess judgment against the Secretary monwealth of the Northern Mariana Is- in any court without the Secretary’s lands: Provided. That no loan shall be prior authorization. made pursuant to 38 U.S.C. 3711 unless (d) Each Regional Office, regional of- the real property is located in one of fice and insurance center, and Medical the areas designated from time to time and Regional Office Center shall main- by the Department of Veterans Affairs tain and keep current a cumulative list as an area in which private capital is of all employees of that Office or Cen- not available under 38 U.S.C. chapter 37 ter who, since May 1, 1980, have occu- to eligible veterans for financing of the pied the positions of Director, Loan purchase, construction, repairs, alter- Guaranty Officer, and Assistant Loan ations, or improvement of a farm resi- Guaranty Officer. This list will include dence or other dwelling, as the case each employee’s name, title, date the may be. employee assumed the position, and [46 FR 43675, Aug. 31, 1981] the termination date, if applicable, of the employee’s tenure in such position. § 36.4524 Sale of loans. The list shall be available for public inspection and copying at the Regional In the event a direct loan is pur- Office, or Center, during normal busi- chased from the Department of Vet- ness hours. erans Affairs at any time pursuant to the provisions of 38 U.S.C. 3711(g), the (Authority: 38 U.S.C. 501, 3720(a)(5)) Department of Veterans Affairs may [23 FR 2340, Apr. 10, 1958, as amended at 43 issue a guaranty in connection there- FR 60461, Dec. 28, 1978; 45 FR 21243, Mar. 1, with within the maximums applicable 1980; 46 FR 43675, Aug. 31, 1981; 54 FR 34988, to loans guaranteed under 38 U.S.C. Aug. 23, 1989; 61 FR 28059, June 4, 1996] 3710 and such loans shall thereafter be subject to the applicable provisions of § 36.4521 Minimum property and construction requirements. the regulations governing the guaranty or insurance of loans to veterans, and No loan for the purchase or construc- such part of the regulations concerning tion of residential property shall be direct loans to veterans as may be in- made unless such property complies or consistent therewith or variant there- conforms with those standards of plan- from shall no longer govern the subse- ning, construction, and general accept- quent disposition of the rights and liability applicable thereto which have abilities of any interested parties. been prescribed by the Secretary. [24 FR 2659, Apr. 7, 1959] [23 FR 2340, Apr. 10, 1958]

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§ 36.4525 Requirement of a construc- (b) Notwithstanding that direct loan tion warranty. funds may be available for reservation Any commitment to make a direct when issuance of a reservation commit- loan and any approval of a direct loan ment is requested by a builder or spon- application issued or made on or after sor, the Department of Veterans Af- May 2, 1955, shall, if the purpose of the fairs may withhold issuance of such loan is to finance the construction of a commitment in any case in which it dwelling or farmhouse or to finance the determines that the experience or technical qualifications of the builder in repurchase of a newly constructed dwell- spect to home construction are not ac- ing, be subject to the express condition ceptable, or that other factors bearing that the builder, seller, or the real on the likelihood of the success of the party in interest in the transaction proposed project are such as to justify shall deliver to the veteran con- withholding issuance of a fund reserva- structing or purchasing such dwelling tion commitment. with the aid of a direct loan a warranty, in the form prescribed by the [23 FR 2340, Apr. 10, 1958] Secretary, that the property has been completed in substantial conformity § 36.4527 Direct housing loans to Na- with the plans and specifications upon tive American veterans on trust lands. which the Secretary based the valuation of the property, including any (a) The Secretary may make a direct modifications thereof, or changes or housing loan to a Native American vet- variations therein, approved in writing eran if: by the Secretary, and no direct loan (1) The Secretary has entered into a shall be disbursed in full unless a copy memorandum of understanding with of such warranty duly receipted by the respect to such loans with the tribal purchaser is submitted to the Depart- organization that has jurisdiction over ment of Veterans Affairs. the veteran; or (2) The tribal organization that has [20 FR 2463, Apr. 14, 1955, as amended at 46 jurisdiction over the veteran has en- FR 43676, Aug. 31, 1981] tered into a memorandum of understanding with any department or agen- § 36.4526 Issuance of fund reservation cy of the United States with respect to commitments. such loans and the memorandum com- (a) Any builder or sponsor proposing plies with the requirements of para- to construct one or more dwellings in graph (b) of this section. an area designated as eligible for direct loans may apply for a commitment for (Authority: 38 U.S.C. 3762(a)) the reservation of direct loan funds to (3) The memorandum is in effect be used for the making of loans to eli- when the loan is made and will remain gible veterans for the purchase or con- in effect until the maturity of the sub- struction of such dwellings. Such com- ject loan. mitment may be issued on such condi- (b)(1) Subject to paragraph (b)(2) of tions as the Department of Veterans this section, each memorandum of un- Affairs determines to be proper in the derstanding entered into by the Sec- particular case and will be valid for a retary with a tribal organization shall period of 3 months; provide for the following: Provided, That the Department of Vet- (i) That each Native American veterans Affairs may, for good and suffi- eran who is under the jurisdiction of cient reasons, extend the period of the the tribal organization and to whom commitment. No commitment shall be the Secretary makes a direct loan issued unless the builder or sponsor under this section shall have paid an amount equivalent (A) Holds, possesses, or acquires to 2 percent of the funds being re- using the proceeds of the loan a mean- served, which amount shall be non- ingful interest in a lot and/or dwelling refundable. The commitment shall be that is located on trust land; and nontransferable except with the writ- (B) Will purchase, construct, or im- ten approval of the Department of Vet- prove a dwelling on the lot using the erans Affairs. proceeds of the loan.

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(ii) That each Native American vet- under this section are made in a re- eran obtaining a direct loan under this sponsible and prudent manner. section will convey to the Secretary by (2) The Secretary, or his or her des- an appropriate instrument the interest ignee, may only enter into a memo- referred to in paragraph (A) as security randum of understanding with a tribal for the direct loan or, if the laws of the organization under this section if the tribal organization do not allow the Secretary, or designee, determines that veteran to convey the meaningful in- the memorandum provides for stand- terest to the Secretary, the memo- ards and procedures necessary to rea- randum of understanding may author- sonably protect the financial interests ize the tribe to serve as Trustee for the of the United States. Secretary for purposes of protecting (c)(1) Except as otherwise provided in the interest of the Secretary as lender. this paragraph, and notwithstanding (iii) That the tribal organization and the provisions of section 36.4503 of this each Native American veteran obtain- title, the principal amount of any loan ing a direct loan under this section will made under this section may not ex- permit the Secretary or his or her des- ceed $80,000. The original principal ignee to enter upon the trust land of amount of any loan made under this that organization or veteran for the section shall not exceed an amount purposes of carrying out such actions which bears the same ratio to $80,000 as as the Secretary or his or her designee the amount of the guaranty to which determines may be necessary: the veteran would be entitled under 38 (A) To evaluate the advisability of U.S.C. 3710 at the time the loan is made the loan; and bears to $36,000. (B) To monitor any purchase, con- (2) The Secretary may make loans struction, or improvements carried out which exceed the amount specified in using the proceeds of the loan. paragraph (c)(1) of this section in geo- (C) To protect the improvements graphic areas in which the Secretary from vandalism and the elements, has determined that housing costs are (D) To make property inspections in significantly higher than average hous- conjunction with loan servicing, finan- ing costs nationwide. The Secretary cial counseling, foreclosure, acquisi- shall determine the maximum loan tion, management, repair, and resale of amounts in such areas. The original the secured interest. principal amount of any such loan (iv) That the tribal organization has shall not exceed an amount which established standards and procedures bears the same ratio to the maximum that authorize the grantee to legally loan amount established by the Sec- establish the interest conveyed by a retary as the amount of the guaranty Native American veteran pursuant to to which the veteran would be entitled subsection (B) and terminate all inter- under 38 U.S.C. 3710 at the time the est of the veteran in the land and im- loan is made bears to $36,000. provements, including: (3) Loans made under this section (A) Procedures for foreclosing the shall bear interest at a rate determined loan in the event of a default; by the Secretary after considering (B) Procedures for acquiring posses- yields on comparable mortgages in the sion of the veteran’s interest in the secondary market, including bid and property; and ask prices on mortgage-backed securi- (C) Procedures for the resale of the ties guaranteed by the Government Na- property interest and/or the dwelling tional Mortgage Association (GNMA). purchased, constructed, or improved (4) The minimum requirements for using the proceeds of the loan. planning, construction, improvement, (v) That the tribal organization and general acceptability relating to agrees to such other terms and condi- any direct loan made under this sections with respect to the making of dition shall be consistent with the ad- rect loans to Native American veterans ministrative property standards estab- under the jurisdiction of the tribal or- lished for loans made or guaranteed ganization as the Secretary and the under title 38, U.S.C., chapter 37. tribal organization may negotiate in (d) Notwithstanding the provisions of order to ensure that direct loans made § 36.4504(b), for loans made under this

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section, the Native American veteran- that they should be modified on ac- borrower shall pay the following loan count of the purpose of the program to closing costs to the parties indicated: make available housing to Native (1) A loan fee of 1.25 percent of the American veterans living on trust total loan amount (2 percent for Re- lands. servists who qualify under the provi- (2) The Secretary shall determine the sions of 38 U.S.C. 3701(b)(5)) to the De- reasonable value of the leasehold or partment of Veterans Affairs. All or other property interest that will serve part of such fee may be paid in cash at as security for a loan made under this loan closing or all or part of the fee section in accordance with § 37.4519, of may be included in the loan without re- this chapter, unless the Secretary de- gard to the reasonable value of the termines that such requirements are property or the maximum loan impractical to implement in a geo- amount. In computing the fee, the De- graphic area, on particular trust lands, partment of Veterans Affairs will dis- or under circumstances specified by the regard any amount included in the loan Secretary. to enable the borrower to pay such fee. (f) In connection with the origination (2) The fee described in paragraph of any loan under this section, the Sec- (d)(1) of this section shall not be col- retary may make advances in cash to lected from a veteran who is receiving provide for repairs, alterations, and im- compensation (or who but for the re- provements and to meet incidental ex- ceipt of retirement pay would be enti- penses of the loan transaction. tled to receive compensation) or from a (g) Loans made under this section surviving spouse described in shall be amortized under a generally § 3701(b)(2) of title 38 U.S.C. recognized plan which provides for (3) If the Secretary designates a third equal monthly installments consisting party to process the loan package on of principal and interest, except for the VA’s behalf, a processing fee to that final installment, which may not be in third party not to exceed $300 plus the excess of two times the regular month- actual cost of any credit report re- ly installment. The limitation on the quired. amount of the final installment shall (4) Costs or expenses normally paid not apply in the case of any loan ex- by a purchaser or mortgagee incident tended, ballooned and/or reamortized. to loan closing including but not lim- (h) The Secretary may: ited to the following: (1) Take any action that the Sec- (i) Fees of the Department of Vet- retary determines to be necessary for erans Affairs designated appraisers and the custody, management, and protec- compliance inspectors; tion of properties and the realization (ii) Recording fees or other charges or sale of investments under the VA incident to recordation; Native American Direct Loan Program; (iii) That portion of assessments and (2) Determine any necessary expenses other similar items for the current and expenditures and the manner in year chargeable to the borrower; and which such expenses and expenditures (iv) Hazard insurance premiums, if shall be incurred, allowed, and paid; such insurance is available. (3) Employ, utilize, and compensate (5) Charges or costs payable by the persons, organizations, or departments Native American veteran-borrower, ex- or agencies (including departments and cept for the loan fee described in para- agencies of the United States) des- graph (d)(1) of this section, shall be ignated by the Secretary to carry out paid in cash and may not be paid out of necessary functions, including but not the proceeds of the loan. No service or limited to loan processing and serv- brokerage fee shall be charged against icing activities, appraisals, and prop- the Native American veteran-borrower erty inspections. by any third party for procuring a di- (i) Notwithstanding any requirement, rect loan. condition, or limitation stated in or (e)(1) The credit underwriting stand- imposed by any provision of this regu- ards of 38 CFR 36.4337 shall apply to lation, the Under Secretary for Bene- loans made under this section except to fits, or the Director, Loan Guaranty the extent the Secretary determines Service, within the limitations and

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conditions prescribed by the Secretary, to be made for any purpose authorized may execute memoranda of under- by 38 U.S.C. chapter 37. standing, make determinations con- (2) Designated positions: cerning the maximum direct loan amount as provided in paragraph (c) of Under Secretary for Benefits Deputy Under Secretary for Benefits this section, and take such supple- Director, Loan Guaranty Service mentary administrative action as may Director, Medical and Regional Office Center be necessary or appropriate to relieve Director, VA Regional Office and Insurance any undue prejudice to a debtor, or Center other person, which might otherwise Director, Regional Office result, provided such action shall not Loan Guaranty Officer impair the vested rights of any person Assistant Loan Guaranty Officer affected thereby. If such a requirement, condition, or limitation is of an admin- The authority hereby delegated to em- istrative or procedural nature, such ac- ployees of the positions designated in tion may be taken by any employee au- this paragraph may, with the approval thorized to act under paragraph (j) of of the Under Secretary for Benefits, be this section. redelegated. (j)(1) Except as hereinafter provided, (3) Nothing in this section shall be each employee of the Department of construed to authorize any such em- Veterans Affairs appointed to, or oth- ployee to exercise the authority vested erwise lawfully filling, any position in the Secretary under 38 U.S.C. 501(a) designated in paragraph (j)(2) of this or 3703(a)(2) or to sue or enter appear- section is hereby delegated authority, ance for and on behalf of the Secretary within the limitations and conditions or confess judgment against the Sec- prescribed by law, to exercise the pow- retary in any court without the Sec- ers and functions of the Secretary with retary’s prior authorization. respect to the making of loans and the (4) Each Regional Office, Regional Of- rights and liabilities arising therefrom, fice and Insurance Center, and Medical including, but not limited to the col- and Regional Office Center shall main- lection or compromise of amounts due, tain and keep current a cumulative list in money or other property, the exten- of all employees of that Office or Cen- sion, rearrangement, or sale of loans, ter who, since May 1, 1980, have occu- and the management and disposition of pied the positions of Director, Loan secured or unsecured notes and other Guaranty Officer, and Assistant Loan property. In connection with direct Guaranty Officer. This list will include loans made and held by the Depart- each employee’s name, title, date the ment of Veterans Affairs, such des- employee assumed the position, and ignated employees may take any ac- the termination date, if applicable, of tion which they are authorized to con- the employee’s tenure in such position. sent to or approve in respect to guaran- The list shall be available for public in- teed loans under § 36.4342. Incidental to spection and copying at the Regional the exercise and performance of the Office, or Center, during normal busi- powers and functions hereby delegated, ness hours. each such employee is authorized to (Authority: 38 U.S.C. 3761–3764) execute and deliver (with or without acknowledgment) for, and on behalf of, [58 FR 59660, Nov. 10, 1993, as amended at 68 FR 6627, Feb. 10, 2003] the Secretary such certificates, forms, conveyances, and other instruments as may be appropriate in connection with Subpart E—Sale of Loans, Guar- the acquisition, ownership, manage- antee of Payment, and Flood ment, sale, transfer, assignment, en- Insurance cumbrance, rental, or other disposition of real or personal property or of any § 36.4600 Sale of loans, guarantee of right, title, or interest therein, includ- payment. ing, but not limited to, contracts of (a) Whenever loans are sold by the sale, installment contracts, deeds, Department of Veterans Affairs, they leases, bills of sale, assignments, and will be clearly identified as loans sold releases; and to approve disbursements with or without recourse.

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(b) The payment of all loans sold paid in full, and to apply the entire with recourse shall be guaranteed in consideration in reduction of the prin- accordance with the provisions of this cipal balance of the loan. section. (5) To maintain the tax and insur- (c) Wherever the term ‘‘holder’’ ap- ance account as provided for in the pears in this section it shall mean the loan instruments and to pay accrued purchaser of a loan sold by the Sec- taxes, special assessments, ground or retary and any subsequent transferee water rents and premiums on fire or or assignee of such loan. The holder of other insurance properly chargeable to each loan sold subject to guaranty the tax and insurance account. shall be deemed to have agreed with (6) To submit to the Secretary notice the Secretary as follows: of any suit or action or other legal or equitable proceeding to which the hold- (Authority: 38 U.S.C. 501, 3720): er is a party (including a copy of every (1) To furnish the Secretary with no- procedural paper filed on behalf of the tice of default within 60 days after a holder or served on the holder), loan has become two full installments brought on or in connection with a in default. loan sold under this section or involving title to, or other lien on, the prop- (Authority: 38 U.S.C. 501, 3720) erty securing the loan, within the time (2) To maintain on the real estate a that would be required if the Secretary lien of the dignity assigned or trans- were a party to the proceeding. ferred to the purchaser by the Sec- (7) To submit to the Secretary for retary. prior approval any proposal to recast (3) To maintain insurance in an or extend the repayment terms of the amount sufficient to protect the secu- loan. rity against risks or hazards to which (8) To take no action to accelerate it may be subjected to the extent cus- the indebtedness or terminate the debt- tomary in the locality, and to apply or’s interest in the property without the proceeds of loss payments to the the prior approval of the Secretary. loan balance or the restoration of the (9) To make advances only for the security, as the holder may in the hold- maintenance and repairs reasonably er’s discretion deem proper. Flood in- necessary for the preservation of the surance will be required on any build- security, or for the payment of accrued ing or personal property securing a taxes, special assessments, ground or loan at any time during the term of the water rents, premiums on fire or other loan that such security is located in an insurance against loss or damage to area identified by the Federal Emer- the property, or for other purposes ap- gency Management Agency as having proved in advance by the Secretary. special flood hazards and in which flood (10) To furnish the Secretary prompt insurance has been made available notice of the cancellation of any repur- under the National Flood Insurance chase endorsement or notice on the Act, as amended. The amount of flood note or bond upon the payment in full insurance must be at least equal to the of any loan sold pursuant to this sec- lesser of the outstanding principal bal- tion or of the release of the Secretary ance of the loan or the maximum limit from liability to repurchase the loan. of coverage available for the particular (11) To maintain adequate accounting type of property under the National records and to provide the Secretary Flood Insurance Act, as amended. The with such data relating to the loan as notice requirements of 38 CFR 36.4709 the Secretary may request incident to shall apply to loans sold pursuant to the Secretary’s determination of the this section. amount payable in connection with a request for the repurchase of the loan. (Authority: 42 U.S.C. 4012a, 4104a) (12) To service the loans properly in (4) To obtain a consideration equal to accordance with established practices. the fair market value of any real estate (13) To permit the Secretary to in- released from the first lien securing spect, examine or audit at reasonable the loan, except where the loan will be times and places the records of loans

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which are subject to repurchase under (f) A delinquency of any amount has this section. continued for at least 6 months since (14) To sell any loan to the Secretary the account first became delinquent for the amount specified in paragraph and no written repayment plan has (e)(1) of this section upon request of been arranged. the Secretary if the loan is six (6) full (g) The loan has been submitted to installments or more in default. the Department of Veterans Affairs for (15) To dispose of partial payments in repurchase; accordance with the provisions of this (h) The lien position of the security paragraph. A partial payment is a re- instrument would be jeopardized by ac- mittance on a loan in default of any ceptance of the partial payment. amount less than the full amount due (iii) A failure by the holder to comply under the terms of the loan and secu- with the provisions of this paragraph rity instruments at the time the remit- may result in a deduction from the re- tance is tendered; a default is a failure purchase price pursuant to paragraph of a borrower to comply with the terms (e)(1) of this section. of a loan agreement. (i) Except as provided in paragraph (Authority: 38 U.S.C. 3720) (c)(15)(ii) of this section, or upon the express waiver of the Secretary, the NOTE: In any instance in which the holder mortgage holder shall accept any par- desires Department of Veterans Affairs prior approval to a proposed action the holder may tial payment and either apply it to the submit the facts to the Loan Guaranty Offi- mortgagor’s account or identify it with cer as provided in paragraph (i) of this sec- the mortgagor’s account and hold it in tion. a special account pending disposition. (16) To obtain and forward a current When partial payments held for dis- credit report(s) on the debtor(s) to the position aggregate a full monthly in- Secretary when requesting that the stallment, including escrow, they shall Secretary repurchase the loan. be applied to the mortgagor’s account. (ii) A partial payment may be re- (Authority: 38 U.S.C. 3703(c)(1) and 3720) turned to the mortgagor, within 10 calendar days from date of receipt of such (d) The Secretary’s guaranty liability payment, with a letter of explanation under this section shall consist of and only if one or more of the following be limited solely to liability to repur- conditions exist: chase the loan from the holder thereof (a) The property is wholly or par- whenever, tially tenant-occupied and rental pay- (1) The debtor is in default by reason ments are not being remitted to the of nonpayment of not less than two full holder for application to the loan ac- installments and default has continued count; for three months or more on the date (b) The payment is less than one full the holder submits its written request monthly installment, including es- for repurchase by the Secretary; or crows and late charge, if applicable, (2) The property securing the loan unless the lesser payment amount has has been abandoned by the debtor; or been agreed to under a written repay- (3) The debtor has failed to comply ment plan; with any other covenant or obligation (c) The payment is less than 50 per- of the loan contract and on the date of cent of the total amount then due, un- the holder’s request for repurchase less the lesser payment amount has such failure has continued for more been agreed to under a written repay- than 90 days after the holder’s demand ment plan; for compliance with the covenant or (d) The payment is less than the obligation, except that if the failure is amount agreed to in a written repay- due to nonpayment of real estate taxes ment plan; the failure to pay when due has per- (e) The amount tendered is in the sisted for a continuing period of 180 form of personal check and the holder days; or has previously notified the mortgagor (4) The Secretary determines, upon in writing that only cash or certified request of the holder to repurchase any remittances are acceptable; loan, that such repurchase is in the

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best interests of the Government not- (f) Notwithstanding any other provi- withstanding that the account is ineli- sion of this section, the Secretary shall gible for repurchase under paragraphs be released from liability and shall not (d) (1) through (3) of this section. be obligated to repurchase any loan in (e)(1) A cash payment shall be made respect to which: to the holder upon the repurchase of a (1) An obligor has been released from loan by the Secretary and shall be an personal liability by any act or omis- amount equal to the price paid by the sion of the holder without the prior ap- purchaser when the loan was sold by proval of the Secretary, except that a the Secretary, less repayments re- holder shall not be under any duty to ceived by the holder which are properly establish the debt as a valid claim applicable to the principal balance of against the assets of the estate of any deceased or bankrupt obligor when the loan, plus any advances made for such failure will not impair the valid- the purposes described in paragraph ity or effectiveness of the lien securing (c)(9) of this section, but no payments the loan; or shall be made for accrued unpaid inter- (2) The holder has instituted fore- est, except that with respect to loans closure action against the property se- sold by the Secretary after July 15, curing the loan without the prior ap- 1970, payment will be made for unpaid proval of the Secretary, and such ac- accured interest from the date of the tion has proceeded to the point where first uncured default to the date of the the judicial sale or sale under the claim for repurchase, but not in excess power in the deed of trust has been of interest for 120 days. If, however, held or the owner’s interest in the there has been a failure of any holder property has been terminated by the to comply with the provisions of para- holder by strict foreclosure, acceptance graph (c) of this section the Secretary of a voluntary deed, or by other liq- shall be entitled to deduct from the re- uidation action; or purchase price otherwise payable such (3) Any material alteration has been amount as the Secretary determines to made to the note, bond, security in- be necessary to restore the Secretary strument, or installment sale contract to the position the Secretary would after sale and delivery of the instru- have occupied upon repurchase of the ments by the Secretary to the pur- loan in the absence of any such failure. chaser. Incident to the repurchase by the Sec- (g)(1) Each employee of the Depart- retary, the holder will pay to the Sec- ment of Veterans Affairs heretofore or retary an amount equal to the balance, hereafter appointed to or lawfully fill- if any, remaining in the tax and insuring, any position designated in para- ance account. graph (g)(2) of this section is hereby (2) The holder shall be deemed to delegated authority within the limita- have received as trustee for the benefit tions and conditions prescribed by law of the Secretary any amounts received to exercise the powers and functions of on account of the loan indebtedness the Secretary with respect to the sale, subsequent to submitting its request to assignment, transfer, and repurchase of repurchase and shall pay such amounts loans, including, but not limited to the to the Department of Veterans Affairs offering of such loans for sale, the ac- upon the assignment and delivery of ceptance of purchase offers, the assign- the note, bond and security instrument or transfer of notes or bonds and ments to the Department of Veterans security instruments evidencing the Affairs. loans sold, granting the prior approval (3) The holder may be reimbursed for of the Secretary under this section, de- the cost of a current credit report(s) on termining the eligibility of the loans the debtor(s) which is (are) forwarded for repurchase and to calculate and pay to the Secretary along with the request the sum due the holder upon repur- for repurchase and for any other costs chase of the loan by the Department of or expenses incurred which are ap- Veterans Affairs. proved in advance by the Secretary as (2) Designated positions: being necessary to protect the Govern- Under Secretary for Benefits. ment’s interest. Director, Loan Guaranty Service.

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Director, Regional Office. loans sold pursuant to section 3711(g) of Director, Medical and Regional Office Cen- chapter 37, title 38, U.S.C. ter. Director, VA Center. (Authority: 38 U.S.C. 3703(c)(1) and 3720) Loan Guaranty Officer. (Information collection requirements con- Assistant Loan Guaranty Officer. tained in paragraphs (c) and (e) were ap- (h) No waiver, consent, or approval proved by the Office of Management and required or authorized by this section Budget under control number 2900–0840.) shall be valid unless in writing signed [27 FR 2686, Mar. 22, 1962, as amended at 39 by an employee of the Department of FR 7785, Feb. 28, 1974; 44 FR 25839, May 3, Veterans Affairs authorized in this sec- 1979; 45 FR 31065, May 12, 1980; 51 FR 4596, tion to act for the Secretary. Feb. 6, 1986; 52 FR 6548, Mar. 4, 1987; 53 FR 34296, Sept. 6, 1988; 61 FR 28059, June 4, 1996; (i) Whenever prior approval or con- 62 FR 5532, Feb. 6, 1997] sent of the Secretary is desired in respect to an action to be taken by a § 36.4700 Authority, purpose, and holder of a loan, the holder may ad- scope. dress such request to the Loan Guar- (a) Authority. Sections 36.4700 anty Officer in the Regional Office or through 36.4709 of this part are issued Center having jurisdiction over the pursuant to 42 U.S.C. 4012a, 4104a, 4104b, area in which the real estate security 4106, and 4128. is located. (b) Purpose. The purpose of sections (j) Notwithstanding any requirement, 36.4700 through 36.4709 of this part is to condition, or limitation stated in or implement the requirements of the Na- imposed by this section concerning the tional Flood Insurance Act of 1968 and sale and repurchase of loans, the Under the Flood Disaster Protection Act of Secretary for Benefits, or the Director, 1973, as amended (42 U.S.C. 4001–4129). Loan Guaranty Service, within the (c) Scope. Sections 36.4700 through limitations and conditions prescribed 36.4709 of this part, except for §§ 36.4705 by the Secretary may take such action and 36.4707, apply to loans secured by as may be necessary or appropriate to buildings or mobile homes located or relieve undue prejudice to a holder, to be located in areas determined by the Director of the Federal Emergency debtor or other person, which might Management Agency to have special otherwise result, as long as such action flood hazards. Sections 36.4705 and shall not impair the vested rights of 36.4707 apply to loans secured by build- any person affected thereby. If such re- ings or mobile homes, regardless of lo- quirement, condition, or limitation is cation. of an administrative or procedural nature, such action may be taken by an (Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, employee authorized to act under para- and 4128) graph (g) of this section. [62 FR 5532, Feb. 6, 1997] (k) This section will apply to all loans sold by the Department of Vet- § 36.4701 Definitions. erans Affairs after the effective date of (a) Act means the National Flood In- this section which were originated or surance Act of 1968, as amended (42 acquired by the Secretary of Veterans U.S.C. 4001–4129). Affairs under chapter 37, title 38, (b) Secretary means the Secretary of U.S.C., or title III of the Servicemen’s Veterans Affairs. Readjustment Act of 1944, as amended, (c) Building means a walled and except that it shall not apply to direct roofed structure, other than a gas or liquid storage tank, that is principally above ground and affixed to a permanent site, and a walled and roofed structure while in the course of construction, alteration, or repair. (d) Community means a State or a political subdivision of a State that has zoning and building code jurisdiction

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over a particular area having special securing the loan is covered by flood flood hazards. insurance for the term of the loan. The (e) Designated loan means a loan se- amount of insurance must be at least cured by a building or mobile home equal to the lesser of the outstanding that is located or to be located in a principal balance of the designated special flood hazard area in which flood loan or the maximum limit of coverage insurance is available under the Act. available for the particular type of (f) Director of FEMA means the Direc- property under the Act. Flood insur- tor of the Federal Emergency Manage- ance coverage under the Act is limited ment Agency. to the overall value of the property se- (g) Mobile home means a structure, curing the designated loan minus the transportable in one or more sections, value of the land on which the property that is built on a permanent chassis is located. and designed for use with or without a permanent foundation when attached (Authority: 42 U.S.C. 4012a) to the required utilities. The term mo- [62 FR 5532, Feb. 6, 1997] bile home does not include a recreational vehicle. For purposes of this § 36.4703 Exemptions. part, the term mobile home means a The flood insurance requirement pre- mobile home on a permanent founda- scribed by 38 CFR 36.4702 does not apply tion. The term mobile home includes a with respect to: manufactured home as that term is (a) Any State-owned property cov- used in the NFIP. ered under a policy of self-insurance (h) NFIP means the National Flood satisfactory to the Director of FEMA, Insurance Program authorized under who publishes and periodically revises the Act. the list of States falling within this ex- (i) Residential improved real estate emption; or means real estate upon which a home (b) Property securing any loan with or other residential building is located an original principal balance of $5,000 or to be located. or less and a repayment term of one (j) Servicer means the person respon- year or less. sible for: (1) Receiving any scheduled, periodic (Authority: 42 U.S.C. 4012a(c)) payments from a borrower under the [62 FR 5533, Feb. 6, 1997] terms of a loan, including amounts for taxes, insurance premiums, and other § 36.4704 Escrow requirement. charges with respect to the property If the Secretary requires the escrow securing the loan; and of taxes, insurance premiums, fees, or (2) Making payments of principal and any other charges for a loan secured by interest and any other payments from residential improved real estate or a the amounts received from the bor- mobile home that is made, increased, rower as may be required under the terms of the loan. extended, or renewed on or after Octo- (k) Special flood hazard area means ber 1, 1996, the Secretary shall also re- the land in the flood plain within a quire the escrow of all premiums and community having at least a one per- fees for any flood insurance required cent chance of flooding in any given under 38 CFR 36.4702. The Secretary, or year, as designated by the Director of a servicer acting on behalf of the Sec- FEMA. retary, shall deposit the flood insurance premiums on behalf of the bor- (Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106 rower in an escrow account. This es- and 4128) crow account will be subject to escrow [62 FR 5532, Feb. 6, 1997] requirements adopted pursuant to section 10 of the Real Estate Settlement § 36.4702 Requirement to purchase Procedures Act of 1974 (12 U.S.C. 2609) flood insurance where available. (RESPA), which generally limits the In general. The Secretary shall not amount that may be maintained in es- make, increase, extend, or renew any crow accounts for certain types of designated loan unless the building or loans and requires escrow account mobile home and any personal property statements for those accounts, only if

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the loan is otherwise subject to retary or a servicer acting on behalf of RESPA. Following receipt of a notice the Secretary, shall purchase insurance from the Director of FEMA or other on the borrower’s behalf. The Sec- provider of flood insurance that pre- retary or a servicer acting on behalf of miums are due, the Secretary, or a the Secretary, may charge the bor- servicer acting on behalf of the Sec- rower for the cost of premiums and fees retary, shall pay the amount owed to incurred in purchasing the insurance. the insurance provider from the escrow account by the date when such pre- (Authority: 42 U.S.C. 4012a(e)) miums are due. [62 FR 5533, Feb. 6, 1997] (Authority: 42 U.S.C. 4012a(d)) § 36.4707 Determination fees. [62 FR 5533, Feb. 6, 1997] (a) General. Notwithstanding any § 36.4705 Required use of standard Federal or State law other than the flood hazard determination form. Flood Disaster Protection Act of 1973 (a) Use of form. The Secretary shall as amended (42 U.S.C. 4001–4129), the use the standard flood hazard deter- Secretary, or a servicer acting on be- mination form developed by the Direc- half of the Secretary, may charge a tor of FEMA (as set forth in appendix reasonable fee for determining whether A of 44 CFR part 65) when determining the building or mobile home securing whether the building or mobile home the loan is located or will be located in offered as collateral security for a loan a special flood hazard area. A deter- is or will be located in a special flood mination fee may also include, but is hazard area in which flood insurance is not limited to, a fee for life-of-loan available under the Act. The standard flood hazard determination form may monitoring. be used in a printed, computerized, or (b) Borrower fee. The determination electronic manner. fee authorized by paragraph (a) of this (b) Retention of form. The Secretary section may be charged to the borrower shall retain a copy of the completed if the determination: standard flood hazard determination (1) Is made in connection with a mak- form, in either hard copy or electronic ing, increasing, extending, or renewing form, for the period of time the Sec- of the loan that is initiated by the bor- retary owns the loan. rower; (Authority: 42 U.S.C. 4104b) (2) Reflects the Director of FEMA’s revision or updating of floodplain areas [62 FR 5533, Feb. 6, 1997] or flood-risk zones; § 36.4706 Forced placement of flood in- (3) Reflects the Director of FEMA’s surance. publication of a notice or compendium If the Secretary, or a servicer acting that: on behalf of the Secretary, determines (i) Affects the area in which the at any time during the term of a des- building or mobile home securing the ignated loan that the building or mo- loan is located; or bile home and any personal property (ii) By determination of the Director securing the designated loan is not cov- of FEMA, may reasonably require a de- ered by flood insurance or is covered by termination whether the building or flood insurance in an amount less than mobile home securing the loan is lo- the amount required under 38 CFR cated in a special flood hazard area; or 36.4702, then the Secretary or a servicer (4) Results in the purchase of flood acting on behalf of the Secretary, shall insurance coverage by the Secretary or notify the borrower that the borrower a servicer acting on behalf of the Sec- should obtain flood insurance, at the retary, on behalf of the borrower under borrower’s expense, in an amount at least equal to the amount required 38 CFR 36.4706. under 38 CFR 36.4702, for the remaining (c) Purchaser or transferee fee. The de- term of the loan. If the borrower fails termination fee authorized by para- to obtain flood insurance within 45 graph (a) of this section may be days after notification, then the Sec- charged to the purchaser or transferee

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of a loan in the case of the sale or servicer for the period of time the Sec- transfer of the loan. retary owns the loan. (e) Alternate method of notice. Instead (Authority: 42 U.S.C. 4012a(h)) of providing the notice to the borrower [62 FR 5533, Feb. 6, 1997] required by paragraph (a) of this section, the Secretary may obtain satis- § 36.4708 Notice of special flood haz- factory written assurance from a seller ards and availability of Federal dis- or lessor that, within a reasonable time aster relief assistance. before the completion of the sale or (a) Notice requirement. When the Sec- lease transaction, the seller or lessor retary makes, increases, extends, or re- has provided such notice to the pur- news a loan secured by a building or a chaser or lessee. The Secretary shall mobile home located or to be located in retain a record of the written assur- a special flood hazard area, the Sec- ance from the seller or lessor for the retary shall mail or deliver a written period of time the Secretary owns the notice to the borrower and to the loan. servicer in all cases whether or not (f) Use of prescribed form of notice. The flood insurance is available under the Secretary will be considered to be in Act for the collateral securing the compliance with the requirement for loan. notice to the borrower of this section (b) Contents of notice. The written no- by providing written notice to the bor- tice must include the following infor- rower containing the language pre- mation: sented in appendix A to this part with- (1) A warning, in a form approved by in a reasonable time before the comple- the Director of FEMA, that the build- tion of the transaction. The notice pre- ing or the mobile home is or will be lo- sented in appendix A to this part satis- cated in a special flood hazard area; fies the borrower notice requirements (2) A description of the flood insur- of the Act. ance purchase requirements set forth in section 102(b) of the Flood Disaster (Authority: 42 U.S.C. 4104a) Protection Act of 1973, as amended (42 [62 FR 5533, Feb. 6, 1997] U.S.C. 4012a(b)); (3) A statement, where applicable, § 36.4709 Notice of servicer’s identity. that flood insurance coverage is avail- (a) Notice requirement. When the Sec- able under the NFIP and may also be retary makes, increases, extends, re- available from private insurers; and news, sells, or transfers a loan secured (4) A statement whether Federal dis- by a building or mobile home located aster relief assistance may be available or to be located in a special flood haz- in the event of damage to the building ard area, the Secretary shall notify the or mobile home caused by flooding in a Director of FEMA (or the Director’s Federally declared disaster. designee) in writing of the identity of (c) Timing of notice. The Secretary the servicer of the loan. The Director shall provide the notice required by of FEMA has designated the insurance paragraph (a) of this section to the bor- provider to receive the Secretary’s no- rower within a reasonable time before tice of the servicer’s identity. This no- the completion of the transaction, and tice may be provided electronically if to the servicer as promptly as prac- electronic transmission is satisfactory ticable after the Secretary provides no- to the Director of FEMA’s designee. tice to the borrower and in any event (b) Transfer of servicing rights. The no later than the time the Secretary Secretary shall notify the Director of provides other similar notices to the FEMA (or the Director’s designee) of servicer concerning hazard insurance any change in the servicer of a loan de- and taxes. Notice to the servicer may scribed in paragraph (a) of this section be made electronically or may take the within 60 days after the effective date form of a copy of the notice to the bor- of the change. This notice may be pro- rower. vided electronically if electronic trans- (d) Record of receipt. The Secretary mission is satisfactory to the Director shall retain a record of the receipt of of FEMA’s designee. Upon any change the notices by the borrower and the in the servicing of a loan described in

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paragraph (a) of this section, the duty tion improvements or making other al- to provide notice under this paragraph terations, improvements, or repairs. (b) shall transfer to the transferee servicer. (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(1), (4), and (7)) (Authority: 42 U.S.C. 4104a) Alterations. Any structural changes [62 FR 5534, Feb. 6, 1997] or additions to existing improved realty. Subpart F—Guaranty or Insurance Automatic lender. A lender that may of Loans to Veterans With process a loan or assumption without Electronic Reporting submitting the credit package to the Department of Veterans Affairs for un- SOURCE: 73 FR 6310, Feb. 1, 2008, unless oth- derwriting review. Pursuant to 38 erwise noted. U.S.C. 3702(d) there are two categories of lenders who may process loans auto- § 36.4800 Applicability of this subpart. matically: (a) This subpart applies to loans serv- (1) Entities such as banks, savings iced by a mortgage servicing industry and loan associations, and mortgage segment on or after the date that VA and loan companies that are subject to issues a FEDERAL REGISTER notice examination by an agency of the making this subpart applicable to that United States or any State and segment. This includes loans entitled (2) Lenders approved by the Depart- to an automatic guaranty, or otherwise ment of Veterans Affairs pursuant to guaranteed or insured, on or after the standards established by the Depart- date assigned in the FEDERAL REG- ment of Veterans Affairs. ISTER, and loans that were previously guaranteed or insured to the extent (Authority: 38 U.S.C. 3702(d)) that no legal rights vested under the Compromise sale. A sale to a third regulations are impaired. party for an amount less than is suffi- (b) Title 38 U.S.C., chapter 37, is a cient to repay the unpaid balance on continuation and restatement of the the loan where the holder has agreed in provisions of Title III of the Service- advance to release the lien in exchange men’s Readjustment Act of 1944, and for the proceeds of such sale. may be considered an amendment to Condominium. Unless otherwise pro- such Title III. References to the sec- vided by State law, a condominium is a tions or chapters of title 38 U.S.C., form of ownership where the buyer re- shall, where applicable, be deemed to ceives title to a three dimensional air refer to the prior corresponding provi- space containing the individual living sions of the law. unit together with an undivided inter- (Authority: 38 U.S.C. 3703(c)(1)) est or share in the ownership of common elements. § 36.4801 Definitions. Cost. Cost means the entire consider- Whenever used in 38 U.S.C. chapter 37 ation paid or payable for or on account or subpart F of this part, unless the of the application of materials and context otherwise requires, the terms labor to tangible property. defined in this section shall have the Credit package. Any information, re- following meaning: ports or verifications used by a lender, A period of more than 180 days. For the holder or authorized servicing agent to purposes of sections 3707 and determine the creditworthiness of an 3702(a)(2)(C) of title 38 U.S.C., the term applicant for a Department of Veterans a period of more than 180 days shall Affairs guaranteed loan or the assumer mean 181 or more calendar days of con- of such a loan. tinuous active duty. (Authority: 38 U.S.C. 3710 and 3714) Acquisition and improvement loan. A loan to purchase an existing property Date of first uncured default. Date of which includes additional funds for the first uncured default means the due purpose of installing energy conserva- date of the earliest payment not fully

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satisfied by the proper application of Economic readjustment. Economic re- available credits or deposits. adjustment means rearrangement of an Default. Default means failure of a eligible veteran’s indebtedness in a borrower to comply with the terms of a manner calculated to enable the vet- loan agreement. eran to meet obligations and thereby Designated appraiser. Designated ap- avoid imminent loss of the property praiser means a person requested by which secures the delinquent obliga- the Secretary to render an estimate of tion. the reasonable value of a property, or Energy conservation improvement. An of a specified type of property, within a improvement to an existing dwelling or stated area for the purpose of justi- farm residence through the installation fying the extension of credit to an eli- of a solar heating system, a solar heat- gible veteran for any of the purposes ing and cooling system, or a combined stated in 38 U.S.C. chapter 37. An ap- solar heating and cooling system or praiser on a fee basis is not an agent of through application of a residential en- the Secretary. ergy conservation measure as pre- Discharge or release. For purposes of scribed in 38 U.S.C. 3710(d) or by the basic eligibility a person will be con- Secretary. sidered discharged or released if the veteran was issued a discharge certifi- (Authority: 38 U.S.C. 3710(a)(7)) cate under conditions other than dis- Full disbursement. Payment by a lend- honorable (38 U.S.C. 3702(c)). The term er of the entire proceeds of a loan or discharge or release includes— the purposes described in the report of (1) Retirement from the active mili- the lender in respect of such loan to tary, naval, or air service, and the Secretary either: (2) The satisfactory completion of the (1) By payment to those contracting period of active military, naval, or air with the borrower for such purposes, or service for which a person was obli- (2) By payment to the borrower, or gated at the time of entry into such (3) By transfer to an account against service in the case of a person who, due which the borrower can draw at will, or to enlistment or reenlistment, was not awarded a discharge or release from (4) By transfer to an escrow account, such period of service at the time of or such completion thereof and who, at (5) By transfer to an earmarked ac- such time, would otherwise have been count if eligible for the award of a discharge or (i) The amount is not in excess of 10 release under conditions other than percent of the loan, or dishonorable. (ii) The loan is an Acquisition and Improvement loan pursuant to § 36.4801, (Authority: 38 U.S.C. 101(18)) or (iii) The loan is one submitted by a Dwelling. Any building designed pri- lender of the class specified in 38 U.S.C. marily for use as a home consisting of 3702(d) or 3703(a)(2). not more than four family units plus an added unit for each veteran if more (Authority: 38 U.S.C. 3703(c)(1)) than one eligible veteran participates in the ownership, except that in the Graduated payment mortgage loan. A case of a condominium housing devel- loan for the purpose of acquiring a sin- opment or project within the purview gle-family dwelling unit involving a of 38 U.S.C. 3710(a)(6) and §§ 36.4860 plan for repayment in which a portion through 36.4865 of this part the term is of the interest due is deferred for a pe- limited to a one single-family residen- riod of time. The interest so deferred is tial unit. Also, a manufactured home, added to the principal balance thus re- permanently affixed to a lot owned by sulting in a principal amount greater a veteran and classified as real prop- than at loan origination (negative am- erty under the laws of the State where ortization). The monthly payments in- it is located. crease on an annual basis (graduate) for a predetermined period of time (Authority: 38 U.S.C. 3710(a) and (f)) until the payments reach a level which

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will fully amortize the loan during the ics’ liens, lease-purchase contracts, remaining loan term. conditional sales contracts, consignments. (Authority: 38 U.S.C. 3703(c) and (d)) Liquidation sale. Any judicial, con- Guaranty. Guaranty means the obli- tractual or statutory disposition of gation of the United States, assumed real property, under the terms of the by virtue of 38 U.S.C. chapter 37, to loan instruments and applicable law, to repay a specified percentage of a loan liquidate a defaulted loan that is se- upon the default of the primary debtor. cured by such property. This includes a Holder. The lender or any subsequent voluntary conveyance made to avoid assignee or transferee of the guaran- such disposition of the obligation or of teed obligation or the authorized serv- the security. This term also includes a icing agent (also referred to as ‘‘the compromise sale. servicer’’) of the lender or of the assignee or transferee. (Authority: 38 U.S.C. 3732)

(Authority: 38 U.S.C. 3714) Lot. A parcel of land acceptable to the Secretary as a manufactured home Home. Home means place of resi- site. dence. Improvements. Any alteration that (Authority: 38 U.S.C. 3710(a)(9)) improves the property for the purpose for which it is occupied. Manufactured home. A moveable Insurance. Insurance means the obli- dwelling unit designed and constructed gation assumed by the United States to for year-round occupancy by a single indemnify a lender to the extent speci- family, on land, containing permanent fied in this subpart for any loss in- eating, cooking, sleeping and sanitary curred upon any loan insured under 38 facilities. A double-wide manufactured U.S.C. 3703(a)(2). home is a moveable dwelling designed Insurance account. Insurance account for occupancy by one family and con- means the record of the amount avail- sisting of: able to a lender or purchaser for losses (1) Two or more units intended to be incurred on loans insured under 38 joined together horizontally when lo- U.S.C. 3703(a). cated on a site, but capable of inde- Lender. The payee or assignee or pendent movement or transferee of an obligation at the time (2) A unit having a section or sec- it is guaranteed or insured. This term tions which unfold along the entire also includes any sole proprietorship, length of the unit. For the purposes of partnership, or corporation and the this section of VA regulations, manu- owners, officers and employees of a sole factured home/lot loans guaranteed proprietorship, partnership, or corpora- under the purview of §§ 36.4800 through tion engaged in the origination, pro- 36.4893 must be for units permanently curement, transfer, servicing, or funding of a loan which is guaranteed or in- affixed to a lot and considered to be sured by VA. real property under the laws of the State where it is located. If the loan is (Authority: 38 U.S.C. 3703(c)(1) and 3704(d)) for the purchase of a manufactured home and lot it must be considered as Lien. Lien means any interest in, or one loan. power over, real or personal property, reserved by the vendor, or created by (Authority: 38 U.S.C. 3710(a)(9)) the parties or by operation of law, chiefly or solely for the purpose of as- Net loss (insured loans). Net loss on insuring the payment of the purchase sured loans means the indebtedness, price, or a debt, and irrespective of the plus any other charges authorized identity of the party in whom title to under § 36.4814, remaining unsatisfied the property is vested, including but after the liquidation of all available se- not limited to mortgages, deeds with a curity and recourse to all intangible defeasance therein or collaterally, rights of the holder against those obli- deeds of trust, security deeds, mechan- gated on the debt.

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Net value. The fair market value of time for properties sold during the pre- real property, minus an amount rep- ceding fiscal year; and resenting the costs that the Secretary (B) Dividing the figure calculated in estimates would be incurred by VA in paragraph (3)(i)(A) of this definition by acquiring and disposing of the prop- the VBA ratio of personal services erty. The number to be subtracted costs to total obligations. from the fair market value will be cal- (ii) The three cost averages will be culated by multiplying the fair market added to the average loss (or gain) on value by the current cost factor. The property sold during the preceding fis- cost factor used will be the most recent cal year (based on the average property percentage of the fair market value purchase price) and the sum will be di- that VA calculated and published in vided by the average fair market value the Notices section of the FEDERAL at the time of acquisition for prop- REGISTER (it is intended that this per- erties which were sold during the pre- centage will be calculated annually). In ceding fiscal year to derive the per- computing this cost factor, VA will de- centage to be used in estimating net termine the average operating ex- value. penses and losses (or gains) on resale incurred for properties acquired under (Authority: 38 U.S.C. 3732) § 36.4823 which were sold during the preceding fiscal year and the average ad- Purchase price. The entire legal con- ministrative cost to VA associated sideration paid or payable upon or on with the property management activ- account of the sale of property, exclu- ity. The final net value derived from sive of acquisition costs, or for the cost this calculation will be stated as a of materials and labor to be applied to whole dollar amount (any fractional the property. amount will be rounded up to the next Real-estate loan. Any obligation in- whole dollar). The cost items included curred for the purchase of real property in the calculation will be: or a leasehold estate as limited in (1) Property operating expenses. All §§ 36.4800 through 36.4893 or for the con- disbursements made for payment of struction of fixtures or appurtenances taxes, assessments, liens, property thereon or for alterations, improve- maintenance and related repairs, man- ments, or repairs thereon required by agement broker’s fees and commis- §§ 36.4800 through 36.4893 to be secured sions, and any other charges to the by a lien on such property or is so se- property account excluding property cured. Loans for the purpose specified improvements and selling expenses. in 38 U.S.C. 3710(a)(5) (refinancing of (2) Selling expenses. All disbursements mortgage loans or other liens on a for sales commissions plus any other dwelling or farm residence), loans for costs incurred and paid in connection the purpose specified in 38 U.S.C. with the sale of the property. 3710(a)(8) (refinancing of a VA guaran- (3) Administrative costs. (i) An esti- teed, insured or direct loan to lower mate of the total cost for VA of per- the interest rate), loans for the pur- sonnel (salary and benefits) and over- poses specified in 38 U.S.C. 3710(a)(9) head (which may include things such as (purchase of manufactured homes/lots travel, transportation, communication, or the refinancing of such loans in utilities, printing, supplies, equipment, order to reduce the interest rate or insurance claims and other services) purchase a lot, in States in which man- associated with the acquisition, manufactured homes, when permanently af- agement and disposition of property fixed to a lot, are considered real prop- acquired under § 36.4823 of this part. erty, and loans to purchase one-family The average administrative costs will residential units in condominium hous- be determined by: ing developments or projects within (A) Dividing the total cost for VA the purview of 38 U.S.C. 3710(a)(6) and personnel and overhead salary and ben- §§ 36.4860 through 36.4865 shall also be efits costs by the average number of considered real estate loans. properties on hand and adjusting this Reasonable value. Reasonable value figure based on the average holding means that figure which represents the

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amount a reputable and qualified ap- tion of a dwelling, and on which such praiser, unaffected by personal inter- dwelling is to be erected. est, bias, or prejudice, would recommend to a prospective purchaser as (Authority: 38 U.S.C. 3703(c)(1) and 3710(a)) a proper price or cost in the light of Secretary. The Secretary of Veterans prevailing conditions. Affairs, or any employee of the Depart- Registered mail. The term registered ment of Veterans Affairs authorized to mail wherever used in the regulations act in the Secretary’s stead. concerning guaranty or insurance of Servicer. The authorized servicer is ei- loans to veterans shall include cer- ther: tified mail. (1) The servicing agent of a holder; or Repairs. Any alteration of existing (2) The holder itself, if the holder is improved realty or equipment which is performing all servicing functions on a necessary or advisable for protective, loan. The servicer is typically the enti- safety or restorative purposes. ty reporting all loan activity to VA Repayment plan. A repayment plan is and filing claims under the guaranty a written executed agreement by and on behalf of the holder. VA will gen- between the borrower and the holder to erally issue guaranty claims and other reinstate a loan that is 61 or more cal- payments to the servicer, who will be endar days delinquent, by requiring the responsible for forwarding funds to the borrower to pay each month over a holder in accordance with its servicing fixed period (minimum of three months agreement. Incentives under § 36.4819 duration) the normal monthly pay- will generally be paid directly to the ments plus an agreed upon portion of servicer based on its performance the delinquency each month. under that section and in accordance Repossession. Repossession means re- with its tier ranking under § 36.4818. covery or acquisition of such physical Servicing agent. An agent designated control of property (pursuant to the by the loan holder as the entity to col- provisions of the security instrument lect installments on the loan and/or or as otherwise provided by law) as to perform other functions as necessary make further legal or other action un- to protect the interests of the holder. necessary in order to obtain actual possession of the property or to dispose of (Authority: 38 U.S.C. 3714) the same by sale or otherwise. Residential property. (1) Any one-fam- Special forbearance. This is a written ily residential unit in a condominium agreement executed by and between housing development within the pur- the holder and the borrower where the view of 38 U.S.C. 3710(a)(6) and §§ 36.4860 holder agrees to suspend all payments through 36.4865; or accept reduced payments for one or (2) Any manufactured home perma- more months, on a loan 61 or more cal- nently affixed to a lot owned or being endar days delinquent, and the bor- purchased by a veteran and considered rower agrees to pay the total delin- to be real property under the laws of quency at the end of the specified pe- the State where it is located; riod or enter into a repayment plan. (3) Any improved real property (other Total indebtedness: For purposes of 38 than a condominium housing develop- U.S.C. 3732(c), the veteran’s ‘‘total in- ment or a manufactured home and/or debtedness’’ shall be the sum of: the lot) or leasehold estate therein as lim- unpaid principal on the loan as of the ited by this subpart, the primary use of date of the liquidation sale, accrued which is for occupancy as a home, con- unpaid interest permitted by § 36.4824(a) sisting of not more than four family of this part, and allowable advances/ units, plus an added unit for each eligi- other charges permitted to be included ble veteran if more than one partici- in the guaranty claim by § 36.4814 of pates in the ownership thereof; or this part. (4) Any land to be purchased out of (Authority: 38 U.S.C. 3703(c)(1)) the proceeds of a loan for the construc-

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§ 36.4802 Computation of guaranties or of the guaranty or insurance entitle- insurance credits. ment which remains available to an el- (a) With respect to a loan to a vet- igible veteran after prior use of entitle- eran guaranteed under 38 U.S.C. 3710 ment: the guaranty shall not exceed the less- (1) If a veteran previously secured a er of the dollar amount of entitlement nonrealty (business) loan, the amount available to the veteran or— of nonrealty entitlement used is dou- (1) 50 percent of the original principal bled and subtracted from $36,000. The loan amount where the loan amount is sum remaining is the amount of available entitlement for use, except that: not more than $45,000; or (i) Entitlement may be increased by (2) $22,500 where the original prin- up to $24,000 if the loan amount exceeds cipal loan exceeds $45,000, but is not $144,000 and the loan is for purchase or more than $56,250; or construction of a home or purchase of (3) Except as provided in paragraph a condominium; and (a)(4) of this section, the lesser of (ii) Entitlement for manufactured $36,000 or 40 percent of the original home loans that are to be guaranteed principal loan amount where the loan under 38 U.S.C. 3712 may not exceed amount exceeds $56,250; or $20,000. (4) The lesser of $60,000 or 25 percent (2) If a veteran previously secured a of the original principal loan amount realty (home) loan, the amount of real- where the loan amount exceeds $144,000 ty (home) loan entitlement used is sub- and the loan is for the purchase or contracted from $36,000. The sum remain- struction of a home or the purchase of ing is the amount of available entitle- a condominium unit. ment for use, except that: (b) With respect to an interest rate (i) Entitlement may be increased by reduction refinancing loan guaranteed up to $24,000 if the loan amount exceeds under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or $144,000 and the loan is for purchase or (a)(11), the dollar amount of guaranty construction of a home or purchase of may not exceed the greater of the a condominium; and original guaranty amount of the loan (ii) Entitlement for manufactured being refinanced, or 25 percent of the home loans that are to be guaranteed refinancing loan amount. under 38 U.S.C. 3712 may not exceed $20,000. (Authority: 38 U.S.C. 3703, 3710) (3) If a veteran previously secured a (c) With respect to a loan for an en- manufactured home loan under 38 ergy efficient mortgage guaranteed U.S.C. 3712, the amount of entitlement under 38 U.S.C. 3710(d), the amount of used for that loan is subtracted from the guaranty shall be in the same pro- $36,000. The sum remaining is the portion as would have been provided if amount of available entitlement for the energy efficient improvements home loans and the sum remaining were not added to the loan amount, may be increased by up to $24,000 if the and there shall be no additional charge loan amount exceeds $144,000 and the to the veteran’s entitlement as a result loan is for purchase or construction of of the increased guaranty amount. a home or purchase of a condominium. To determine the amount of entitle- (Authority: 38 U.S.C. 3703, 3710) ment available for manufactured home (d) An amount equal to 15 percent of loans processed under 38 U.S.C. 3712, the original principal amount of each the amount of entitlement previously insured loan shall be credited to the in- used for that purpose is subtracted surance account of the lender and shall from $20,000. The sum remaining is the be charged against the guaranty enti- amount of available entitlement for tlement of the borrower: Provided, use for manufactured home loan pur- That no loan may be insured unless the poses under 38 U.S.C. 3712. borrower has sufficient entitlement remaining to permit such credit. (Authority: 38 U.S.C. 3703) (e) Subject to the provisions of (f) For the purpose of computing the § 36.4803(g), the following formulas shall remaining guaranty or insurance ben- govern the computation of the amount efit to which a veteran is entitled,

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loans guaranteed prior to February 1, any one of the following cir- 2008 shall be taken into consideration cumstances: as if made subsequent thereto. (1)(i) The property which secured the (g) A loan eligible for insurance may loan has been disposed of by the vet- be either guaranteed or insured at the eran or has been destroyed by fire or option of the borrower and the lender, other natural hazard; and provided that if the Secretary is not (ii) The loan has been repaid in full; advised of the exercise of such option or, the Secretary has been released at the time the loan is reported pursu- from liability as to the loan; or, if the ant to § 36.4803, such loan will not be el- Secretary has suffered a loss on such igible for insurance. loan, the loss has been paid in full. (h) A guaranty is reduced or in- (2) A veteran-transferee has agreed to creased pro rata with any deduction or assume the outstanding balance on the increase in the amount of the guaran- loan and consented to the use of the teed indebtedness, but in no event will veteran-transferee’s entitlement, to the amount payable on a guaranty ex- the extent that the entitlement of the ceed the amount of the original guar- veteran-transferor had been used origi- anty, except where the guaranty has nally, in place of the veteran-trans- been increased under § 36.4815, or the feror’s for the guaranteed, insured, or percentage of the total indebtedness direct loan, and the veteran-transferee corresponding to that of the original otherwise meets the requirements of guaranty whichever is less. However, this chapter. on a graduated payment mortgage (3)(i) The loan has been repaid in full; loan, the percentage of guaranty appli- and cable to the original loan amount pur- (ii) The loan for which the veteran suant to paragraph (a) of this section seeks to use entitlement under this shall apply to the loan indebtedness to chapter is secured by the same prop- the extent scheduled deferred interest erty which secured the loan referred to is added to principal during the gradua- in the preceding paragraph (j)(3)(i) of tion period without regard to the origi- this paragraph. nal maximum dollar amount of guar- (4) In a case not covered by (j)(1) or anty. (j)(2) of this section, the Secretary may, one time per veteran, exclude en- (Authority: 38 U.S.C. 3703(b) and (d)) titlement used if: (i) The amount of any guaranty or (i) The loan has been repaid in full the amount credited to a lender’s in- and, if the Secretary has suffered a loss surance account in relation to any in- on the loan, the loss has been paid in sured loan shall be charged against the full; or original or remainder of the guaranty (ii) The Secretary has been released benefit of the borrower. Complete or from liability as to the loan and, if the partial liquidation, by payment or oth- Secretary has suffered a loss on the erwise, of the veteran’s guaranteed or loan, the loss has been paid in full. insured indebtedness does not increase (k) The Secretary may, in any case the remainder of the guaranty benefit, involving circumstances that the Sec- if any, otherwise available to the vet- retary deems appropriate, waive one or eran. When the maximum amount of more of the requirements set forth in guaranty or insurance legally available paragraph (j)(1) of this section. to a veteran shall have been granted, no further guaranty or insurance is (Authority: 38 U.S.C. 3702(b), 3710) available to the veteran. (l)(1) The amount of guaranty enti- (j) Notwithstanding the provisions of tlement, available and unused, of an el- paragraph (i) of this section, in com- igible unmarried surviving spouse puting the aggregate amount of guar- (whose eligibility does not result from anty or insurance housing loan entitle- his or her own service) is determinable ment available to a veteran under this in the same manner as in the case of chapter, the Secretary may exclude the any veteran, and any entitlement amount of guaranty or insurance hous- which the decedent (who was his or her ing loan entitlement used for any guar- spouse) used shall be disregarded. A anteed, insured, or direct loan under certificate as to the eligibility of such

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surviving spouse, issued by the Sec- ported for issuance of an insurance retary, shall be a condition precedent credit. to the guaranty or insurance of any loan made to a surviving spouse in (Authority: 38 U.S.C. 3702(d), 3703(a)(2)) such capacity. (c) Each loan proposed to be made to an eligible veteran by a lender not (Authority: 38 U.S.C. 3701(a)) within a class described in 38 U.S.C. (2) An unmarried surviving spouse 3702(d) shall be submitted to the Sec- who was a co-obligor under an existing retary for approval prior to closing. VA guaranteed, insured or direct loan Lenders described in 38 U.S.C. 3702(d) shall be considered to be a veteran eli- shall have the optional right to submit gible for an interest rate reduction re- any loan for such prior approval. The financing loan pursuant to 38 U.S.C. Secretary, upon determining any loan 3710(a)(8) or (9)(B)(i). so submitted to be eligible for a guaranty, or for insurance, will issue a cer- (Authority: 38 U.S.C. 3710(e)(3), 3703(c)(1)) tificate of commitment with respect thereto. § 36.4803 Reporting requirements. (d) A certificate of commitment shall (a) With respect to loans automati- entitle the holder to the issuance of cally guaranteed under 38 U.S.C. the evidence of guaranty or insurance 3703(a)(1), evidence of the guaranty will upon the ultimate actual payment of be issuable to a lender of a class de- the full proceeds of the loan for the scribed under 38 U.S.C. 3702(d) if the purposes described in the original report and upon the submission within 60 loan is reported to the Secretary not days thereafter of a supplemental re- later than 60 days following full dis- port showing that fact and: bursement and upon the certification (1) The identity of any property pur- of the lender that: chased therewith, (1) No default exists thereunder that (2) That all property purchased or ac- has continued for more than 30 days; quired with the proceeds of the loan (2) Except for acquisition and im- has been encumbered as required by provement loans as defined in § 36.4801, the regulations concerning guaranty or any construction, repairs, alterations, insurance of loans to veterans, or improvements effected subsequent (3) Except for acquisition and im- to the appraisal of reasonable value, provement loans as defined in and paid for out of the proceeds of the § 36.4801(c), any construction, repairs, loan, which have not been inspected alterations, or improvements paid for and approved upon completion by a out of the proceeds of the loan, which compliance inspector designated by the have not been inspected and approved Secretary, have been completed prop- subsequent to completion by a compli- erly in full accordance with the plans ance inspector designated by the Sec- and specifications upon which the retary, have been completed properly original appraisal was based; and any in full accordance with the plans and deviations or changes of identity in specifications upon which the original said property have been approved as re- appraisal was based; and that any devi- quired in § 36.4804 concerning guaranty ations or changes of identity in said or insurance of loans to veterans; property have been approved as re- (3) The loan conforms otherwise with quired by § 36.4804, and the applicable provisions of 38 U.S.C. (4) That the loan conforms otherwise chapter 37 and of the regulations con- with the applicable provisions of 38 cerning guaranty or insurance of loans U.S.C. chapter 37 and the regulations to veterans. 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. (Authority: 38 U.S.C. 3703(c)(1)) 3703(a), although not entitled to auto- (e) Upon the failure of the lender to matic insurance thereunder, may, report in accordance with the provi- when made by a lender of a class de- sions of paragraph (d) of this section, scribed in 38 U.S.C. 3702(d)(1), be re- the certificate of commitment shall

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have no further effect, or the amount or refinancing loan is for extensive of guaranty or insurance shall be re- changes to the property that will pre- duced pro rata, as may be appropriate vent the veteran or the spouse of the under the facts of the case: Provided, active duty veteran from occupying the nevertheless, that if the loan otherwise property while the work is being com- meets the requirements of this section, pleted. In such a case the veteran or said certificate of commitment may be spouse of the active duty veteran must given effect by the Secretary, notwith- certify that he or she intends to occupy standing the report is received after or reoccupy the property as his or her the date otherwise required. home upon completion of the substan- (f) For loans not reported within 60 tial improvements or repairs. All of the days, evidence of guaranty will be mentioned certifications must take issued only if the loan report is accom- place at the time of loan application panied by a statement signed by a cor- and closing except in the case of loans porate officer of the lending institution automatically guaranteed, in which which explains why the loan was re- case veterans or, in the case of an ac- ported late. The statement must iden- tive duty veteran, the veteran’s spouse tify the case or cases in issue and must shall make the required certification set forth the specific reason or reasons only at the time the loan is closed. why the loan was not submitted on time. Upon receipt of such a statement (Authority: 38 U.S.C. 3704(c)) evidence of guaranty will be issued. A (h) Subject to compliance with the pattern of late reporting and the rea- regulations concerning guaranty or in- sons therefore will be considered by VA surance of loans to veterans, the cer- in taking action under § 36.4853. tificate of guaranty or the evidence of (g) Evidence of a guaranty will be insurance credit will be issuable within issued by the Secretary by appropriate the available entitlement of the vet- endorsement on the note or other in- eran on the basis of the loan stated in strument evidencing the obligation, or the final loan report or certification of by a separate certificate at the option loan disbursement, except for refi- of the lender. Notice of credit to an in- nancing loans for interest rate reduc- surance account will be given to the tions. The available entitlement of a lender. Unused certificates of eligi- veteran will be determined by the Sec- bility issued prior to March 1, 1946, are retary as of the date of receipt of an void. No certificate of commitment application for guaranty or insurance shall be issued and no loan shall be of a loan or of a loan report. Such date guaranteed or insured unless the lend- of receipt shall be the date the applica- er, the veteran, and the loan are shown tion or loan report is date-stamped to be eligible. Evidence of guaranty or into VA. Eligibility derived from the insurance will not be issued on any most recent period of service: loan for the purchase or construction (1) Shall cancel any unused entitle- of residential property unless the vet- ment derived from any earlier period of eran, or the veteran’s spouse in the service, and case of a veteran who cannot occupy (2) Shall be reduced by the amount the property because of active duty by which entitlement from service dur- status with the Armed Forces, certifies ing any earlier period has been used to in such form as the Secretary shall pre- obtain a direct, guaranteed, or insured scribe that the veteran, or spouse of loan: the active duty veteran, intends to oc- (i) On property which the veteran cupy the property as his or her home. owns at the time of application, or Guaranty or insurance evidence will (ii) As to which the Secretary has in- not be issued on any loan for the alter- curred actual liability or loss, unless in ation, improvement, or repair of any the event of loss or the incurrence and residential property or on a refinancing payment of such liability by the Sec- loan unless the veteran, or spouse of an retary, the resulting indebtedness of active duty servicemember, certifies the veteran to the United States has that he or she presently occupies the been paid in full. Provided, that if the property as his or her home. An excep- Secretary issues or has issued a certifi- tion to this is if the home improvement cate of commitment covering the loan

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described in the application for guar- surance will be issuable in respect to anty or insurance or in the loan report, any loan to finance a contract that: the amount and percentage of guaranty (1) Is for the purchase, construction, or the amount of the insurance credit repair, alteration, or improvement of a contemplated by the certificate of dwelling or farm residence; commitment shall not be subject to re- (2) Is dated on or after June 4, 1969; duction if the loan has been or is closed (3) Provides for a purchase price or on a date that is not later than the ex- cost to the veteran in excess of the rea- piration date of the certificate of com- sonable value established by the Sec- mitment, notwithstanding that the retary; and Secretary in the meantime and prior to (4) Was signed by the veteran prior to the issuance of the evidence of guar- the veteran’s receipt of notice of such anty or insurance shall have incurred reasonable value; unless such contract actual liability or loss on a direct, includes, or is amended to include, a guaranteed, or insured loan previously provision that reads substantially as obtained by the borrower. For the pur- follows: poses of this paragraph, the Secretary It is expressly agreed that, notwith- will be deemed to have incurred actual standing any other provisions of this con- loss on a guaranteed or insured loan if tract, the purchaser shall not incur any pen- the Secretary has paid a guaranty or alty by forfeiture of earnest money or other- insurance claim thereon and the vet- wise be obligated to complete the purchase eran’s resultant indebtedness to the of the property described herein, if the contract purchase price or cost exceeds the rea- Government has not been paid in full, sonable value of the property established by and to have incurred actual liability on the Department of Veterans Affairs. The pur- a guaranteed or insured loan if the Sec- chaser shall, however, have the privilege and retary is in receipt of a claim on the option of proceeding with the consummation guaranty or insurance or is in receipt of this contract without regard to the of a notice of default. In the case of a amount of the reasonable value established direct loan, the Secretary will be by the Department of Veterans Affairs. deemed to have incurred an actual loss (Authority: 38 U.S.C. 501, 3703(c)(1)) if the loan is in default. A loan, the proceeds of which are to be disbursed (l) With respect to any loan for which progressively or at intervals, will be a commitment was made on or after deemed to have been closed for the pur- March 1, 1988, the Secretary must be poses of this paragraph if the loan has notified whenever the holder receives been completed in all respects except- knowledge of disposition of the resi- ing the actual ‘‘payout’’ of the entire dential property securing a VA-guaran- loan proceeds. teed loan. (1) If the seller applies for prior ap- (Authority: 38 U.S.C. 3702(a), 3710(c)) proval of the assumption of the loan, then: (i) Any amounts that are disbursed (i) A holder (or its authorized serv- for an ineligible purpose shall be ex- icing agent) who is an automatic lend- cluded in computing the amount of er must examine the creditworthiness guaranty or insurance credit. of the purchaser and determine compli- (j) Notwithstanding the lender has ance with the provisions of 38 U.S.C. erroneously, but without intent to mis- 3714. The creditworthiness review must represent, made certification with re- be performed by the party that has spect to paragraph (a)(1) of this sec- automatic authority. If both the holder tion, the guaranty or insurance will be- and its servicing agent are automatic come effective upon the curing of such lenders, then they must decide between default and its continuing current for a themselves which one will make the period of not less than 60 days there- determination of creditworthiness, after. For the purpose of this para- whether the loan is current and wheth- graph a loan will be deemed current so er there is a contractual obligation to long as the installment is received assume the loan, as required by 38 within 30 days after its due date. U.S.C. 3714. If the actual loan holder (k) No guaranty or insurance com- does not have automatic authority and mitment or evidence of guaranty or in- its servicing agent is an automatic

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lender, then the servicing agent must (ii) If neither the holder nor its au- make the determinations required by thorized servicing agent is an auto- 38 U.S.C. 3714 on behalf of the holder. matic lender, the notice to VA shall in- The actual holder will remain ulti- clude: mately responsible for any failure of (A) Advice regarding whether the its servicing agent to comply with the loan is current or in default; applicable law and VA regulations. (B) A copy of the purchase contract; (A) If the assumption is approved and and the transfer of the security is com- (C) A complete credit package devel- pleted, then the notice required by this oped by the holder which the Secretary paragraph (l) shall consist of the credit may use for determining the credit- package (unless previously provided in worthiness of the purchaser. accordance with paragraph (l)(1)(i)(B) (D) The notice and documents re- of this section) and a copy of the exe- quired by this section must be sub- cuted deed and/or assumption agree- mitted to the VA office of jurisdiction ment as required by VA office of juris- no later than 35 days after the date of diction. The notice shall be submitted receipt by the holder of a complete ap- to the Department with the VA receipt plication package for the approval of for the funding fee provided for in the assumption, subject to the same § 36.4813(e)(2). extensions as provided in paragraph (B) If the application for assumption (l)(l)(i) of this section. If the assump- is disapproved, the holder shall notify tion is not automatically approved by the seller and the purchaser that the the holder or its authorized agent, pur- decision may be appealed to the VA of- suant to the automatic authority pro- fice of jurisdiction within 30 days. The visions, $50 of any fee collected in ac- holder shall make available to that VA cordance with § 36.4813(d)(8) must be re- office all items used by the holder in funded. If the Department of Veterans making the holder’s decision in case Affairs does not approve the assump- the decision is appealed to VA. If the tion, the holder will be notified and an application remains disapproved after 60 days (to allow time for appeal to and additional $50 of any fee collected review by VA), then the holder must under § 36.4813(d)(8) must be refunded refund $50 of any fee previously col- following the expiration of the 30-day lected under the provisions of appeal period set out in paragraph § 36.4813(d)(8). If the application is sub- (l)(l)(i)(B) of this section. If such an ap- sequently approved and the sale is peal is made to the Department of Vet- completed, then the holder (or its au- erans Affairs, then the review will be thorized servicing agent) shall provide conducted at the Department of Vet- the notice described in paragraph erans Affairs office of jurisdiction by (l)(1)(i)(A) of this section. an individual who was not involved in (C) In performing the requirements of the original disapproval decision. If the paragraphs (l)(1)(i)(A) or (l)(1)(i)(B) of application for assumption is approved this section, the holder must complete and the transfer of security is com- its examination of the creditworthiness pleted, then the holder (or its author- of the prospective purchaser and advise ized servicing agent) shall provide the the seller no later than 45 days after notice required in paragraph (l)(l)(i)(A) the date of receipt by the holder of a of this section. complete application package for the (2) If the seller fails to notify the approval of the assumption. The 45-day holder before disposing of property se- period may be extended by an interval curing the loan, the holder shall notify not to exceed the time caused by the Secretary within 60 days after delays in processing of the application learning of the transfer. Such notice that are documented as beyond the shall advise whether or not the holder control of the holder, such as employ- intends to exercise its option to imme- ers or depositories not responding to diately accelerate the loan and wheth- requests for verifications, which were er or not an opportunity will be ex- timely forwarded, or follow-ups on tended to the transferor and transferee those requests. to apply for retroactive approval of the

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assumption under the terms of this (b) There has been no default on the paragraph (l). loan, except that the existence of a default shall not preclude issuance of a (Authority: 38 U.S.C. 3714) guaranty certificate or insurance ad- (The Office of Management and Budget has vice if a certificate of commitment was approved the information collection require- issued with respect to the loan. ments in this section under control number (c) The Secretary determines that a 2900–0516.) person of reasonable prudence similarly situated would not make further § 36.4804 Deviations; changes of iden- disbursements in the situation pre- tity. sented. A deviation of more than 5 percent (d) There has been full compliance between the estimates upon which a with the provisions of 38 U.S.C. chapter certificate of commitment has been 37 and of the applicable regulations up issued and the report of final payment to the time of the last disbursement. of the proceeds of the loan, or a change (e) In the case of a construction loan in the identity of the property upon when the construction is not fully com- which the original appraisal was based, pleted, the amount and percentage of will invalidate the certificate of com- the guaranty and the amount of the mitment unless such deviation or loan for the purposes of insurance or change be approved by the Secretary. accounting to the Secretary shall be Any deviation in excess of 5 percent or based upon such portion of the amount change in the identity of the property disbursed out of the proceeds of the upon which the original appraisal was loan which, when added to any other based must be supported by a new or payments made by or on behalf of the supplemental appraisal of reasonable veteran to the builder or the con- value: Provided, That substitution of tractor, does not exceed 80 percent of materials of equal or better quality the value of that portion of the con- and value approved by the veteran and struction performed (basing value on the designated appraiser shall not be the contract price) plus the sum, if deemed a ‘‘change in the identity of any, disbursed by the lender out of the the property’’ within the purview of proceeds of the loan for the land on this section. A deviation not in excess which the construction is situated: And of 5 percent will not require the prior provided further, That the lender shall approval of the Secretary. certify as follows: (1) Any amount advanced for land is (Authority: 38 U.S.C. 3703(c)(1)) protected by title or lien as provided in the regulations concerning guaranty or § 36.4805 Partial disbursement. insurance of loans to veterans; and In cases where intervening cir- (2) No enforceable liens, for any work cumstances make it impracticable to done or material furnished for that complete the actual paying out of the part of the construction completed and loan originally proposed, or justify the for which payment has been made out lender in declining to make further dis- of the proceeds of the loan, exist or can bursements on a construction loan, evi- come into existence. dence of guaranty or of insurance of (Authority: 38 U.S.C. 3703(c)(1) and (d)) the loan or the proper pro rata part thereof will be issuable if the loan is § 36.4806 Refinancing of mortgage or otherwise eligible for automatic guar- other lien indebtedness. anty or a certificate of commitment (a) Any loan for the purpose of refi- was issued thereon: Provided, nancing (38 U.S.C. 3710(a)(5)) an exist- (a) A report of the loan is submitted ing mortgage loan or other indebted- to the Secretary within a reasonable ness secured by a lien of record on a time subsequent to the last disburse- dwelling or farm residence owned and ment, but in no event more than 90 occupied or to be reoccupied if the refi- days thereafter, unless report of the nancing loan is for the completion of facts and circumstances is made and an major alterations, repairs or improve- extension of time obtained from the ments to the property, by an eligible Secretary. veteran as the veteran’s home, or in

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the case of an eligible veteran unable that was for the purchase of, and is se- to occupy the property because of accured by, a manufactured home in tive duty status in the Armed Forces, order to purchase the lot on which the occupied or to be reoccupied by the manufactured home is or will be per- veteran’s spouse as the spouse’s home, manently affixed, provided the fol- shall be eligible for guaranty in an lowing requirements are met: amount as computed under § 36.4802(a) (1) The refinancing of a manufactured provided that— home and the purchase of a lot must be (1) The amount of the loan may not considered as one loan; exceed an amount equal to 90 percent (2) The manufactured home upon of the reasonable value of the dwelling being permanently affixed to the lot or farm residence which will secure the will be considered real property under loan, as determined by the Secretary. the laws of the State where it is located; (Authority: 38 U.S.C. 3710(e)(1)) (3) The loan must be secured by the (2) The dollar amount of discount, if same manufactured home which is any, to be paid by the veteran is rea- being refinanced and the real property sonable in amount as determined by on which the manufactured home is or the Secretary in accordance with will be located; § 36.4813(d)(7)(i), (4) The amount of the loan may not (3) The loan is otherwise eligible for exceed an amount equal to the sum of guaranty. the balance of the loan being refi- (b) [Reserved] nanced; the purchase price, not to ex- (c) Nothing shall preclude guaranty ceed the reasonable value of the lot; of a loan to an eligible veteran having the costs of the necessary site prepara- home loan guaranty entitlement to re- tion of the lot as determined by the finance under the provisions of 38 Secretary; a reasonable discount as au- U.S.C. 3710(a)(5) a VA guaranteed or in- thorized in § 36.4813(d)(6) with respect sured (or direct) mortgage loan made to that portion of the loan used to refi- to him or her which is outstanding on nance the existing purchase money lien the dwelling or farm residence owned on the manufactured home, and closing and occupied or to be reoccupied after costs as authorized in § 36.4813; and the completion of major alterations, (5) If the loan being refinanced was repairs, or improvements to the property, by the veteran as a home, or in guaranteed by VA, the portion of the the case of an eligible veteran unable loan made for the purpose of refi- to occupy the property because of ac- nancing an existing purchase money tive duty status in the Armed Forces, manufactured home loan may be, guar- occupied or to be reoccupied by the anteed without regard to the out- veteran’s spouse as the spouse’s home. standing guaranty entitlement available for use by the veteran, and the (Authority: 38 U.S.C. 3710(e)(1)) veteran’s guaranty entitlement shall not be charged as a result of any guar- (d) A refinancing loan may include anty provided for the refinancing por- contractual prepayment penalties, if tion of the loan. For the purposes enu- any, due the holder of the mortgage or merated in 38 U.S.C. 3702(b), the refi- other lien indebtedness to be refinancing portion of the loan shall be nanced. considered to have been obtained with (e) [Reserved] the guaranty entitlement used to ob- (f) Nothing in this section shall pre- tain VA-guaranteed loan being refi- clude the refinancing of the balance nanced. The total guaranty for the new due for the purchase of land on which loan shall be the sum of the guaranty new construction is to be financed entitlement used to obtain VA-guaran- through the proceeds of the loan, or teed loan being refinanced and any ad- the refinancing of the balance due on ditional guaranty entitlement avail- an existing land sale contract relating able to the veteran. However, the total to a veteran’s dwelling or farm resi- guaranty may not exceed the guaranty dence. amount as calculated under § 36.4802(a). (g) A veteran may refinance (38 U.S.C. 3710(a)(9)(B)(ii)) an existing loan (Authority: 38 U.S.C. 3703(a), 3710)

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§ 36.4807 Interest rate reduction refi- costs authorized by § 36.4813(d) and a nancing loan. discount not to exceed 2 percent of the (a) Pursuant to 38 U.S.C. 3710(a)(8), loan amount; or (a)(9)(B)(i), and (a)(11), a veteran may (ii) In the case of a loan to refinance refinance an existing VA guaranteed, an existing VA-guaranteed or direct insured, or direct loan to reduce the in- loan and to improve the dwelling secur- terest rate payable on the existing loan ing such loan through energy efficient provided that all of the following re- improvements, the amount referred to quirements are met: with respect to the loan under para- (1) The new loan must be secured by graph (a)(4)(i) of this section, plus the the same dwelling or farm residence as amount authorized by § 36.4839(a)(4). the loan being refinanced. (2) The veteran owns the dwelling or (Authority: 38 U.S.C. 3703, 3710) farm residence securing the loan and (5) If the loan being refinanced is de- (i) Occupies the dwelling or residence linquent (delinquent means that a as his or her home; or scheduled monthly payment of prin- (ii) Previously occupied the dwelling cipal and interest is more than 30 days or residence as his or her home and cer- past due), the new loan will be guaran- tifies, in such form as the Secretary teed only if the Secretary approves it shall require, that he or she has pre- in advance after determining that the viously occupied the dwelling or resi- borrower, through the lender, has pro- dence as a home; or vided reasons for the loan deficiency, (iii) In a case in which the veteran is has provided information to establish or was unable to occupy the residence that the cause of the delinquency has or dwelling as a home because the vet- been corrected, and qualifies for the eran was on active duty status as a loan under the credit standards con- member of the Armed Forces, the tained in § 36.4840. In such cases, the spouse of the veteran occupies, or pre- term ‘‘balance of the loan being refi- viously occupied, the dwelling or resi- nanced’’ shall include any past due in- dence as the spouse’s home and cer- stallments, plus allowable late charges. tifies to that occupancy in such form (6) The dollar amount of guaranty on as the Secretary shall require. the 38 U.S.C. 3710(a)(8) or (a)(9)(B)(i) loan does not exceed the greater of the (Authority: 38 U.S.C. 3710(e)(1)) original guaranty amount of the loan (3) The monthly principal and inter- being refinanced or 25 percent of the est payment on the new loan is lower new loan. than the principal and interest pay- (7) The term of the refinancing loan ment on the loan being refinanced; or (38 U.S.C. 3710(a)(8)) may not exceed the term of the new loan is shorter the original term of the loan being refi- than the term of the loan being refinanced plus ten years, or the maximum nanced; or the new loan is a fixed-rate loan term allowed under 38 U.S.C. loan that refinances a VA-guaranteed 3703(d)(1), whichever is less. For manu- adjustable rate mortgage; or the in- factured home loans that were pre- crease in the monthly payments on the viously guaranteed under 38 U.S.C. loan results from the inclusion of en- 3712, the loan term, if being refinanced ergy efficient improvements, as pro- under 38 U.S.C. 3710(a)(9)(B)(i), may ex- vided by § 36.4839(a)(4); or the Secretary ceed the original term of the loan but approves the loan in advance after de- may not exceed the maximum loan termining that the new loan is nec- term allowed under 38 U.S.C. 3703(d)(1). essary to prevent imminent foreclosure and the veteran qualifies for the new (Authority: 38 U.S.C. 3703(c)(1), 3710(e)(1)) loan under the credit standards con- (b) Notwithstanding any other regu- tained in § 36.4840. latory provision, the interest rate re- (4) The amount of the refinancing duction refinancing loan may be guar- loan does not exceed: anteed without regard to the amount (i) An amount equal to the balance of of guaranty entitlement available for the loan being refinanced, which is not use by the veteran, and the amount of delinquent, except as provided in para- the veteran’s remaining guaranty enti- graph (a)(5) of this section, plus closing tlement, if any, shall not be charged

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for an interest rate reduction refi- tent required by 38 U.S.C. chapter 37 nancing loan. The interest rate reduc- and the regulations concerning guar- tion refinancing loan will be guaran- anty or insurance of loans to veterans. teed with the lesser of the entitlement (b) Notwithstanding the provisions of used by the veteran to obtain the loan paragraph (a) of this section, the join- being refinanced or the amount of the der of the spouse of a veteran-borrower guaranty as calculated under in the ownership of residential prop- § 36.4802(a). The veteran’s loan guar- erty shall not require prior approval or anty entitlement originally used for a preclude the issuance of a guaranty or purpose as enumerated in 38 U.S.C. insurance credit based upon the entire 3710(a)(1) through (7) and (a)(9)(A)(i) amount of the loan. If both spouses be and (ii) and subsequently transferred to eligible veterans, either or both may, an interest rate reduction refinancing within permissible maxima, utilize loan (38 U.S.C. 3710(a)(8) or (a)(9)(B)(i)) available guaranty or insurance enti- shall be eligible for restoration when tlement. the interest rate reduction refinancing (c) For the purpose of determining loan or subsequent interest rate reduc- the rights and the liabilities of the Sec- tion refinancing loans on the same retary with respect to a loan subject to property meets the requirements of paragraph (a) of this section, credits le- § 36.4802(h). gally applicable to the entire loan shall be applied as follows: (Authority: 38 U.S.C. 3703(a)) (1) Prepayments made expressly for credit to that portion of the indebted- (c) Title to the estate which is refi- ness allocable to the veteran (including nanced for the purpose of an interest the gratuity paid pursuant to former rate reduction must be in conformity provisions of law), shall be applied to with § 36.4854. such portion of the indebtedness. All (Authority: 38 U.S.C. 3710(a)(8), (a)(9)(B)(i) other payments shall be applied rat- and (e)) ably to those portions of the loan allo- (The Office of Management and Budget has cable respectively to the veteran and approved the information collection require- to the other debtors. ments in this section under control number (2) Proceeds of the sale or other liq- 2900–0601.) uidation of the security shall be applied ratably to the respective portions § 36.4808 Joint loans. of the loan, such portion of the pro- (a) Except as provided in paragraph ceeds as represents the interest of the (b) of this section, the prior approval of veteran being applied to that portion of the Secretary is required in respect to the loan allocable to such veteran. any loan to be made to two or more (Authority: 38 U.S.C. 3703) borrowers who become jointly and severally liable, or jointly liable therefor, § 36.4809 Transfer of title by borrower and who will acquire an undivided in- or maturity by demand or accelera- terest in the property to be purchased tion. or who will otherwise share in the pro- (a) Except as provided by paragraphs ceeds of the loan, or in respect to any (b) or (c) of this section the conveyance loan to be made to an eligible veteran of or other transfer of title to property whose interest in the property owned, by operation of law or otherwise, after or to be acquired with the loan pro- the creation of a lien thereon to secure ceeds, is an undivided interest only, a loan which is guaranteed or insured unless such interest is at least a 50 per- in whole or in part by the Secretary, cent interest in a partnership. The shall not constitute an event of de- amount of the guaranty or insurance fault, or acceleration of maturity, elec- credit shall be computed in such cases tive or otherwise, and shall not of itself only on that portion of the loan allo- terminate or otherwise affect the guar- cable to the eligible veteran which, anty or insurance. taking into consideration all relevant (b)(1) The Secretary may issue guar- factors, represents the proper contribu- anty on loans in which a State, Terri- tion of the veteran to the transaction. torial, or local governmental agency Such loans shall be secured to the ex- provides assistance to a veteran for the

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acquisition of a dwelling. Such loans by which the spouse of the borrower be- will not be considered ineligible for comes the sole owner of the property. guaranty if the State, Territorial, or In such a case the borrower shall have local authority, by virtue of its laws or the option of applying directly to the regulations or by virtue of Federal law, Department of Veterans Affairs re- requires the acceleration of maturity gional office of jurisdiction for a re- of the loan upon the sale or conveyance lease of liability in accordance with of the security property to a person in- § 36.4826; or eligible for assistance from such au- (viii) A transfer into an inter vivos thority. trust in which the borrower is and re- (2) At the time of application for a mains a beneficiary and which does not loan assisted by a State, Territorial, or relate to a transfer of rights of occu- local governmental agency, the vet- pancy in the property. eran-applicant must be fully informed (2) With respect to each such loan at and consent in writing to the housing least one of the instruments used in authority restrictions. A copy of the the transaction shall contain the fol- veteran’s consent statement must be lowing statement: ‘‘This loan is not as- forwarded with the loan application or sumable without the approval of the the report of a loan processed on the Department of Veterans Affairs or its automatic basis. authorized agent.’’ This statement must be: (Authority: 38 U.S.C. 3703(c)) (i) Printed in a font size which is the (c) Any housing loan which is fi- larger of: nanced under 38 U.S.C. chapter 37, and (A) Two times the largest font size to which section 3714 of that chapter contained in the body of the instru- applies, shall include a provision in the ment; or security instrument that the holder (B) 18 points; and may declare the loan immediately due (ii) Contained in at least one of the and payable upon transfer of the prop- following: erty securing such loan to any trans- (A) The note; feree unless the acceptability of the as- (B) The mortgage or deed of trust; or sumption of the loan is established pur- (C) A rider to either the note, the suant to section 3714. mortgage, or the deed of trust. (1) A holder may not exercise its option to accelerate a loan upon: (Authority: 38 U.S.C. 3714(d)) (i) The creation of a lien or other encumbrance subordinate to the lender’s (d) The term of payment of any guar- security instrument which does not re- anteed or insured obligation shall bear late to the transfer of rights of occu- a proper relation to the borrower’s pancy in the property; present and anticipated income and ex- (ii) The creation of a purchase money penses, (except loans pursuant to 38 security interest for household appli- U.S.C. 3710(a)(8) or (a)(9)(B)(i)). In addi- ances; tion the terms of payment of any guar- (iii) A transfer by devise, descent, or anteed or insured obligation shall pro- operation of law on the death of a joint vide for discharge of the obligation at a tenant or tenant by the entirety; definite date or dates or intervals, in (iv) The granting of a leasehold inter- amount specified on or computable est of three years or less not con- from the face of the instrument. A loan taining an option to purchase; which is payable on demand, or at (v) A transfer to a relative resulting sight, or on presentation, or at a time from the death of a borrower; not specified or computable from the (vi) A transfer where the spouse or language in the note, mortgage, or children of the borrower become joint other loan instrument, or which con- owners of the property with the bor- templates periodic renewals at the op- rower; tion of the holder to satisfy the repay- (vii) A transfer resulting from a de- ment requirements of this section, is cree of a dissolution of marriage, legal not eligible for guaranty or insurance, separation agreement, or from an inci- except as provided in paragraph (f) of dental property settlement agreement this section.

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(e) No guaranteed or insured obliga- will include all installment payments tion shall contain a provision to the ef- (principal, interest, taxes, insurance, fect that the holder shall have the advances, etc.) due and unpaid and any right to declare the indebtedness due, accumulated late charges plus any rea- or to pursue one or more legal or equi- sonable expenses incurred and paid by table remedies, if holder ‘‘shall feel in- the holder if termination proceedings secure,’’ or upon the occurrence of one have begun (e.g., advertising costs, or more such conditions optional to the foreclosure costs, attorney or trustee holder, without regard to an act or fees, recording fees, etc.). omission by the debtor, which condi- (Authority: 38 U.S.C. 3703(c)) tion by the terms of the note, mortgage, or other loan instrument would (The Office of Management and Budget has at the option of the holder afford a approved the information collection require- basis for declaring a default. ments in this section under control number 2900–0516.) (f) Notwithstanding the inclusion in the guaranteed or insured obligation of § 36.4810 Amortization. a provision contrary to the provisions (a) All loans, the maturity date of of this section, the right of the holder which is beyond 5 years from date of to payment of the guaranty or insur- loan or date of assumption by the vet- ance shall not be thereby impaired: eran, shall be amortized. Except as pro- Provided, vided in paragraph (e) of this section, (1) Default was declared or maturity the schedule of payments thereon shall was accelerated under some other pro- be in accordance with any generally vision of the note, mortgage, or other recognized plan of amortization requir- loan instrument, or ing approximately equal periodic pay- (2) Activation or enforcement of such ments and shall require a principal re- provision is warranted under duction not less often than annually § 36.4850(i)(2), or if there exist condi- during the life of the loan. The final in- tions justifying the appointment of a stallment on any loan shall not be in receiver for the property (without ref- excess of two times the average of the erence to any contractual provisions preceding installments, except that on for such appointment), or a construction loan such installment (3) The prior approval of the Sec- may be for an amount not in excess of retary was obtained. 5 percent of the original principal amount of the loan. The limitations (Authority: 38 U.S.C. 3703(c)) imposed herein on the amount of the (g) The holder of any guaranteed or final installment shall not apply in the insured obligation shall have the right, case of any loan extended pursuant to notwithstanding the absence of express § 36.4815. provision therefor in the instruments (b) Any plan of repayment on loans evidencing the indebtedness, to accel- required to be amortized which does erate the maturity of such obligation not provide for approximately equal at any time after the continuance of periodic payments shall not be eligible any default for the period of three unless the plan conforms with the pro- months. visions of paragraph (e) of this section, (h) If sufficient funds are tendered to or is otherwise approved by the Sec- bring a delinquency current at any retary. time prior to a judicial or statutory (c) Every guaranteed or insured loan sale or other public sale under power of shall be repayable within the estimated sale provisions contained in the loan economic life of the property securing instruments to liquidate any security the loan. for a guaranteed loan, the holder shall (d) Subject to paragraph (a) of this be obligated to accept the funds in pay- section, any amounts which under the ment of the delinquency unless the terms of a loan do not become due and prior approval of the Secretary is ob- payable on or before the last maturity tained to do otherwise, or unless rein- date permissible for loans of its class statement of the loan would adversely under the limitations contained in 38 affect the dignity of the lien or be oth- U.S.C. chapter 37 shall automatically erwise precluded by law. A delinquency fall due on such date. See § 36.4837.

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(e) A graduated payment mortgage until the next following installment loan, providing for deferrals of interest due date or 30 days after such prepay- during the first 5 years of the loan and ment, whichever is earlier. The holder addition of the deferred amounts to and the debtor may agree at any time principal shall be eligible, Provided: that any prepayment not previously (1) The loan is for the purpose of ac- applied in satisfaction of matured in- quiring a single-family dwelling unit, stallments shall be reapplied for the including a condominium unit or si- purpose of curing or preventing any multaneously acquiring and improving subsequent default. a previously occupied, existing single- family dwelling unit. (Authority: 38 U.S.C. 3703(d)) (2)(i) For proposed construction or existing homes not previously occupied § 36.4812 Interest rates. (new homes), the maximum loan (a) In guaranteeing or insuring loans amount cannot exceed 97.5 percent of under 38 U.S.C. chapter 37, the Sec- the lesser of the reasonable value of retary may elect to require that such the property as of the time the loan is loans either bear interest at a rate that made or the purchase price. is agreed upon by the veteran and the (ii) For previously occupied, existing lender, or bear interest at a rate not in homes the maximum loan amount excess of a rate established by the Sec- must be computed to assure that the retary. The Secretary may, from time principal amount of the loan, including to time, change that election by pub- all interest scheduled to be deferred lishing a notice in the FEDERAL REG- and added to the loan principal, will ISTER. However, the interest rate of a not exceed the purchase price or rea- loan for the purpose of an interest rate sonable value of the property, which- reduction under 38 U.S.C. 3710(a)(8), ever is less, as of the time the loan is (a)(9)(B)(i), or (a)(11) must be less than made; the interest rate of the VA loan being (3) The increases in the monthly peri- refinanced. This paragraph does not odic payment amount occur annually apply in the case of an adjustable rate on each of the first five annual anni- mortgage being refinanced under 38 versary dates of the first loan install- U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) ment due date, at a rate of 7.5 percent with a fixed rate loan. over the preceding year’s monthly payment amount; (Authority: 38 U.S.C. 3703, 3710) (4) Beginning with the payment due on the fifth annual anniversary date of (b) For loans bearing an interest rate the first loan installment due date, all agreed upon by the veteran and the remaining monthly periodic payments lender, the veteran may pay reasonable are approximately equal in amount and discount points in connection with the amortize the loan fully in accordance loan. The discount points may not be with the requirements of this section, included in the loan amount, except for and interest rate reduction refinancing (5) The plan is otherwise acceptable loans under 38 U.S.C. 3710(a)(8), to the Secretary. (a)(9)(B)(i), and (a)(11). For loans bearing an interest rate agreed upon by the (Authority: 38 U.S.C. 3703(d)) veteran and the lender, the provisions § 36.4811 Prepayment. of § 36.4813(d)(6) and (d)(7) do not apply. The debtor shall have the right to (Authority: 38 U.S.C. 3703, 3710) prepay at any time, without premium or fee, the entire indebtedness or any (c) Except as provided in § 36.4815, in- part thereof not less than the amount terest in excess of the rate reported by of one installment, or $100, whichever the lender when requesting evidence of is less. Any prepayment in full of the guaranty or insurance shall not be pay- indebtedness shall be credited on the able on any advance, or in the event of date received, and no interest may be any delinquency or default: Provided, charged thereafter. Any partial prepay- that a late charge not in excess of an ment made on other than an install- amount equal to 4 percent on any in- ment due date need not be credited stallment paid more than 15 days after

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due date shall not be considered a vio- through adjustments to the borrower’s lation of this limitation. monthly payments. (4) Initial rate and magnitude of (Authority: 38 U.S.C. 3710) changes. The initial contract interest (d) Effective October 1, 2003, adjust- rate of an adjustable rate mortgage able rate mortgage loans which comply shall be agreed upon by the lender and with the requirements of this para- the veteran. Annual adjustments in the graph (d) are eligible for guaranty. interest rate shall correspond to an- (1) Interest rate index. Changes in the nual changes in the interest rate index, interest rate charged on an adjustable subject to the following conditions and rate mortgage must correspond to limitations: changes in the weekly average yield on (i) No single adjustment to the inter- one year (52 weeks) Treasury bills ad- est rate may result in a change in ei- justed to a constant maturity. Yields ther direction of more than one per- on one year Treasury bills at ‘‘constant centage point from the interest rate in maturity’’ are interpolated by the effect for the period immediately pre- United States Treasury from the daily ceding that adjustment. Index changes yield curve. This curve, which relates in excess of one percentage point may the yield on the security to its time to not be carried over for inclusion in an maturity, is based on the closing mar- adjustment in a subsequent year. Ad- ket bid yields on actively traded one justments in the effective rate of inter- year Treasury bills in the over-the- est over the entire term of the mort- counter market. The weekly average gage may not result in a change in ei- one year constant maturity Treasury ther direction of more than five per- bill yields are published by the Federal centage points from the initial con- Reserve Board of the Federal Reserve tract interest rate. System. The Federal Reserve Statis- (ii) At each adjustment date, changes tical Release Report H. 15 (519) is rein the index interest rate, whether in- leased each Monday. These one year creases or decreases, must be trans- constant maturity Treasury bill yields lated into the adjusted mortgage inter- are also published monthly in the Fed- est rate, rounded to the nearest one- eral Reserve Bulletin, published by the eighth of one percent, up or down. For Federal Reserve Board of the Federal example, if the margin is 2 percent and Reserve System, as well as quarterly in the new index figure is 6.06 percent, the the Treasury Bulletin, published by the adjusted mortgage interest rate will be Department of the Treasury. 8 percent. If the margin is 2 percent (2) Frequency of interest rate changes. and the new index figure is 6.07 per- Interest rate adjustments must occur cent, the adjusted mortgage interest on an annual basis, except that the rate will be 8 1/8 percent. first adjustment may occur no sooner (5) Pre-loan disclosure. The lender than 36 months from the date of the shall explain fully and in writing to the borrower’s first mortgage payment. borrower, at the time of loan applica- The adjusted rate will become effective tion, the nature of the obligation the first day of the month following taken. The borrower shall certify in the adjustment date; the first monthly writing that he or she fully under- payment at the new rate will be due on stands the obligation and a copy of the the first day of the following month. signed certification shall be placed in To set the new interest rate, the lender the loan folder and furnished to VA will determine the change between the upon request. initial (i.e., base) index figure and the (i) The fact that the mortgage inter- current index figure. The initial index est rate may change, and an expla- figure shall be the most recent figure nation of how changes correspond to available before the date of mortgage changes in the interest rate index; loan origination. The current index fig- (ii) Identification of the interest rate ure shall be the most recent index fig- index, its source of publication and ure available 30 days before the date of availability; each interest rate adjustment. (iii) The frequency (i.e., annually) (3) Method of rate changes. Interest with which interest rate levels and rate changes may only be implemented monthly payments will be adjusted,

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and the length of the interval that will taining any guaranty or insurance precede the initial adjustment; and under 38 U.S.C. chapter 37, nor shall (iv) A hypothetical monthly payment any premiums for insurance on the life schedule that displays the maximum of the borrower be paid out of the pro- potential increases in monthly pay- ceeds of a loan. ments to the borrower over the first (d) The following schedule of permis- five years of the mortgage, subject to sible fees and charges shall be applica- the provisions of the mortgage instru- ble to all Department of Veterans Af- ment. fairs guaranteed or insured loans. (6) Annual disclosure. At least 25 days (1) The veteran may pay reasonable before any adjustment to a borrower’s and customary amounts for any of the monthly payment may occur, the lend- following items: er must provide a notice to the bor- (i) Fees of Department of Veterans rower which sets forth the date of the Affairs appraiser and of compliance in- notice, the effective date of the change, spectors designated by the Department the old interest rate, the new interest of Veterans Affairs except appraisal rate, the new monthly payment fees incurred for the predetermination amount, the current index and the date of reasonable value requested by others it was published, and a description of than veteran or lender. how the payment adjustment was cal- (ii) Recording fees and recording culated. A copy of the annual disclo- taxes or other charges incident to rec- sure shall be made a part of the lend- ordation. er’s permanent record on the loan. (iii) Credit report. (Authority: 38 U.S.C. 3707A) (iv) That portion of taxes, assessments, and other similar items for the § 36.4813 Charges and fees. current year chargeable to the bor- (a) No charge shall be made against, rower and an initial deposit (lump-sum or paid by, the borrower incident to the payment) for the tax and insurance ac- making of a guaranteed or insured loan count. other than those expressly permitted (v) Hazard insurance required by under paragraph (d) or (e) of this sec- § 36.4829. tion, and no loan shall be guaranteed (vi) Survey, if required by lender or or insured unless the lender certifies to veteran; except that any charge for a the Secretary that it has not imposed survey in connection with a loan under and will not impose any charges or fees §§ 36.4860 through 36.4865 (Condominium against the borrower in excess of those Loans) must have the prior approval of permissible under paragraph (d) or (e) the Secretary. of this section. Any charge which is (vii) Title examination and title in- proper to make against the borrower surance, if any. under the provisions of this paragraph (viii) The actual amount charged for may be paid out of the proceeds of the flood zone determinations, including a loan: Provided, That if the purpose of charge for a life-of-the-loan flood zone the loan is to finance the purchase or determination service purchased at the construction of residential property time of loan origination, if made by a the costs of closing the loan including third party who guarantees the accu- the pro rata portion of the ground racy of the determination. A fee may rents, hazard insurance premiums, cur- not be charged for a flood zone deter- rent year’s taxes, and other prepaid mination made by a Department of items normally involved in financing Veterans Affairs appraiser or for the such transaction may not be included lender’s own determination. in the loan. (ix) Such other items as may be au- (b) Except as provided in this sub- thorized in advance by the Under Sec- part, no brokerage or service charge or retary for Benefits as appropriate for their equivalent may be charged inclusion under this paragraph (d) as against the debtor or the proceeds of proper local variances. the loan either initially, periodically, (2) A lender may charge and the vet- or otherwise. eran may pay a flat charge not exceed- (c) Brokerage or other charges shall ing 1 percent of the amount of the loan, not be made against the veteran for ob- provided that such flat charge shall be

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in lieu of all other charges relating to (i) To refinance existing indebtedness costs of origination not expressly spec- pursuant to 38 U.S.C. 3710(a)(5), (a)(8), ified and allowed in this schedule. (a)(9)(B)(i) or (a)(9)(B)(ii); (3) In cases where a lender makes ad- (ii) To repair, alter or improve a vances to a veteran during the progress dwelling owned by the veteran pursu- of construction, alteration, improve- ant to 38 U.S.C. 3710(a)(4) or (7) if such ment, or repair, either under a commit- loan is to be secured by a first lien; ment of the Department of Veterans (iii) To construct a dwelling or farm Affairs to issue a guaranty certificate residence on land already owned or to or insurance credit upon completion, or be acquired by the veteran, provided where the lender would be entitled to that the veteran did not or will not ac- guaranty or insurance on such ad- quire the land directly or indirectly from a builder or developer who will be vances when reported under automatic constructing such dwelling or farm res- procedure, the lender may make a idence; charge against the veteran of not ex- (iv) To purchase a dwelling from a ceeding 2 percent of the amount of the class of sellers which the Secretary de- loan for its services in supervising the termines are legally precluded under making of advances and the progress of all circumstances from paying such a construction notwithstanding that the discount if the best interest of the vet- ‘‘holdback’’ or final advance is not ac- eran would be so served. tually paid out until after the con- (7) Discounts shall be computed as struction, alteration, improvement, or follows: repair is fully completed: Provided, (i) Unless otherwise approved by the That the major portion (51 percent or Secretary, the discount, if any, to be more) of the loan proceeds is paid out paid by the borrower on a loan secured during the actual progress of the con- by a first lien may not exceed the dif- struction, alteration, improvement, or ference between the bid price, rounded repair. Such charge may be in addition to the lower whole number, and par to the 1 percent charge allowed under value for GNMA (Government National paragraph (d)(2) of this section. Mortgage Association) 90-day forward (4) In consideration, alteration, im- bid closing price for pass through secu- provement or repair loans, including rities 1⁄2 percent less than the face note supplemental loans made pursuant to rate of the loan. Unless the lender and § 36.4859, where no charge is permissible borrower negotiate a firm written com- under the provisions of paragraph (d)(3) mitment for a maximum amount of of this section the lender may charge discount to be paid, the bid price to be and the veteran may pay a flat sum not used in the computation must be the exceeding 1 percent of the amount of GNMA 90-day forward bid closing quote the loan. Such charge may be in addi- for any day 1 to 4 business days prior to tion to the 1 percent allowed under loan closing. ‘‘Loan closing’’ is defined for this purpose as the date on which paragraph (d)(2) of this section. the borrower’s 3-day right of rescission (5) The fees and charges permitted commences pursuant to the Truth in under this paragraph are maximums Lending Act. If the lender and bor- and are not intended to preclude a rower choose to negotiate a firm dis- lender from making alternative count commitment for a maximum charges against the veteran which are amount of discount to be paid, the bid not specifically authorized in the price to be used in establishing the schedule provided the imposition of maximum discount must be the closing such alternative charges would not re- quote for the business day prior to the sult in an aggregate charge or payment date of the commitment. Lenders nego- in excess of the prescribed maximum. tiating firm commitments must close (6) The veteran borrower subject to that loan at a discount no higher than the limitations set forth in paragraphs the firm commitment regardless of (d)(6) and (7) of this section may pay a changes in the maximum allowable De- discount required by a lender when the partment of Veterans Affairs interest proceeds of the loan will be used for rate. If a lender’s commitment expires any of the following purposes: prior to loan closing, the lender and

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borrower may negotiate a new firm reasonable fee, not to exceed the lesser commitment based on the procedure of $300 and the actual cost of any credit outlined in this paragraph (d)(7)(i) or report required, or any maximum pre- may use the procedure for determining scribed by applicable State law, for the discount based on the GNMA 90-day processing an application for assump- forward bid closing quote for any day 1 tion and changing its records. to 4 business days prior to loan closing. (ii) The borrower, subject to the limi- (Authority: 38 U.S.C. 3714) tations set forth in paragraphs (d)(6) (e) Subject to the limitations set out and (7) of this section, may pay a dis- in paragraph (e)(4) of this section, a fee count required by the lender when the must be paid to the Secretary. proceeds of the loan will be used to re- (1) The fee on loans to veterans shall pair, alter, or improve a dwelling be as follows: owned by the veteran pursuant to 38 (i) On all interest rate reduction refi- U.S.C. 3710(a)(4) or (7) if such loan is nancing loans guaranteed under 38 unsecured or secured by less than a U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11), first lien. No such discount may be the fee shall be 0.50 percent of the total charged unless: loan amount. (A) The loan is submitted to the Sec- (ii) On all refinancing loans other retary for prior approval; than those described in paragraph (B) The dollar amount of the dis- (e)(1)(i) of this section, the funding fee count is disclosed to the Secretary and shall be 2.75 percent of the loan amount the veteran prior to the issuance by for loans to veterans whose entitle- the Secretary of the certificate of com- ment is based on service in the Se- mitment. Said certificate of commit- lected Reserve under the provisions of ment shall specify the discount to be 38 U.S.C. 3701(b)(5), and 2 percent of the paid by the veteran, and this discount loan amount for loans to all other vet- may not be increased once the commit- erans; provided, however, that if the ment is issued without the approval of veteran is using entitlement for a sec- the Secretary; and ond or subsequent time, the fee shall be (C) The discount has been determined 3 percent of the loan amount. by the Secretary to be reasonable in (iii) Except for loans to veterans amount. whose entitlement is based on service (iii) A veteran may pay the discount in the Selected Reserve under the pro- on an acquisition and improvement visions of 38 U.S.C. 3701(b)(5), the fund- loan (as defined in § 36.4801) provided: ing fee shall be 2 percent of the total (A) The veteran pays no discount on loan amount for all loans for the pur- the acquisition portion of the loan ex- chase or construction of a home on cept in accordance with paragraph which the veteran does not make a (d)(6)(iv) of this section; and down payment, unless the veteran is (B) The discount paid on the im- using entitlement for a second or sub- provements portion of the loan does sequent time, in which case the fee not exceed the percentage of discount shall be 3 percent. On purchase or con- paid on the acquisition portion of the struction loans on which the veteran loan. makes a down payment of 5 percent or NOTE TO PARAGRAPH (d)(7)(iii): Acquisition more, but less than 10 percent, the and improvement loans may be closed either amount of the funding fee shall be 1.50 on the automatic or prior approval basis. percent of the total loan amount. On (iv) Unless the Under Secretary for purchase or construction loans on Benefits otherwise directs, all powers which the veteran makes a down pay- of the Secretary under paragraphs ment of 10 percent or more, the amount (d)(6) and (7) of this section are hereby of the funding fee shall be 1.25 percent delegated to the officials designated by of the total loan amount. § 36.4845(b). (iv) On loans to veterans whose entitlement is based on service in the Se- (Authority: 38 U.S.C. 3703, 3710; 42 U.S.C. 4001 lected Reserve under the provisions of note, 4012a) 38 U.S.C. 3701(b)(5), the funding fee (8) On any loan to which 38 U.S.C. shall be 2.75 percent of the total loan 3714 applies, the holder may charge a amount on loans for the purchase or

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construction of a home on which the scribed in paragraph (e)(1) of this sec- veteran does not make a down pay- tion is made more than 30 days after ment, unless the veteran is using enti- loan closing, interest will be assessed tlement for a second or subsequent at a rate set in conformity with the time, in which case the fee shall be 3 Department of Treasury’s Fiscal Re- percent. On purchase or construction quirements Manual. This interest loans on which veterans whose entitle- charge is in addition to the 4 percent ment is based on service in the Se- late charge, but the late charge is not lected Reserve make a down payment included in the amount on which inter- of 5 percent or more, but less than 10 est is computed. This interest charge is percent, the amount of the funding fee shall be 2.25 percent of the total loan to be calculated on a daily basis begin- amount. On purchase or construction ning on the date of closing, although loans on which such veterans make a the interest will be assessed only on down payment of 10 percent or more, funding fee payments received more the amount of the funding fee shall be than 30 days after closing. 2 percent of the total loan amount. (4) The lender is required to pay to (v) All or part of the fee may be paid the Secretary electronically through in cash at loan closing or all or part of the Automated Clearing House (ACH) the fee may be included in the loan system the fees described in paragraphs without regard to the reasonable value (e)(1) and (e)(2) of this section and any of the property or the computed max- late fees and interest due on them. imum loan amount, as appropriate. In This shall be paid to a collection agent computing the fee, the lender will dis- by operator-assisted telephone, ter- regard any amount included in the loan minal entry, or CPU-to-CPU trans- to enable the borrower to pay such fee. mission. The collection agent will be identified by the Secretary. The lender (Authority: 38 U.S.C. 3729) shall provide the collection agent with (2) Subject to the limitations set out the following: authorization for pay- in this section, a fee of one-half of one ment of the funding fee (including late percent of the loan balance must be fees and interest) along with the fol- paid to the Secretary in a manner pre- lowing information: VA lender ID num- scribed by the Secretary by a person ber; four-digit personal identification assuming a loan to which 38 U.S.C. 3714 number; dollar amount of debit; VA applies. The instrument securing such a loan shall contain a provision de- loan number; OJ (office of jurisdiction) scribing the right of the holder to col- code; closing date; loan amount; infor- lect this fee as trustee for the Depart- mation about whether the payment in- ment of Veterans Affairs. The loan cludes a shortage, late charge, or inter- holder shall list the amount of this fee est; veteran name; loan type; sale in every assumption statement pro- amount; down payment; whether the vided and include a notice that the fee veteran is a reservist; and whether this must be paid to the holder imme- is a subsequent use of entitlement. For diately following loan settlement. The all transactions received prior to 8:15 fee must be transmitted to the Sec- p.m. on a workday, VA will be credited retary within 15 days of the receipt by with the amount paid to the collection the holder of the notice of transfer. agent at the opening of business the next banking day. (Authority: 38 U.S.C. 3714, 3729) (3) The lender is required to pay to (Authority: 38 U.S.C. 3729(a)) the Secretary the fee described in para- (5) The fees described in paragraph graph (e)(1) of this section within 15 (e)(1) and (e)(2) of this section shall not days after loan closing. Any lender closing a loan, subject to the limita- be collected from a veteran who is re- tions set out in paragraph (e)(4) of this ceiving compensation (or who but for section who fails to submit timely pay- the receipt of retirement pay would be ment of this fee will be subject to a entitled to receive compensation) or late charge equal to 4 percent of the from a surviving spouse described in total fee due. If payment of the fee de-

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section 3701(b) of title 38, United States (5)(i) Fees for legal services actually Code. performed, not to exceed the reasonable and customary fees for such serv- (Authority: 38 U.S.C. 3729) ices in the State where the property is (The Office of Management and Budget has located, as determined by the Sec- approved the information collection require- retary. ments in this section under control numbers (ii) In determining what constitutes 2900–0474 and 2900–0516.) the reasonable and customary fees for § 36.4814 Advances and other charges. legal services, the Secretary shall review allowances for legal fees in con- (a) A holder may advance any nection with the foreclosure of single- amount reasonably necessary and prop- family housing loans, including bank- er for the maintenance or repair of the ruptcy-related services, issued by HUD, security, or for the payment of accrued Fannie Mae, and Freddie Mac. The Sec- taxes, special assessments, ground or retary will review such fees annually water rents, or premiums on fire or and, as the Secretary deems necessary, other casualty insurance against loss publish in the FEDERAL REGISTER a of or damage to such property and any table setting forth the amounts the such advance so made may be added to Secretary determines to be reasonable the guaranteed or insured indebted- and customary. The table will reflect ness. A holder may also advance the the primary method for foreclosing in one-half of one percent funding fee due each state, either judicial or non-judi- on a transfer under 38 U.S.C. 3714 when cial, with the exception of those States this is not paid at the time of transfer. where either judicial or non-judicial is All security instruments for loans to acceptable. The use of a method not which 38 U.S.C. 3714 applies must in- authorized in the table will require clude a clause authorizing the collec- prior approval from VA. This table will tion of an assumption funding fee and be available throughout the year on a an advance for this fee if it is not paid VA controlled Web site, such as at at the time of transfer. http://www.homeloans.va.gov. (iii) If the foreclosure attorney has (Authority: 38 U.S.C. 3703, 3714, 3732) the discretion to conduct the sale or to (b) In addition to advances allowable name a substitute trustee to conduct under paragraph (a) of this section, the the sale, the combined total paid for holder may charge against the proceeds legal fees under paragraph (b)(5)(i) of of the sale of the security; may charge this section and trustee’s fees pursuant against gross amounts collected; may to paragraph (b)(4) of this section shall include in any accounting to the Sec- not exceed the applicable maximum al- retary after payment of a claim under lowance for legal fees established under the guaranty; may include in the com- paragraph (b)(5)(ii) of this section. If putation of a claim under the guar- the trustee conducting the sale must anty, if lawfully authorized by the loan be a Government official under local agreement and subject to § 36.4824(a); law, or if an individual other than the or, may include in the computation of foreclosing attorney (or any employee an insurance loss, any of the following of that attorney) is appointed as part items actually paid: of judicial proceedings, and local law (1) Any expense which is reasonably also establishes the fees payable for the necessary for preservation of the secu- services of the public or judicially ap- rity; pointed trustee, then those fees will (2) Court costs in a foreclosure or not be subject to the maximum estab- other proper judicial proceeding in- lished for legal fees under paragraph volving the security; (b)(5)(ii) of this section and may be in- (3) Other expenses reasonably nec- cluded in the total indebtedness. essary for collecting the debt, or repos- (6) The cost of a credit report(s) on session or liquidation of the security; the debtor(s), which is (are) to be for- (4) Reasonable trustee’s fees or com- warded to the Secretary in connection missions not in excess of those allowed with the claim; by statute and in no event in excess of (7) Reasonable and customary costs 5 percent of the unpaid indebtedness; of property inspections;

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(8) Any other expense or fee that is the foreclosure by the debtor, the hold- approved in advance by the Secretary. er granting forbearance in excess of 30 days at the request of the Secretary, or (Authority: 38 U.S.C. 3720(a)(3), 3732) other factors beyond the control of the (c) Any advances or charges enumer- holder. ated in paragraph (a) or (b) of this sec- (Authority: 38 U.S.C. 3703(c), 3720, 3732) tion may be included as specified in the holder’s accounting to the Secretary, § 36.4815 Loan modifications. but they are not chargeable to the (a) Subject to the provisions of this debtor unless he or she otherwise be section, the terms of any guaranteed liable therefor. loan may be modified by written agree- (d) Advances of the type enumerated ment between the holder and the bor- in paragraph (a) of this section and any rower, without prior approval of the other advances determined by VA to be Secretary, if all of the following condi- necessary and proper in order to pre- tions are met: serve or protect the security may be authorized by employees designated in (1) The loan is in default; § 36.4845(b) in the case of any property (2) The event or circumstances that constituting the security for a loan ac- caused the default has been or will be quired by the Secretary or constituting resolved and it is not expected to re- the security for the unpaid balance of occur; the purchase price owing to the Sec- (3) The obligor is considered to be a retary on account of the sale of such reasonable credit risk, based on a re- property. Such advances shall be se- view by the holder of the obligor’s cured to the extent legal and prac- creditworthiness under the criteria ticable by a lien on the property. specified in § 36.4840, including a cur- (e) Notwithstanding the provisions of rent credit report. The fact of the re- paragraph (a) or (b) of this section, cent default will not preclude the hold- holders of condominium loans guaran- er from determining the obligor is now teed or insured under 38 U.S.C. a satisfactory credit risk provided the 3710(a)(6) shall not pay those assess- holder determines that the obligor is ments or charges allocable to the con- able to resume regular mortgage in- dominium unit which are provided for stallments when the modification be- in the instruments establishing the comes effective based upon a review of condominium form of ownership in the the obligor’s current and anticipated absence of the prior approval of the income, expenses, and other obliga- Secretary. tions as provided in § 36.4840; (f)(1) Fees and charges otherwise al- (4) At least 12 monthly payments lowable by this section that accrue have been paid since the closing date of after the date specified in paragraph the loan; (f)(2) of this section may not be in- (5) The current owner(s) is obligated cluded in a claim under the guaranty. to repay the loan, and is party to the (2) The date referenced in paragraph loan modification agreement; and (f)(1) of this section will be computed (6) The loan will be reinstated to per- by adding 210 calendar days to the due forming status by virtue of the loan date of the last paid installment, plus modification. the reasonable period that the Sec- (b) Without the prior approval of the retary has determined, pursuant to Secretary, a loan can be modified no § 36.4822(a), it should have taken to more than once in a 3-year period and complete the foreclosure. There will no more than three times during the also be added to the time period speci- life of the loan. fied in the previous sentence such addi- (c) All modified loans must bear a tional time as the Secretary deter- fixed-rate of interest, which may not mines was reasonably necessary to exceed the Government National Mort- complete the foreclosure if the Sec- gage Association (GNMA) current retary determines the holder was un- month coupon rate that is closest to able to complete the foreclosure within par (100) plus 50 basis points. The rate the time specified in that section due shall be determined as of the close of to Bankruptcy proceedings, appeal of business the last business day of the

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month preceding the date the holder § 36.4816 Acceptability of partial pay- approved the loan modification. ments. (d) The unpaid balance of the modi- A partial payment is a remittance by fied loan may be re-amortized over the or on behalf of the borrower on a loan remaining life of the loan. The loan in default (as defined in § 36.4801) of any term may extend the maturity date to amount less than the full amount due the shorter of: under the terms of the loan and secu- (1) 360 months from the due date of rity instruments at the time the remit- the first installment required under tance is tendered. the modification, or (a) Except as provided in paragraph (2) 120 months after the original ma- (b) of this section, or upon the express turity date of the loan. waiver of the Secretary, the mortgage (e) Only unpaid principal; accrued in- holder shall accept any partial pay- terest; deficits in the taxes and insur- ment and either apply it to the mort- ance impound accounts; and advances gagor’s account or identify it with the required to preserve the lien position, mortgagor’s account and hold it in a such as homeowner association fees, special account pending disposition. special assessments, water and sewer When partial payments held for dis- liens, etc., may be included in the position aggregate a full monthly in- modified indebtedness. Late fees and stallment, including escrow, they shall other charges may not be capitalized. be applied to the mortgagor’s account. (f) Holders shall not charge a proc- (b) A partial payment may be re- essing fee under any circumstances to turned to the mortgagor, within 10 cal- complete a loan modification. How- endar days from date of receipt of such ever, late fees and any other actual payment, with a letter of explanation costs incurred and legally chargeable, only if one or more of the following including but not limited to the cost of conditions exist: a title insurance policy for the modi- (1) The property is wholly or par- fied loan, but which cannot be capital- tially tenant-occupied and rental pay- ized in the modified indebtedness, may ments are not being remitted to the be collected directly from the borrower holder for application to the loan ac- as part of the modification process. count; (g) Holders will ensure the first lien (2) The payment is less than one full status of the modified loan. monthly installment, including es- (h) The dollar amount of the guar- crows and late charge, if applicable, anty may not exceed the greater of: unless the lesser payment amount has (1) The original guaranty amount of been agreed to under a documented re- the loan being modified (but if the payment plan; modified loan amount is less than the (3) The payment is less than 50 per- original loan amount, then the amount cent of the total amount then due, un- of guaranty will be equal to the origi- less the lesser payment amount has nal guaranty percentage applied to the been agreed to under a documented re- modified loan), or payment plan; (2) 25 percent of the loan being modi- (4) The payment is less than the fied subject to the statutory maximum amount agreed to in a documented re- specified at 38 U.S.C. 3703(a)(1)(B). payment plan; (i) The obligor may not receive any (5) The amount tendered is in the cash back from the modification. form of a personal check and the holder (j) This section does not create a has previously notified the mortgagor right of a borrower to have a loan in writing that only cash or certified modified, but simply authorizes the remittances are acceptable; loan holder to modify a loan in certain (6) A delinquency of any amount has situations without the prior approval continued for at least 6 months since of the Secretary. the account first became delinquent and no written repayment plan has (Authority: 38 U.S.C. 3703(c)(1), 3720) been arranged;

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(7) Foreclosure has been commenced port this event regardless of delin- by the taking of the first action re- quency status. quired for foreclosure under local law; (3) Release of liability—when an obli- or gor has been released from liability. (8) The holder’s lien position would The servicer shall report this event re- be jeopardized by acceptance of the gardless of delinquency status. partial payment. (4) Partial release of security—when (c) A failure by the holder to comply the holder has released the lien on a with the provisions of this paragraph part of the security for the loan pursu- may result in a partial or total loss of ant to § 36.4827. The servicer shall re- guaranty or insurance pursuant to port this event regardless of delin- § 36.4828(b), but such failure shall not quency status. constitute a defense to any legal action (5) Servicing transfer (transferring to terminate the loan. servicer)—when a holder transfers the loan to another servicer. (Authority: 38 U.S.C. 3703(c)(1)) (6) Servicing transfer (receiving servicer)—when a servicer boards the § 36.4817 Servicer reporting requirements. loan. (7) Electronic Default Notification (a) Servicers of loans guaranteed by (EDN)—when the loan becomes at least the Secretary shall report the informa- 61 days delinquent. The servicer shall tion required by this section to the report this event no later than the 7th Secretary electronically. The Sec- calendar day from when the event oc- retary shall accept electronic submis- curred. The servicer shall report this sion from each entity servicing loans event only once per default for delin- guaranteed under 38 U.S.C. chapter 37 quent loans in its portfolio. not later than the effective date of this (8) Delinquency status—when the rule. servicer notifies VA of any updates to (b) Not later than the seventh cal- the delinquency information on loans endar day of each month each servicer for which an EDN has been submitted. shall report to the Secretary basic in- The servicer shall report this event formation (loan identification informa- monthly (i.e., no later than the 7th cal- tion, payment due date, and unpaid endar day of the month following the principal balance) for every loan guar- month for which the reported informa- anteed by the Secretary currently tion applies) until the default cures or being serviced by that entity, unless the loan terminates. previously reported under paragraph (9) Contact information change— (c)(7) of this section and has not rein- when there is a change to the contact stated, terminated, or paid in full. information for current owners or a (c) Servicers shall report to the Sec- property or mailing address change. retary the following specific loan (10) Occupancy status change—when events in accordance with the time- there is a change in property occu- frames described for each event. Unless pancy status. otherwise specified herein, the servicer (11) Bankruptcy filed—when any shall report these events on a monthly owner files a petition under the Bank- basis (i.e., no later than the 7th cal- ruptcy Code. The servicer shall report endar day of the month following the this event no later than the 7th cal- month in which the event occurred) endar day from when the event oc- only for delinquent loans in its port- curred. The servicer shall report this folio. event only on delinquent loans in its (1) Loan paid in full—when the loan portfolio, if appropriate, or with the obligation has been fully satisfied by EDN when it is reported. receipt of funds and not a servicing (12) Bankruptcy update—when a sig- transfer. The servicer shall report this nificant event related to the bank- event regardless of delinquency status. ruptcy has occurred. The servicer shall (2) Authorized transfer of owner- report this event no later than the 7th ship—when the servicer learns that an calendar day from when the event oc- authorized transfer of ownership has curred. The servicer shall report this been completed. The servicer shall re- event only on delinquent loans in its

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portfolio, if appropriate, or with the (26) Transfer of custody—when the EDN when it is reported. servicer notifies VA of the holder’s in- (13) Loss mitigation letter sent— tent to convey the property. The when the servicer sends the loss miti- servicer shall report this no later than gation letter to the borrower as re- the 15th calendar day from the date of quired by § 36.4850(g)(1)(iv). liquidation sale (such as the date of (14) Partial payment returned—when foreclosure sale, date of recordation of the servicer returns a partial payment a deed-in-lieu of foreclosure, or con- to the borrower. firmation/ratification of sale date when (15) Default cured/loan reinstated— required under local practice). when a previously reported default (i.e., (27) Improper transfer of custody— an EDN was filed) has cured/loan rein- when the servicer discovers that the stated. conveyance of the property to VA was improper. The servicer shall report this (16) Default reported to credit bu- no later than the 7th calendar day from reau—when the servicer notifies the when the error is discovered. credit bureaus of a defaulted loan or (28) Invalid sale results—when the loan termination. The servicer shall re- foreclosure sale is invalid. The servicer port this event only on delinquent shall report this no later than the 7th loans in its portfolio, and shall report calendar day from discovery of the the first occurrence only. event that invalidated the sale. (17) Repayment plan approved—when (29) Confirmed sale date with no the servicer approves a repayment transfer of custody—when the loan is plan. terminated, the property is not con- (18) Special forbearance approved— veyed, and the property is located in a when the servicer approves a special confirmation/ratification of sale state. forbearance agreement. (30) Basic claim information—when (19) Loan modification approved— the servicer files a claim under guar- when the servicer approves a loan anty. The servicer shall report this modification. event within 365 calendar days of loan (20) Loan modification complete— termination for non-refund claims, and when both the servicer (and/or the within 60 calendar days of the refund holder, where necessary) and the approval date for refund claims. owner(s) have executed the modifica- (31) Refunding Settlement—when VA tion agreement. refunds a loan and the servicer reports (21) Compromise sale complete—when the tax and insurance information. The a compromise sale closes. servicer shall report this event within (22) Deed-in-lieu of foreclosure com- 60 calendar days of the refund approval plete—when the servicer records the date. deed-in-lieu of foreclosure. The servicer (Authority: 38 U.S.C. 3703(c), 3732) shall report this no later than the 7th calendar day from when the event oc- (The Office of Management and Budget has approved the information collection require- curred. ments in this section under control number (23) Foreclosure referral—when the 2900–0021.) loan is referred to legal counsel for foreclosure. The servicer shall report § 36.4818 Servicer tier ranking—tem- this no later than the 7th calendar day porary procedures. from when the event occurred. (a) The Secretary shall assign to each (24) Foreclosure sale scheduled—when servicer a ‘‘Tier Ranking’’ based upon the foreclosure sale is scheduled. The the servicer’s performance in servicing servicer shall report this no later than guaranteed loans. There shall be four the 7th calendar day from when the tiers, known as tier one, tier two, tier event occurred. three, and tier four, with tier one being (25) Results of sale—when the fore- the highest rated and tier four the low- closure sale is complete, the servicer est. Upon the effective date of this reg- reports the results of the foreclosure ulation, every servicer of loans guaran- sale. The servicer shall report this no teed by the Secretary shall be pre- later than the 7th calendar day from sumed to be in servicer tier two, and when the event occurred. shall remain in tier two until the date

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specified in paragraph (c)(2) of this sec- of this section, provided the servicer tion. has received evaluations for at least (b) For purposes of this section, the four continuous calendar quarters. term ‘‘calendar quarter’’ shall mean (d) The quarterly evaluation and tier the 3-month periods ending on March ranking of a servicer shall be deemed 31, June 30, September 30, and Decem- to be confidential and privileged and ber 31. shall not be disclosed by the Secretary (c)(1) No later than 30 calendar days to any other party. after the last business day of the first calendar quarter occurring after the (Authority: 38 U.S.C. 3703(c)) rules for determining tier rankings take effect, and then not later than 30 § 36.4819 Servicer loss-mitigation options and incentives. calendar days after the last business day of each subsequent calendar quar- (a) The Secretary will pay a servicer ter, the Secretary shall provide each in tiers one, two, or three an incentive servicer with an evaluation of their payment for each of the following suc- performance under such rules. cessful loss-mitigation options or al- (2) No later than 45 calendar days ternatives to foreclosure completed: re- after the last business day of the payment plans, special forbearance fourth calendar quarter during which agreements, loan modifications, com- the Secretary evaluates the perform- promise sales, and deeds-in-lieu of fore- ance of servicers, and then annually closure. Only one incentive payment thereafter, VA shall advise each will be made with respect to any de- servicer of its tier ranking. fault required to be reported to the (3) Any entity which begins servicing Secretary pursuant to § 36.4817(c). No guaranteed loans after the first cal- incentive payment will be made to a endar quarter occurring after rules for servicer in tier four. The options and determining tier rankings take effect alternatives are listed in paragraph (b) shall be presumed to be in tier two. of this section from top to bottom in The Secretary will evaluate the per- their preferred order of consideration formance of such servicer as provided (i.e., a hierarchy for review), but VA in paragraph (c)(1) of this section. The recognizes that individual cir- Secretary will advise such servicer of cumstances may lead to ‘‘out of the or- its tier ranking at the time other dinary’’ considerations. servicers are advised of their tier (b) The amount of the incentive pay- rankings pursuant to paragraph (c)(2) ment is as follows:

Tier ranking One Two Three Four

Repayment Plan ...... $200 $160 $120 $0 Special Forbearance ...... 200 160 120 0 Loan Modification ...... 700 500 300 0 Compromise Sale ...... 1,000 800 600 0 Deed in Lieu of Foreclosure ...... 350 250 150 0

(c) For purposes of this section, a plan may be eligible upon loan rein- loss-mitigation option or alternative statement; to foreclosure will be deemed success- (3) With respect to a loan modifica- fully completed as follows: tion, when the modification is executed (1) With respect to a repayment plan and the loan reinstates; (as defined in § 36.4801), when the loan (4) With respect to a compromise reinstates; sale, when the claim under guaranty is (2) With respect to special forbear- filed; or ance (as defined in § 36.4801), when the (5) With respect to a deed-in-lieu of loan reinstates. If a repayment plan is foreclosure, when the claim under developed at the end of the forbearance guaranty is filed. period, then the special forbearance is (d) Incentive payments with respect not eligible for an incentive payment, to repayment plans, special although the subsequent repayment forbearances and loan modifications

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shall be made no less frequently than provided to the servicer have been cor- monthly. For all other successful loss- rected. mitigation options, incentives shall be (Authority: 38 U.S.C. 3703(c) and 3732(a)) paid in the final claim payment. (The Office of Management and Budget has (e) The Secretary shall reserve the approved the information collection require- right to stop an incentive payment to a ments in this section under control number servicer if the servicer fails to perform 2900–0362.) adequate servicing. § 36.4821 Service of process. (Authority: 38 U.S.C. 3703(c), 3720, 3722) (a) In any legal or equitable pro- (The Office of Management and Budget has ceeding to which the Secretary is a approved the information collection require- party (including probate and bank- ments in this section under control number ruptcy proceedings) arising from a loan 2900–0021.) guaranteed, insured, or made, or a property acquired by the Secretary § 36.4820 Refunding of loans in default. pursuant to title 38, U.S.C. chapter 37, (a) Upon receiving a notice of default original process and any other process or a notice under § 36.4817, the Sec- prior to appearance that may be served retary may require the holder upon on the Secretary must be delivered to penalty of otherwise losing the guar- the VA Regional Counsel located in the anty or insurance to transfer and as- jurisdiction in which the proceeding is sign the loan and the security there- docketed. Copies of such process will fore to the Secretary or to another des- also be served on the Attorney General of the United States and the United ignated by the Secretary upon receipt States Attorney having jurisdiction of payment in full of the balance of the over that area. Within the time re- indebtedness remaining unpaid to the quired by applicable law, or rule of date of such assignment. Such assign- court, the Secretary will cause appro- ment may be made without recourse priate special or general appearance to but the transferor shall not thereby be be entered in the case by an authorized relieved from the provisions of § 36.4828. attorney. (b) If the obligation is assigned or transferred to a third party pursuant (Authority: 38 U.S.C. 3703(c) and 3720(a)) to paragraph (a) of this section the (b) After appearance of the Secretary Secretary may continue in effect the by attorney all process and notice oth- guaranty or insurance issued with re- erwise proper to serve on the Secretary spect to the previous loan in such man- before or after judgment, if served on ner as to cover the assignee or trans- the attorney of record, shall have the feree. same effect as if the Secretary were (c) Servicers must deliver to the Sec- personally served within the jurisdic- retary all legal documents, including tion of the court. but not limited to proper loan assign- (Authority: 38 U.S.C. 3720, 3732) ments, required as evidence of proper loan transfer within 60 calendar days § 36.4822 Loan termination. from the date that VA sends notice to (a) For purposes of this part, a hold- the servicer that VA has decided to re- er, using reasonable diligence must fund a loan under this section. complete a foreclosure within the Servicers exhibiting a continued fail- timeframe and in the manner deter- ure to provide timely loan transfer doc- mined by the Secretary. In deter- umentation may, at the discretion of mining what constitutes allowable the Secretary and following advance time and method for foreclosure, the notice to the servicer, be subject to Secretary shall review allowances for temporary suspension of all property time and method in connection with acquisition and claim payments until the foreclosure of single-family hous- all deficiencies identified in the notice ing loans issued by HUD, Fannie Mae, and Freddie Mac, as well as State statutory requirements. The Secretary will review such timeframes annually and,

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as the Secretary deems necessary, pub- mined under paragraph (b) of this sec- lish in the FEDERAL REGISTER a table tion. Those costs will be calculated setting forth the timeframes and meth- using the percentage derived by the ods the Secretary determines to be rea- Secretary and published in the FED- sonable. The schedule will reflect the ERAL REGISTER pursuant to § 36.4801. timeframe allowed for the standard, (d) If the holder learns of any mate- acceptable method for foreclosure pro- rial damage to the property occurring ceedings in each State. The use of an- after the appraisal and prior to the liq- other method will require prior ap- uidation sale, the impact of such dam- proval from VA. VA will maintain the age on the fair market value must be loan termination time allowable time- determined in consultation with the frames on a Web site under VA’s con- fee appraiser, and the net value ad- trol, such as at http:// justed accordingly. www.homeloans.va.gov. (e)(1) A holder may approve a com- (b)(1) At least 30 days prior to the promise sale of the property securing scheduled or anticipated date of the the loan without the prior approval of liquidation sale, the holder must re- the Secretary provided that: quest that VA assign an appraiser to (i) The holder has determined the conduct a liquidation appraisal. loan is insoluble; (2) If the holder (or its authorized (ii) The credit to the indebtedness servicing agent) has been approved by (consisting of the net proceeds from the Secretary to process liquidation the compromise sale and any waiver of appraisals under 38 CFR 36.4848, the ap- indebtedness by the holder) must equal praiser shall forward the liquidation or exceed the net value of the property appraisal report directly to the holder securing the loan; and for a determination of the fair market (iii) The current owner of the prop- value of the property pursuant to erty securing the loan will not receive § 36.4848. any proceeds from the sale of the prop- (3) If the holder (or its authorized erty. servicing agent) has not been approved by the Secretary to process liquida- (2) A holder may request advance ap- tions appraisals under 38 CFR 36.4848, proval from the Secretary for a com- the Secretary shall review the ap- promise sale notwithstanding that all praisal and determine the fair market of the conditions specified in paragraph value of the property. The Secretary (e)(1) of this section cannot be met if will provide the holder with a state- the holder believes such compromise ment of the fair market value. sale would be in the best interests of (4)(i) Except as provided in paragraph the veteran and the Secretary. (b)(4)(ii) of this section, a liquidation (f)(1) A holder may accept a deed vol- appraisal or statement of fair market untarily tendered by the current owner value issued pursuant to paragraph of the property securing the loan in (b)(3) of this section will be valid for lieu of conducting a foreclosure with- 180 calendar days. out the prior approval of the Secretary (ii) The Secretary may specify in provided that: writing a shorter validity period, not (i) The holder has determined the less than 90 calendar days, for a liq- loan is insoluble; uidation appraisal or statement of fair (ii) The holder has computed the net market value if rapidly-changing mar- value of the property securing the loan ket conditions in the area where the pursuant to paragraph (c) of this sec- property is located make such shorter tion; validity period in the best fiscal inter- (iii) The holder has considered a com- ests of the United States. promise sale pursuant to paragraph (e) (c) Prior to the liquidation sale, the of this section and determined such holder shall compute the net value of compromise sale is not practical; and, the property securing the guaranteed (iv) The holder has determined the loan by subtracting the estimated current owner of the property can con- costs to the Secretary for the acquisi- vey clear and marketable title to the tion and disposition of the property property that would meet the standard from the fair market value, as deter- stated in paragraph (d)(5) of § 36.4823.

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(2) A holder may request advance ap- 15 calendar days after receipt of the proval from the Secretary for a deed- guaranty claim. in-lieu of foreclosure notwithstanding (c) The holder, in accounting to the that all of the conditions specified in Secretary in connection with the con- paragraph (f)(1) of this section cannot veyance of any property pursuant to be met if the holder believes such deed- this section, may include as a part of in-lieu would be in the best interests of the indebtedness all actual expenses or the veteran and the Secretary. costs of the proceedings, paid by the (Authority: 38 U.S.C. 3703(c), 3732) holder, within the limits defined in § 36.4814. In connection with the con- § 36.4823 Election to convey security. veyance or transfer of property to the (a) If the holder acquires the prop- Secretary the holder may include in erty that secured the guaranteed loan accounting to the Secretary the fol- at the liquidation sale or through ac- lowing expense items if actually paid ceptance of a deed-in-lieu of fore- by the holder, in addition to the con- closure and if, under 38 U.S.C. 3732(c), sideration payable for the property the Secretary may accept conveyance under 38 U.S.C. 3732(c): of the property, the holder must notify (1) State and documentary stamp the Secretary by electronic means no taxes as may be required. later than 15 calendar days after the (2) Amount expended for taxes, spe- date of liquidation sale (i.e., the event cial assessments, including such pay- which fixes the rights of the parties in ments which are specified in paragraph the property, such as the date of fore- (d)(4) of this section. closure sale, date of recordation of a (3) Recording fees. deed-in-lieu of foreclosure, or con- (4) Any other expenditures in connec- firmation/ratification of sale date when tion with the property which are ap- required under local practice) that the proved by the Secretary, including, but holder elects to convey the property to not limited to, the cost of a title policy the Secretary. The Secretary will not insuring title in the name of the Sec- accept conveyance of the property if retary of Veterans Affairs. the holder fails to notify the Secretary (d) The conveyance or transfer of any of its election within such 15 calendar property to the Secretary pursuant to days. In computing the eligible indebt- this section shall be subject to the fol- edness under 38 U.S.C. 3732(c), the hold- lowing provisions: er may follow the alternative proce- (1) The notice of the holder’s election dure described in paragraph (b) of this to convey the property to the Sec- section. retary shall state the amount of the (b) If the calculation by the holder holder’s successful bid and shall state shows that the net value is equal to or the insurance coverage then in force, less than the unguaranteed portion of specifying for each policy, the name of the loan (i.e., the total indebtedness the insurance company, the hazard minus VA’s maximum claim payable covered, the amount, and the expira- under the guaranty), this would pre- tion date. With respect to a voluntary clude conveyance under 38 U.S.C. conveyance to the holder in lieu of 3732(c). However, the holder may desire foreclosure, the amount of the holder’s to convey the property to VA and may successful bid shall be deemed to be the decide to waive a portion of the indebt- lesser of the net value of the property edness to the extent that the property or the total indebtedness. may be conveyed under 38 U.S.C. (2) Coincident with the notice of elec- 3732(c). In such a case, the holder must tion to convey or transfer the property provide the notice described in para- to the Secretary or with the acquisi- graph (a) of this section, and must sub- tion of the property by the holder, fol- sequently waive that portion of the lowing such notice, whichever is later, total indebtedness remaining after ap- the holder shall request endorsements plication of the net value amount and on all insurance policies naming the VA’s guaranty claim payment. The Secretary as an assured, as his/her in- holder must send the borrower(s) a no- terest may appear. Such insurance tice describing the amount of indebted- policies shall be forwarded to the Sec- ness that has been waived no later than retary at the time of the conveyance or

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transfer of the property to the Sec- (iii) The acceptability of a convey- retary or as soon after that time as ance or transfer pursuant to the re- feasible. If insurers cancel policies, quirements of this paragraph will gen- holders must properly account for any erally be established by delivery to the unearned premiums refunded by the in- Secretary of the following evidence of surer. title showing that title to the property (3) Occupancy of the property by any- of the quality specified in this para- one properly in possession by virtue of graph (d)(5) is or will be vested in the and during a period of redemption, or Secretary: by anyone else unless under a claim of (A) A copy of the deed or document title which makes the title sought to evidencing transfer of interest and title be conveyed by the holder of less dig- at the liquidation sale; nity or quality than that required by (B) A special warranty deed con- this section, shall not preclude the veying the property to the Secretary; holder from conveying or transferring (C) Origination Deed of Trust or the property to the Secretary. Except Mortgage; with the prior approval of the Sec- (D) Original or Copy of Mortgagee’s retary, the holder shall not rent the Title Insurance Policy from Loan property to a new tenant, nor extend Origination (except in Iowa, where a the term of an existing tenancy on title abstract is required); other than a month-to-month basis. (E) Owner’s Title Insurance Policy (4) The notice shall provide property issued after loan termination in the tax information to include all taxing name of the Secretary (except in Iowa, authority property identification num- where a title abstract is required); bers. Any taxes, special assessments or (F) Loan Assignments; ground rents due and payable within 30 (G) Appointment of Substitute Trust- days after date of conveyance or trans- ee (where required as part of the termi- fer to the Secretary must be paid by nation process); the holder. (H) Estoppel Affidavit for deed in lieu (5)(i) Each conveyance or transfer of of foreclosure, if required by State law real property to the Secretary pursu- and appropriate language cannot be in- ant to this section shall be acceptable cluded in the deed in lieu of fore- if: closure; and/or (A) The holder thereby covenants or (I) Any evidence that the Secretary warrants against the acts of the holder may reasonably require. and those claiming under the holder (iv) In lieu of such title evidence list- (e.g., by special warranty deed); and ed in paragraph (d)(5)(iii) of this sec- (B) It vests in the Secretary or will tion, the Secretary will accept a con- entitle the Secretary to such title as is veyance or transfer with general war- or would be acceptable to prudent lend- ranty with respect to the title from a ing institutions, informed buyers, title holder described in 38 U.S.C. 3702(d) or companies, and attorneys, generally, in from a holder of financial responsi- the community in which the property bility satisfactory to the Secretary. is situated. (6) Except with respect to matters (ii) Any title will not be unacceptable covered by any covenants or warran- to the Secretary by reason of any of ties of the holder, the acceptance by the limitations on the quantum or the Secretary of a conveyance or trans- quality of the property or title stated fer by the holder shall conclude the rein § 36.4854(b), Provided, that: sponsibility of the holder to the Sec- (A) At the time of conveyance or retary under the regulations of this transfer to the Secretary there has subpart with respect to the title. In the been no breach of any conditions af- event of the subsequent discovery of fording a right to the exercise of any title defects, the Secretary shall have reverter. no recourse against the holder with re- (B) With respect to any such limita- spect to such title other than by reason tions which came into existence subse- of such covenants or warranties. quent to the making of the loan, full (7) As between the holder and the compliance was had with the require- Secretary, the responsibility for any ments of § 36.4827. loss due to damage to or destruction of

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the property or due to personal injury such property to the Secretary only if sustained in respect to such property the property (including elements of the shall be governed by the provisions of development or project owned in com- this paragraph and paragraph (d)(11) of mon with other unit owners) is this section. Ordinary wear and tear undamaged by fire, earthquake, wind- excepted, the holder shall bear such storm, flooding or boiler explosion. The risk of loss from the date of acquisition absence of a right in the holder to con- by the holder to the date such risk of vey such property which is so damaged loss is assumed by the Secretary. Such shall not preclude a conveyance, if the risk of loss is assumed by the Sec- Secretary agrees in a given case to retary from the date of receipt of the such a conveyance upon completion of holder’s election to convey or transfer repairs within a specified period of the property to the Secretary. The time and such repairs are so completed amount of any loss chargeable to the and the conveyance is otherwise in holder may be deducted from the order. amount payable by the Secretary at (e) Except as provided in paragraph the time the property is transferred. In (d)(6) of this section, the provisions of any case where pursuant to the VA reg- this section shall not be in derogation ulations rejection of the title is legally of any rights which the Secretary may proper, the Secretary may surrender have under § 36.4828. The Under Sec- custody of the property as of the date retary for Benefits, or the Director, specified in the Secretary’s notice to Loan Guaranty Service, may authorize the holder. The Secretary’s assumption any deviation from the provisions of of such risk shall terminate upon such this section, within the limitations surrender. prescribed in 38 U.S.C. chapter 37, (8) The conveyance should be made to which may be necessary or desirable to ‘‘Secretary of Veterans Affairs, an Offi- accomplish the objectives of this sec- cer of the United States.’’ The name of tion if such deviation is made nec- the incumbent Secretary should not be essary by reason of any laws or prac- included unless State law requires tice in any State or Territory or the naming a real person. District of Columbia, Provided, that no (9) The holder shall not be liable to such deviation shall impair the rights the Secretary for any portion of the of any holder not consenting to the de- paid or unpaid taxes, special assess- viation with respect to loans made or ments, ground rents, insurance pre- approved prior to the date the holder is miums, or other similar items. The notified of such action. holder shall be liable to the Secretary for all penalties and interest associated (Authority: 38 U.S.C. 3720, 3732) with taxes not timely paid by the hold- (The Office of Management and Budget has er prior to conveyance. approved the information collection require- (10) The Secretary shall be entitled ments in this section under control number to all rentals and other income col- 2900–0381.) lected from the property and to any insurance proceeds or refunds subsequent § 36.4824 Guaranty claims; subsequent accounting. to the date of acquisition by the holder. (a) Subject to the limitation that the (11) In respect to a property which total amounts payable shall in no was the security for a condominium event exceed the amount originally loan guaranteed or insured under 38 guaranteed, or in the case of a modified U.S.C. 3710(a)(6) the responsibility for loan, such amount as may have been any loss due to damage to or destruc- increased under the provisions of tion of the property or due to personal § 36.4815(h)(2), the amount payable on a injury sustained in respect to such claim for the guaranty shall be the per- property shall in no event pass to the centage of the loan originally guaran- Secretary until the Secretary expressly teed, or the percentage as adjusted assumes such responsibility or until under § 36. 4815(h)(2), whichever is appli- conveyance of the property to the Sec- cable, applied to the sum of: retary, whichever first occurs. The (1) The unpaid principal as of the holder shall have the right to convey date of the liquidation sale;

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(2) Allowable expenses/advances as foreclosure, the date of recordation of described in § 36.4814; and the deed to the holder or the holder’s (3) The lesser of: designee; or (i) The unpaid interest as of the date (C) In the case of a sale of the prop- of the liquidation sale; or erty to a third party for an amount less (ii) The unpaid interest for the rea- than is sufficient to repay the unpaid sonable period that the Secretary has balance on the loan where the holder determined, pursuant to § 36.4822(a), it has agreed in advance to release the should have taken to complete the lien in exchange for the proceeds of foreclosure, plus 210 days from the due such sale, the date of settlement of date of the last paid installment. This such sale. amount will be increased if the Sec- (ii) With respect to any liquidation retary determines the holder was un- sale completed prior to February 1, able to complete the foreclosure within 2008, all claims must be submitted no the time specified in this paragraph later than February 2, 2009. due to Bankruptcy proceedings, appeal (2) If additional information becomes of the foreclosure by the debtor, the known to a holder after the filing of a holder granting forbearance in excess guaranty claim, the holder may file a of 30 days at the request of the Sec- supplemental claim provided that such retary, or other factors beyond the supplemental claim is filed within the control of the holder. time period specified in paragraph (b) Deposits or other credits or (d)(1) of this section. setoffs legally applicable to the indebt- (3) No claim under a guaranty shall edness shall be applied in reduction of be payable unless it is submitted with- the indebtedness on which the claim is in the time period specified in para- based. Any escrowed or earmarked graph (d)(1) of this section. funds not subject to superior claims of (4) A claim shall be submitted to VA third persons must likewise be so ap- electronically on the VA Loan Elec- plied. tronic Reporting Interface system. (c)(1) Credits accruing from the pro- (5) Supporting documents will not be ceeds of a liquidation sale shall be re- submitted with the claim, but must be ported to the Secretary incident to retained by the servicer and are subject claim submission, and the amount pay- to inspection as provided in § 36.4833 of able on the claim shall in no event ex- this title. ceed the remaining balance of the in- (e) In the event that VA does not ap- debtedness. prove payment of any item submitted (2) The amount payable under the under a guaranty claim, VA shall no- guaranty shall be computed applying tify the holder electronically what the formulae in 38 U.S.C. 3732(c). With items are being denied and the reasons respect to a voluntary conveyance to for such denial. The holder may, within the holder in lieu of foreclosure, the 30 days after the date of such denial no- holder shall be deemed to have ac- tification, submit an electronic request quired the property at the liquidation to VA that one or more items that sale for the lesser of the net value of were denied be reconsidered. The hold- the property or the total indebtedness. er must present any additional infor- (d)(1)(i) Except as provided in para- mation justifying payment of items de- graph (d)(1)(ii) of this section, holders nied. shall file a claim for payment under (Authority: 38 U.S.C. 3703(c), 3720, 3732) the guaranty electronically no later (The Office of Management and Budget has than 1 year after the completion of the approved the information collection require- liquidation sale. For purposes of this ments in this section under control number section, the liquidation sale will be 2900–0362.) considered completed when: (A) The last act required under State § 36.4825 Computation of indebted- law is taken to make the liquidation ness. sale final, but excluding any redemp- In computing the indebtedness for tion period permitted under State law; the purpose of filing a claim for pay- (B) If a holder accepts a voluntary ment of a guaranty or for payment of conveyance of the property in lieu of an insured loss, or in the event of a

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transfer of the loan under § 36.4820(a), and if any claim has been filed in bank- or other accounting to the Secretary, ruptcy, insolvency, probate, or similar the holder shall not be entitled to treat proceedings such claim may likewise repayments theretofore made as liq- be required to be so assigned. uidated damages, or rentals, or other- (e) Any amounts paid by the Sec- wise than as payments on the indebted- retary on account of the liabilities of ness, notwithstanding any provision in any veteran guaranteed or insured the note, or mortgage, or otherwise, to under the provisions of 38 U.S.C. chap- the contrary. ter 37 shall constitute a debt owing to (Authority: 38 U.S.C. 3703(c), 3720, 3732) the United States by such veteran. Be- fore a liquidation sale, an official au- § 36.4826 Subrogation and indemnity. thorized to act for the Secretary under (a) The Secretary shall be subrogated provisions of § 36.4845 may approve a to the contract and the lien or other complete or partial release of the Sec- rights of the holder to the extent of retary’s right to collect a debt owing any sum paid on a guaranty or on ac- to the United States under this para- count of an insured loss, which right graph and/or under paragraph (a) of shall be junior to the holder’s rights as this section as follows: against the debtor or the encumbered (1) Complete release. VA will approve a property until the holder shall have re- complete release if an official author- ceived the full amount payable under ized to act for the Secretary under the contract with the debtor. No par- § 36.4845 determines that all of the fol- tial or complete release by a creditor lowing are true: shall impair the rights of the Secretary (i) The loan default was caused by with respect to the debtor’s obligation. circumstances beyond the control of (b) The holder, upon request, shall the obligor; and execute, acknowledge and deliver an (ii) There are no indications of fraud, appropriate instrument tendered for misrepresentation or bad faith on the that purpose, evidencing any payment part of the obligor in obtaining the received from the Secretary and the loan or in connection with the loan de- Secretary’s resulting right of subroga- fault; and tion. (iii) The obligor cooperated with VA (c) The Secretary shall cause the in- in exploring all realistic alternatives strument required by paragraph (b) of to termination of the loan through this section to be filed for record in the foreclosure, and, either: office of the recorder of deeds, or other (A) Review of the obligor’s current fi- appropriate office of the proper county, nancial situation and prospective earn- town or State, in accordance with the ing potential and obligations indicates applicable State law. The filing or fail- there are no realistic prospects that ure to file such instrument for record the obligor could repay all or part of shall have the legal results prescribed the anticipated debt within six years by the applicable law of the State after the liquidation sale and still pro- where the real or personal property is vide the necessities of life for himself situated, with respect to filing or fail- or herself and his or her family; or, ure to so file mortgages and other lien (B) In consideration for a release of instruments and assignments thereof. the Secretary’s collection rights the The references herein to ‘‘filing for obligor completes, or VA is enabled to record’’ include ‘‘registration’’ or any authorize, an action which reduces the similar transaction, by whatever name Government’s claim liability suffi- designated when title to the encum- ciently to offset the amount of the an- bered property has been ‘‘registered’’ ticipated indebtedness which would pursuant to a Torrens or other similar otherwise be established pursuant to title registration system provided by this paragraph and likely be collect- law. able by VA after foreclosure in view of (d) As a condition to paying a claim the obligor’s financial situation. Such for an insured loss the Secretary may actions would include termination of require that the loan, including any se- the loan by means of a deed-in-lieu of curity or judgment held therefor, be as- foreclosure, private sale of the prop- signed to the extent of such payment, erty for less than the indebtedness

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with a reduced claim paid by VA for executes a promissory note which pro- the balance due the loan holder, or ena- vides for regular amortized monthly bling VA to authorize the holder to payments of an amount determined by elect a more expeditious foreclosure VA in accordance with paragraph (e)(3) procedure when such an election would of this section including interest on result in the legal release of the obli- the total amount payable at the rate in gor’s liability; or effect for Loan Guaranty liability ac- (C) The obligor being released is not counts at the time of execution, or, the the current titleholder to the property obligor agrees to other terms of repay- and there are no indications of fraud, ment acceptable to VA including pay- misrepresentation, or bad faith on the ment of a lump sum in settlement of obligor’s part in disposing of the prop- his or her obligation under this para- erty. graph. (2) Partial release. In the event of a (3) Review of obligor’s financial situa- partial release, the amount of indebt- tion. For purposes of authorizing a edness established will be such that the complete or partial release under this obligor’s financial situation permits paragraph, a VA official reviewing an repayment of the debt to the Govern- obligor’s financial situation will con- ment in regular monthly installments sider all of the following: of principal plus interest over a five (i) The obligor’s current and antici- year period commencing within one pated family income based on employ- year after the date the promissory note ment skills and experience; is executed, except in those cases in (ii) The obligor’s current short-term which a lump sum settlement appears and long-term financial obligations, in- to be in the best interest of the Gov- cluding the obligation to repay the ernment or in which it appears the ob- Government which must be afforded ligor may reasonably expect signifi- consideration at least equal to his or cant changes in his or her financial sit- her consumer debt obligations; uation which would permit higher pay- (iii) A current credit report on the ments to be made during later periods obligor; of the life of the note. VA may author- (iv) The obligor’s assets and net ize a partial release if an official au- worth; and thorized to act for the Secretary under (v) The required balance available for § 36.4845 determines that all of the fol- family support used in underwriting lowing are true: VA guaranteed loans in the area. (i) The loan default was caused by (4) Determinations made under para- circumstances beyond the control of graphs (e)(1) and (2) of this section are the obligor; and, intended for the benefit of the Govern- (ii) There are no indications of fraud, ment in reducing the amount of claim misrepresentation or bad faith on the payable by VA and/or avoiding the es- part of the obligor in obtaining the tablishment of uncollectible debts loan or in connection with the loan de- owing to the United States. Such default; and, terminations are discretionary on the (iii) The obligor cooperated with VA part of VA and shall not constitute a in exploring all realistic alternatives defense to any legal action to termi- to termination of the loan through nate the loan nor vest any appellate foreclosure; and, right in an obligor which would require (iv) Review of the obligor’s current further review of the case. financial situation and prospective earning potential and obligations indi- (Authority: 38 U.S.C. 501, 3703(c)(1), 5302) cates there are no realistic prospects (f) Whenever any veteran disposes of that the obligor could repay all of the residential property securing a guaran- anticipated debt within six years of the teed or insured loan obtained by him or liquidation sale while providing the ne- her under 38 U.S.C. chapter 37, and for cessities of life for himself or herself which the commitment to make the and his or her family; and, loan was made prior to March 1, 1988, (v) The obligor executes a written the Secretary, upon application made agreement acknowledging his or her li- by such veteran, shall issue to the vet- ability to VA under this paragraph and eran a release relieving him or her of

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all further liability to the Secretary on erty, the veteran or other person shall account of such loan (including liabil- be relieved of all further liability to ity for any loss resulting from any de- the Secretary with respect to the loan fault of the transferee or any subse- (including liability for any loss result- quent purchaser of such property) if ing from any default of the purchaser the Secretary has determined, after or any subsequent owner of the prop- such investigation as may be deemed erty) and the application for assump- appropriate, that there has been com- tion shall be approved if the holder de- pliance with the conditions prescribed termines that: in 38 U.S.C. 3713. The assumption of full (i) The proposed purchaser is credit- liability for repayment of the loan by worthy; the transferee of the property must be (ii) The proposed purchaser is con- evidenced by an agreement in writing tractually obligated to assume the loan in such form as the Secretary may re- and the liability to indemnify the De- quire. Release of the veteran from li- partment of Veterans Affairs for the ability to the Secretary will not impair amount of any claim paid under the or otherwise affect the Secretary’s guaranty as a result of a default on the guaranty or insurance liability on the loan, or has already done so; and loan, or the liability of the veteran to (iii) The payments on the loan are the holder. Any release of liability current. granted to a veteran by the Secretary (2) Should these requirements be sat- shall inure to the spouse of such vet- isfied, the holder may also release the eran. The release of the veteran from veteran or other person from liability liability to the Secretary will con- on the loan. This does not apply if the stitute the Secretary’s prior approval approval for the assumption is granted to a release of the veteran from liabil- upon special appeal to avoid immediate ity on the loan by the holder thereof. foreclosure. (i) If a veteran requests a release of (Authority: 38 U.S.C. 3713) liability under paragraph (f) of this section, or if a borrower requests a release (g) If any veteran disposes of residen- of liability pursuant to tial property securing a guaranteed or § 36.4809(c)(1)(vii), a holder described in insured loan obtained under 38 U.S.C. the first sentence of § 36.4803(l)(1)(i) is chapter 37, without receiving a release authorized to and must make all deci- from liability with respect to such loan sions regarding the credit-worthiness under 38 U.S.C. 3713 and a default sub- of the transferee, subject to the right sequently occurs which results in li- of a transferee to appeal any denial to ability of the veteran to the Secretary the Secretary within 30 days of being on account of the loan, the Secretary notified in writing of the denial by the may relieve the veteran of such liabil- holder or servicer. The procedures and ity if he determines that: fees specified in §§ 36.4803(l)(1)(i) and (1) A transferee either immediate or 36.4813(d)(8) applicable to decisions remote is legally liable to the Sec- under 38 U.S.C. 3714 shall also apply to retary for the debt of the original vet- decisions specified in this paragraph. eran-borrower established after the termination of the loan, and (Authority: 38 U.S.C. 3703(c), 3713 and 3714) (2) The original loan was current at (The Office of Management and Budget has the time such transferee acquired the approved the information collection require- property, and ments in this section under control number (3) The transferee who is liable to the 2900–0112.) Secretary is found to have been a satisfactory credit risk at the time he or § 36.4827 Release of security. she acquired the property. (a)(1) Except upon full payment of (h)(1) If a veteran or any other person the indebtedness, or except as provided disposes of residential property secur- in paragraph (a)(2) of this section or in ing a guaranteed or insured loan for paragraphs (e) and (f) of § 36.4822, the which a commitment was made on or holder shall not release a lien or other after March 1, 1988, and the veteran or right in or to real property held as se- other person notifies the loan holder in curity for a guaranteed or insured loan, writing before disposing of the prop- or grant a fee or other interest in such

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property, without prior approval of the ceed in such manner as to effectively Secretary. preserve the personal liability of the (2) The holder may, without the prior parties liable, or such of them as the approval of the Secretary, release the Secretary indicates in such notice to lien on a portion of the property secur- the holder; or ing the loan provided: (3) The release of an obligor, or obli- (i) The holder has obtained an ap- gors, from liability on an obligation se- praisal from the Secretary showing the cured by a lien on property, which re- value of the security prior to the par- lease is an incident of and contempora- tial release of the lien and the value of neous with the sale of such property to the security on which the lien will re- an eligible veteran who assumed such main; obligation, which assumed obligation (ii) The portion of the property still is guaranteed on the assuming vet- subject to the lien is fit for dwelling eran’s account pursuant to 38 U.S.C. purposes; and chapter 37; or (iii) The loan-to-value ratio after the (4) The release of an obligor or obli- partial release of the lien: gors as provided in § 36.4815; or, the re- (A) Will be not more than 80 percent; lease of an obligor, or obligors, inci- or dent to the sale of property securing (B) If the loan-to-value ratio after the loan which the holder is authorized the partial release of the lien is 80 per- to approve under the provisions of 38 cent or higher, any proceeds received U.S.C. 3714. as consideration from the partial re- (Authority: 38 U.S.C. 3714) lease of the lien shall be applied to the unpaid loan balance. § 36.4828 Partial or total loss of guar- (b) A holder may release from the anty or insurance. lien personal property including crops (a) Subject to the incontestable pro- without the prior approval of the Sec- visions of 38 U.S.C. 3721 as to loans retary. guaranteed or insured on or subsequent (c) Failure of the holder to comply to July 1, 1948, there shall be no liabil- with the provisions of this section shall ity on account of a guaranty or insur- not in itself affect the validity of the ance, or any certificate or other evi- title of a purchaser to the property re- dence thereof, with respect to a trans- leased. action in which a signature to the (d) The release of the personal liabil- note, the mortgage, or any other loan ity of any obligor on a guaranteed or papers, or the application for guaranty insured obligation resultant from the or insurance is a forgery; or in which act or omission of any holder without the certificate of discharge or the cer- the prior approval of the Secretary tificate of eligibility is counterfeited, shall release the obligation of the Sec- or falsified, or is not issued by the Gov- retary as guarantor or insurer, except ernment. when such act or omission consists of: (1) Except as to a holder who ac- (1) Failure to establish the debt as a quired the loan instrument before ma- valid claim against the assets of the es- turity, for value, and without notice, tate of any deceased obligor, provided and who has not directly or by agent no lien for the guaranteed or insured participated in the fraud, or in the mis- debt is thereby impaired or destroyed; representation hereinafter specified, or any willful and material misrepresen- (2) An election and appropriate pros- tation or fraud by the lender, or by a ecution of legally available effective holder, or the agent of either, in pro- remedies with respect to the reposses- curing the guaranty or the insurance sion or the liquidation of the security credit, shall relieve the Secretary of li- in any case, irrespective of the identity ability, or, as to loans guaranteed or or the survival of the original or of any insured on, or subsequent to July 1, subsequent debtor, if holder shall have 1948, shall constitute a defense against given such notice as required by liability on account of the guaranty or § 36.4817 and if, after receiving such no- insurance of the loan in respect to tice, the Secretary shall have failed to which the willful misrepresentation, or notify the holder within 15 days to pro- the fraud, is practiced: Provided, that if

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a misrepresentation, although mate- concerning guaranty or insurance of rial, is not made willfully, or with loans to veterans, fraudulent intent, it shall have only (2) Inclusion of power to substitute the consequences prescribed in para- trustees (§ 36.4830), graphs (b) and (c) of this section. (3) The procurement and mainte- (2) [Reserved] nance of insurance coverage (§ 36.4829), (b) In taking security required by 38 (4) Any notice required by § 36.4817, U.S.C. chapter 37 and the regulations (5) The release, conveyance, substi- concerning guaranty or insurance of tution, or exchange of security (§ 36.4827), loans to veterans, a holder shall obtain (6) Lack of legal capacity of a party the required lien on property the title to the transaction incident to which to which is such as to be acceptable to the guaranty or the insurance is grant- prudent lending institutions, informed ed (§ 36.4831), buyers, title companies, and attorneys, (7) Failure of the lender to see that generally, in the community in which any escrowed or earmarked account is the property is situated: Provided, that expended in accordance with the agree- a title will not be unacceptable by rea- ment, son of any of the limitations on the (8) The taking into consideration of quantum or quality of the property or limitations upon the quantum or qual- title stated in § 36.4854(b) and if such ity of the estate or property holder fails in this respect or fails to (§ 36.4854(b)), comply with 38 U.S.C. chapter 37 and (9) Any other requirement of 38 the regulations concerning guaranty or U.S.C. chapter 37 or the regulations insurance of loans to veterans, then no concerning guaranty or insurance of claim on the guaranty or insurance loans to veterans which does not by the shall be paid on account of the loan terms of said chapter or the regula- with respect to which such failure oc- tions concerning guaranty or insurance curred, or in respect to which an of loans to veterans result in relieving unwillful misrepresentation occurred, the Secretary of all liability with re- until the amount by which the ulti- spect to the loan, mate liability of the Secretary would (c) If after the payment of a guaranty thereby be increased has been or an insurance loss, or after a loan is ascertained. The burden of proof shall transferred pursuant to § 36.4820(a), the be upon the holder to establish that no fraud, misrepresentation or failure to increase of ultimate liability is attrib- comply with the regulations in this utable to such failure or misrepresen- subpart as provided in this section is tation. The amount of increased liabil- discovered and the Secretary deter- ity of the Secretary shall be offset by mines that an increased loss to the deduction from the amount of the government resulted therefrom the guaranty or insurance otherwise pay- transferor or person to whom such payable, or if consequent upon loss of secu- ment was made shall be liable to the rity shall be offset by crediting to the Secretary for the amount of the loss indebtedness the amount of the impair- caused by such misrepresentation or ment as proceeds of the sale of security failure. in the final accounting to the Sec- (Authority: 38 U.S.C. 3703 and 3720) retary. To the extent the loss resultant from the failure or misrepresentation § 36.4829 Hazard insurance. prejudices the Secretary’s right of sub- The holder shall require insurance rogation acceptance by the holder of policies to be procured and maintained the guaranty or insurance payment in an amount sufficient to protect the shall subordinate the holder’s right to security against the risks or hazards to those of the Secretary. Adjustments which it may be subjected to the ex- under this section may be made for tent customary in the locality. All failure to comply with: moneys received under such policies (1) Obtaining and retaining a lien of covering payment of insured losses the dignity prescribed on all property shall be applied to restoration of the upon which a lien is required by 38 security or to the loan balance. Flood U.S.C. chapter 37 or the regulations insurance will be required on any

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building or personal property securing § 36.4832 Geographical limits. a loan at any time during the term of Any real property purchased, con- the loan that such security is located structed, altered, improved, or repaired in an area identified by the Federal with the proceeds of a guaranteed or Emergency Management Agency as insured loan shall be situated within having special flood hazards and in the United States which for purposes of which flood insurance has been made 38 U.S.C. chapter 37 is here defined as available under the National Flood In- the several States, Territories and pos- surance Act, as amended. The amount sessions, and the District of Columbia, of flood insurance must be at least the Commonwealth of Puerto Rico, and equal to the lesser of the outstanding the Commonwealth of the Northern principal balance of the loan or the Mariana Islands. maximum limit of coverage available (Authority: 38 U.S.C. 3703(c)(1)) for the particular type of property under the National Flood Insurance § 36.4833 Maintenance of records. Act, as amended. The Secretary cannot (a)(1) The holder shall maintain a guarantee a loan for the acquisition or record of the amounts of payments re- construction of property located in an ceived on the obligation and disburse- area identified by the Federal Emer- ments chargeable thereto and the dates gency Management Agency as having thereof, including copies of bills and special flood hazards unless the com- receipts for such disbursements. These munity in which such area is situated records shall be maintained until the is then participating in the National Secretary ceases to be liable as guar- Flood Insurance Program. antor or insurer of the loan, or, if the Secretary has paid a claim on the guar- (Authority: 38 U.S.C. 3703(c)(1), 42 U.S.C. anty, until 3 years after such claim was 4106(a)) paid. For the purpose of any account- § 36.4830 Substitution of trustees. ing with the Secretary or computation of a claim, any holder who fails to In jurisdictions in which valid, any maintain such record and, upon re- deed of trust or mortgage securing a quest, make it available to the Sec- guaranteed or insured loan, if it names retary for review shall be presumed to trustees, or confers a power of sale oth- have received on the dates due all sums erwise, shall contain a provision em- which by the terms of the contract are powering any holder of the indebted- payable prior to date of claim for de- ness to appoint substitute trustees, or fault, or to have not made the disburse- other person with such power to sell, ment for which reimbursement is who shall succeed to all the rights, claimed, and the burden of going for- powers and duties of the trustees, or ward with evidence and of ultimate other person, originally designated. proof of the contrary shall be on such holder. (Authority: 38 U.S.C. 3703(c)(1)) (2) The holder shall maintain records supporting their decision to approve § 36.4831 Capacity of parties to con- any loss mitigation option for which an tract. incentive is paid in accordance with Nothing in §§ 36.4800 through 36.4880 § 36.4819(a). Such records shall be re- shall be construed to relieve any lender tained a minimum of 3 years from the of responsibility otherwise existing, for date of such incentive payment and any loss caused by the lack of legal ca- shall include, but not be limited to, pacity of any person to contract, con- credit reports, verifications of income, vey, or encumber, or caused by the ex- employment, assets, liabilities, and istence of other legal disability or de- other factors affecting the obligor’s fects invalidating, or rendering unen- credit worthiness, work sheets, and forceable in whole or in part, either the other documents supporting the hold- loan obligation or the security there- er’s decision. for. (3) For any loan where the claim on the guaranty was paid on or after Feb- (Authority: 38 U.S.C. 3703(c)(1)) ruary 1, 2008, or action described in

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paragraph (a)(2) of this section was the notice shall be by certified mail taken after February 1, 2008, holders when so provided by §§ 36.4800 to 36.4880. shall submit any documents described in paragraph (a)(1) or (a)(2) of this sec- (Authority: 38 U.S.C. 3703(c)(1)) tion to the Secretary in electronic § 36.4836 [Reserved] form; i.e., an image of the original document in .jpg, .gif, .pdf, or a similar § 36.4837 Conformance of loan instru- widely accepted format. ments. (b) The lender shall retain copies of Regulations issued under 38 U.S.C. all loan origination records on a VA- chapter 37 and in effect on the date of guaranteed loan for at least two years any loan which is submitted and ac- from the date of loan closing. Loan cepted or approved for a guaranty or origination records include the loan application, including any preliminary for insurance thereunder, shall govern application, verifications of employ- the rights, duties, and liabilities of the ment and deposit, all credit reports, in- parties to such loan and any provisions cluding preliminary credit reports, of the loan instruments inconsistent copies of each sales contract and with such regulations are hereby addendums, letters of explanation for amended and supplemented to conform adverse credit items, discrepancies and thereto. the like, direct references from credi- (Authority: 38 U.S.C. 3703(c)(1)) tors, correspondence with employers, appraisal and compliance inspection § 36.4838 Supplementary administra- reports, reports on termite and other tive action. inspections of the property, builder (a) Notwithstanding any require- change orders, and all closing papers ment, condition, or limitation stated and documents. in or imposed by the regulations concerning the guaranty or insurance of (Authority: 38 U.S.C. 501, 3703(c)(1)) loans to veterans, the Under Secretary (c) The Secretary has the right to infor Benefits, or the Director, Loan spect, examine, or audit, at a reason- Guaranty Service, within the limita- able time and place, the records or actions and conditions prescribed by the counts of a lender or holder pertaining Secretary, is hereby authorized, if he to loans guaranteed or insured by the or she finds the interests of the Gov- Secretary. ernment are not adversely affected, to (Authority: 38 U.S.C. 3703(c)(1)) relieve undue prejudice to a debtor, holder, or other person, which might (The Office of Management and Budget has approved the information collection require- otherwise result, provided no such ac- ments in this section under control number tion may be taken which would impair 2900–0515.) the vested rights of any person affected thereby. If such requirement, condi- § 36.4835 Delivery of notice. tion, or limitation is of an administra- Except where otherwise specified in tive or procedural (not substantive) na- this part, any notice required by ture, any employee designated in §§ 36.4800 to 36.4880 to be given the Sec- § 36.4845 is hereby authorized to grant retary must be in writing or such other similar relief if he or she finds the fail- communications medium as may be ap- ure or error of the lender was due to proved by an official designated in misunderstanding or mistake and that § 36.4845 and delivered, by mail or oth- the interests of the Government are erwise, to the VA office at which the not adversely affected. Provisions of guaranty or insurance was issued, or to the regulations considered to be of an any changed address of which the hold- administrative or procedural (nonsub- er has been given notice. Such notice stantive) nature are limited to the fol- must plainly identify the case by set- lowing: ting forth the name of the original vet- (1) The requirement in § 36.4808(a) eran-obligor and the file number as- that a lender obtain in prior approval signed to the case by the Secretary, if of the Secretary before closing a joint available, or otherwise the name and loan if the lender or class of lenders is serial number of the veteran. If mailed, eligible or has been approved by the

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Secretary to close loans on the auto- value of a graduated payment mort- matic basis pursuant to 38 U.S.C. gage loan to purchase a new home, the 3702(d); reasonable value of the property as of (2) The requirements in § 36.4803(l) the time the loan is made shall be cal- concerning the giving of notice in as- culated to increase at a rate not in ex- sumption cases under 38 U.S.C. 3714; cess of 2.5 percent per year, but in no (3) The requirement in § 36.4824(d)(3) event may the projected value of the that no claim is payable unless it is property exceed 115 percent of the ini- submitted within 1 year after the liq- tially established reasonable value. uidation sale; (4) The requirement in § 36.4823(a) to (Authority: 38 U.S.C. 3703(d)(2)) submit notice of election to convey a (3) The veteran has certified, in such property to VA within 15 days of the form as the Secretary may prescribe, date of liquidation sale; that the veteran has paid in cash from (5) The determination by the holder his or her own resources on account of in § 36.4823(b) of the amount of indebt- such purchase, construction, alter- edness that must be waived in order to ation, repair, or improvement a sum make a property eligible for convey- equal to the difference, if any, between ance; the purchase price or cost of the prop- (6) The determination in § 36.4814(f)(2) erty and its reasonable value. of the date beyond which no additional (b) A loan guaranteed under 38 U.S.C. fees or charges will be allowed; 3710(d) which includes the cost of en- (7) The determination in § 36.4824(a)(3) ergy efficient improvements may ex- of the interest payable on a claim ceed the reasonable value of the prop- under guaranty; and erty. The cost of the energy efficient (8) The reconsideration in § 36.4824(e) improvements that may be financed of the holder’s electronic request for may not exceed $3,000; provided, how- review of any denied items within the ever, that up to $6,000 in energy effi- claim; cient improvements may be financed if (b) Authority is hereby granted to the increase in the monthly payment the Loan Guaranty Officer to redele- for principal and interest does not ex- gate authority to make any determina- ceed the likely reduction in monthly tions under this section. utility costs resulting from the energy (Authority: 38 U.S.C. 3714 and 3720) efficient improvements.

§ 36.4839 Eligibility of loans; reason- (Authority: 38 U.S.C. 3710) able value requirements. (c) Notwithstanding that the aggre- (a) Evidence of guaranty or insurance gate of the loan amount in the case of shall be issued in respect to a loan for loans for the purposes specified in para- any of the purposes specified in 38 graph (a) of this section, and the U.S.C. 3710(a) only if all of the fol- amount remaining unpaid on taxes, lowing conditions are met: special assessments, prior mortgage in- (1) The proceeds of such loan have debtedness, or other obligations of any been used to pay for the property pur- character secured by enforceable supe- chased, constructed, repaired, refi- rior liens or a right to such lien exist- nanced, altered, or improved. ing as of the date the loan is closed ex- (2) Except as to refinancing loans ceeds the reasonable value of such pursuant to 38 U.S.C. 3710(a)(8), property as of said date and that evi- (a)(9)(B)(i), (a)(11), or (b)(7) and energy dence of guaranty or insurance credit efficient mortgages pursuant to 38 is issued in respect thereof, as between U.S.C. 3710(d), the loan (including any the holder and Secretary (for the pur- scheduled deferred interest added to pose of computing the claim on the principal) does not exceed the reason- guaranty or insurance and for the pur- able value of the property or projected poses of § 36.4823, and all accounting), reasonable value of a new home which the indebtedness which is the subject is security for a graduated payment of the guaranty or insurance shall be mortgage loan, as appropriate, as de- deemed to have been reduced as of the termined by the Secretary. For the date of the loan by a sum equal to such purpose of determining the reasonable excess, less any amounts secured by

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liens released or paid on the obliga- (2) If the debt-to-income ratio is tions secured by such superior liens or greater than 41 percent (unless it is rights by a holder or others without ex- larger due solely to the existence of pense to or obligation on the debtor re- tax-free income which should be noted sulting from such payment, or release in the loan file), the loan may be ap- of lien or right; and all payments made proved with justification, by the under- on the loan shall be applied to the in- writer’s supervisor, as set out in para- debtedness as so reduced. Nothing in graph (c)(4) of this section. this paragraph affects any right or li- (3) If the ratio is greater than 41 per- ability resulting from fraud or willful cent and the residual income exceeds misrepresentation. the guidelines by at least 20 percent, (Authority: 38 U.S.C. 3703(c)(1), 3710, 3712) the second level review and statement of justification are not required. § 36.4840 Underwriting standards, (4) In any case described by para- processing procedures, lender re- graphs (c)(1) and (c)(2) of this section, sponsibility, and lender certifi- the lender must fully justify the deci- cation. sion to approve the loan or submit the (a) Use of standards. The standards loan to the Secretary for prior ap- contained in paragraphs (c) through (j) proval in writing. The lender’s state- of this section will be used to deter- ment must not be perfunctory, but mine whether the veteran’s present and should address the specific compen- anticipated income and expenses, and sating factors, as set forth in para- credit history are satisfactory. These graph (c)(5) of this section, justifying standards do not apply to loans guar- the approval of the loan. The state- anteed pursuant to 38 U.S.C. 3710(a)(8) ment must be signed by the under- except for cases where the Secretary is writer’s supervisor. It must be stressed required to approve the loan in advance that the statute requires not only con- under § 36.4807. sideration of a veteran’s present and anticipated income and expenses, but (Authority: 38 U.S.C. 3703, 3710) also that the veteran be a satisfactory (b) Waiver of standards. Use of the credit risk. Therefore, meeting both standards in paragraphs (c) through (j) the debt-to-income ratio and residual of this section for underwriting home income standards does not mean that loans will be waived only in extraor- the loan is automatically approved. It dinary circumstances when the Sec- is the lender’s responsibility to base retary determines, considering the to- the loan approval or disapproval on all tality of circumstances, that the vet- the factors present for any individual eran is a satisfactory credit risk. veteran. The veteran’s credit must be (c) Methods. The two primary under- evaluated based on the criteria set writing standards that will be used in forth in paragraph (g) of this section as determining the adequacy of the vet- well as a variety of compensating fac- eran’s present and anticipated income tors that should be evaluated. are debt-to-income ratio and residual (5) The following are examples of ac- income analysis. They are described in ceptable compensating factors to be paragraphs (d) through (f) of this sec- considered in the course of under- tion. Ordinarily, to qualify for a loan, writing a loan: the veteran must meet both standards. (i) Excellent long-term credit; Failure to meet one standard, however, (ii) Conservative use of consumer will not automatically disqualify a vet- credit; eran. The following exceptions shall (iii) Minimal consumer debt; apply to cases where a veteran does not (iv) Long-term employment; meet both standards: (v) Significant liquid assets; (1) If the debt-to-income ratio is 41 (vi) Down payment or the existence percent or less, and the veteran does of equity in refinancing loans; not meet the residual income standard, (vii) Little or no increase in shelter the loan may be approved with jus- expense; tification, by the underwriter’s super- (viii) Military benefits; visor, as set out in paragraph (c)(4) of (ix) Satisfactory homeownership ex- this section. perience;

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(x) High residual income; ber of members of a household to be (xi) Low debt-to-income ratio; counted for residual income purposes if (xii) Tax credits of a continuing na- there is sufficient verified income not ture, such as tax credits for child care; otherwise included in the loan anal- and ysis, such as child support being regu- (xiii) Tax benefits of home owner- larly received as discussed in para- ship. graph (e)(4) of this section. In the case (6) The list in paragraph (c)(5) of this of a spouse not to be obligated on the section is not exhaustive and the items note, verification that he/she has sta- are not in any priority order. Valid ble and reliable employment as dis- compensating factors should represent cussed in paragraph (f)(3) of this sec- unusual strengths rather than mere tion would allow not counting the satisfaction of basic program require- spouse in determining the sufficiency ments. Compensating factors must be of the residual income. The guidelines relevant to the marginality or weak- for residual income are based on data ness. supplied in the Consumer Expenditure (d) Debt-to-income ratio. A debt-to-in- Survey (CES) published by the Depart- come ratio that compares the veteran’s ment of Labor’s Bureau of Labor Sta- anticipated monthly housing expense tistics. Regional minimum incomes and total monthly obligations to his or have been developed for loan amounts her stable monthly income will be up to $79,999 and for loan amounts of computed to assist in the assessment of $80,000 and above. It is recognized that the potential risk of the loan. The the purchase price of the property may ratio will be determined by taking the affect family expenditure levels in indi- sum of the monthly Principal, Interest, vidual cases. This factor may be given Taxes and Insurance (PITI) of the loan consideration in the final determina- being applied for, homeowners and tion in individual loan analyses. For other assessments such as special as- example, a family purchasing in a sessments, condominium fees, home- higher-priced neighborhood may feel a owners association fees, etc., and any need to incur higher-than-average ex- long-term obligations divided by the penses to support a lifestyle com- total of gross salary or earnings and parable to that in their environment, other compensation or income. The whereas a substantially lower-priced ratio should be rounded to the nearest home purchase may not compel such two digits; e.g., 35.6 percent would be expenditures. It should also be clearly rounded to 36 percent. The standard is understood from this information that 41 percent or less. If the ratio is greater no single factor is a final determinant than 41 percent, the steps cited in para- in any applicant’s qualification for a graphs (c)(1) through (c)(6) of this sec- VA-guaranteed loan. Once the residual tion apply. income has been established, other im- (e) Residual income guidelines. The portant factors must be examined. One guidelines provided in this paragraph such consideration is the amount being for residual income will be used to de- paid currently for rental or housing ex- termine whether the veteran’s monthly penses. If the proposed shelter expense residual income will be adequate to is materially in excess of what is cur- meet living expenses after estimated rently being paid, the case may require monthly shelter expenses have been closer scrutiny. In such cases, consider- paid and other monthly obligations ation should be given to the ability of have been met. All members of the the borrower and spouse to accumulate household must be included in deter- liquid assets, such as cash and bonds, mining if the residual income is suffi- and to the amount of debts incurred cient. They must be counted even if the while paying a lesser amount for shel- veteran’s spouse is not joining in title ter. For example, if an application in- or on the note, or if there are any other dicates little or no capital reserves and individuals depending on the veteran excessive obligations, it may not be for support, such as children from a reasonable to conclude that a substan- spouse’s prior marriage who are not tial increase in shelter expenses can be the veteran’s legal dependents. It is ap- absorbed. Another factor of prime im- propriate, however, to reduce the num- portance is the applicant’s manner of

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meeting obligations. A poor credit his- remember that the figures provided tory alone is a basis for disapproving a below for residual income are to be loan, as is an obviously inadequate in- used as a guide and should be used in come. When one or the other is mar- conjunction with the steps outlined in ginal, however, the remaining aspect paragraphs (c) through (j) of this sec- must be closely examined to assure tion. The residual income guidelines that the loan applied for will not ex- are as follows: ceed the applicant’s ability or capacity (1) Table of residual incomes by region to repay. Therefore, it is important to (for loan amounts of $79,999 and below):

TABLE OF RESIDUAL INCOMES BY REGION [For loan amounts of $79,999 and below]

Family size 1 Northeast Midwest South West

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 1 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]

Family size 1 Northeast Midwest South West

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 1 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 in- spouse will continue to receive the ben- come guidelines: Northeast—Con- efits resulting from the use of facilities necticut, Maine, Massachusetts, New on a nearby military base. (This reduc- Hampshire, New Jersey, New York, tion applies to tables in paragraph (e) Pennsylvania, Rhode Island and of this section.) Vermont; Midwest—Illinois, Indiana, (f) Stability and reliability of income. Iowa, Kansas, Michigan, Minnesota, Only stable and reliable income of the Missouri, Nebraska, North Dakota, veteran and spouse can be considered Ohio, South Dakota and Wisconsin; in determining ability to meet mort- South—Alabama, Arkansas, Delaware, gage payments. Income can be consid- District of Columbia, Florida, Georgia, ered stable and reliable if it can be con- Kentucky, Louisiana, Maryland, Mis- cluded that it will continue during the sissippi, North Carolina, Oklahoma, foreseeable future. Puerto Rico, South Carolina, Ten- nessee, Texas, Virginia, West Virginia; (1) Verification. Income of the bor- West—Alaska, Arizona, California, Col- rower and spouse which is derived from orado, Hawaii, Idaho, Montana, Ne- employment and which is considered in vada, New Mexico, Oregon, Utah, Wash- determining the family’s ability to ington and Wyoming. meet the mortgage payments, pay- (4) Military adjustments. For loan ap- ments on debts and other obligations, plications involving an active-duty and other expenses must be verified. If servicemember or military retiree, the the spouse is employed and will be con- residual income figures will be reduced tractually obligated on the loan, the by a minimum of 5 percent if there is a combined income of both the veteran clear indication that the borrower or

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and spouse is considered when the in- verification. The statement must be no come of the veteran alone is not suffi- more than 120 days old (180 days for cient to qualify for the amount of the new construction) and must be the loan sought. In other than community original or a lender-certified copy of property states, if the spouse will not the original. For loans closed auto- be contractually obligated on the loan, matically, this requirement is satisfied Regulation B (12 CFR part 202), pro- if the date of the Leave & Earnings mulgated by the Federal Reserve Board Statement is within 120 days (180 days pursuant to the Equal Credit Oppor- for new construction) of the date the tunity Act, prohibits any request for, note is signed. For prior approval or consideration of, information con- loans, this requirement will be consid- cerning the spouse (including income, ered satisfied if the verification of em- employment, assets, or liabilities), ex- ployment is dated within 120 days of cept that if the applicant is relying on the date the application is received by alimony, child support, or maintenance VA. payments from a spouse or former (ii) For servicemembers within 12 spouse as a basis for repayment of the months of release from active duty, or loan, information concerning such members of the Reserves or National spouse or former spouse may be re- Guard within 12 months of release, one quested and considered (see paragraph of the following is also required: (f)(4) of this section). In community (A) Documentation that the property states, information con- servicemember has in fact already re- cerning a spouse may be requested and enlisted or extended his/her period of considered in the same manner as that active duty or Reserve or National for the applicant. The standards ap- Guard service to a date beyond the 12- plied to income of the veteran are also month period following the projected applicable to that of the spouse. There closing of the loan. can be no discounting of income on ac- (B) Verification of a valid offer of count of sex, marital status, or any local civilian employment following re- other basis prohibited by the Equal Credit Opportunity Act. Income lease from active duty. All data perti- claimed by an applicant that is not or nent to sound underwriting procedures cannot be verified cannot be considered (date employment will begin, earnings, when analyzing the loan. If the veteran etc.) must be included. or spouse has been employed by a (C) A statement from the present employer for less than 2 years, servicemember that he/she intends to a 2-year history covering prior employ- reenlist or extend his/her period of ac- ment, schooling, or other training tive duty or Reserve or National Guard must be secured. Any periods of unem- service to a date beyond the 12 month ployment must be explained. Employ- period following the projected loan ment verifications and pay stubs must closing date, and a statement from the be no more than 120 days (180 days for servicemember’s commanding officer new construction) old to be considered confirming that the servicemember is valid. For loans closed automatically, eligible to reenlist or extend his/her ac- this requirement will be considered tive duty or Reserve or National Guard satisfied if the date of the employment service as indicated and that the com- verification is within 120 days (180 days manding officer has no reason to be- for new construction) of the date the lieve that such reenlistment or exten- note is signed. For prior approval sion will not be granted. loans, this requirement will be consid- (D) Other unusually strong positive ered satisfied if the verification of em- underwriting factors, such as a down ployment is dated within 120 days of payment of at least 10 percent, signifi- the date the application is received by cant cash reserves, or clear evidence of VA. strong ties to the community coupled (2) Active-duty, Reserve, or National with a nonmilitary spouse’s income so Guard applicants. (i) In the case of an high that only minimal income from active-duty applicant, a military Leave the active duty servicemember or & Earnings Statement is required and member of the Reserves or National will be used instead of an employment Guard is needed to qualify.

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(iii) Each active-duty member who used as primary income if it is reason- applies for a loan must be counseled able to conclude that such income will through the use of VA Form 26–0592, continue in the foreseeable future. Oth- Counseling Checklist for Military erwise, it may be used only to offset in- Homebuyers. Lenders must submit a termediate-term debts, as described in signed and dated VA Form 26–0592 with this paragraph. Also, the likely dura- each prior approval loan application or tion of certain military allowances automatic loan report involving a bor- cannot be determined and, therefore, rower on active duty. will be used only to offset inter- (3) Income reliability. Income received mediate-term debts, as described in by the borrower and spouse is to be this paragraph. Such allowances are: used only if it can be concluded that Pro-pay, flight or hazard pay, and over- the income will continue during the seas or combat pay, all of which are foreseeable future and, thus, should be subject to periodic review and/or test- properly considered in determining ing of the recipient to ascertain wheth- ability to meet the mortgage pay- er eligibility for such pay will con- ments. If an employer puts N/A or oth- tinue. Only if it can be shown that such erwise declines to complete a pay has continued for a prolonged pe- verification of employment statement riod and can be expected to continue regarding the probability of continued because of the nature of the recipient’s employment, no further action is re- assigned duties, will such income be quired of the lender. Reliability will be considered as primary income. For in- determined based on the duration of stance, flight pay verified for a pilot the borrower’s current employment to- can be regarded as probably continuous gether with his or her overall docu- and, thus, should be added to the base mented employment history. There can pay. Income derived from service in the be no discounting of income solely be- Reserves or National Guard may be cause it is derived from an annuity, used if the applicant has served in such pension or other retirement benefit, or capacity for a period of time sufficient from part-time employment. However, to evidence good probability that such unless income from overtime work and income will continue beyond 12 part-time or second jobs can be ac- months. The total period of active and corded a reasonable likelihood that it reserve service may be helpful in this is continuous and will continue in the regard. Otherwise, such income may be foreseeable future, such income should used to offset intermediate-term debts. not be used. Generally, the reliability There are a number of additional in- of such income cannot be demonstrated come sources whose contingent nature unless the income has continued for 2 precludes their being considered as years. The hours of duty and other available for repayment of a long-term work conditions of the applicant’s pri- mortgage obligation. Temporary in- mary job, and the period of time in come items such as VA educational al- which the applicant was employed lowances and unemployment com- under such arrangement, must be such pensation do not represent stable and as to permit a clear conclusion as to a reliable income and will not be taken good probability that overtime or part- into consideration in determining the time or secondary employment can and ability of the veteran to meet the in- will continue. Income from overtime come requirement of the governing work and part-time jobs not eligible for law. As required by the Equal Oppor- inclusion as primary income may, if tunity Act Amendments of 1976, Public properly verified for at least 12 months, Law 94–239, income from public assist- be used to offset the payments due on ance programs is used to qualify for a debts and obligations of an inter- loan if it can be determined that the mediate term, i.e., 6 to 24 months. Such income will probably continue for 3 income must be described in the loan years or more. file. The amount of any pension or (4) Tax-exempt income. Special consid- compensation and other income, such eration can be given to verified non- as dividends from stocks, interest from taxable income once it has been estab- bonds, savings accounts, or other de- lished that such income is likely to posits, rents, royalties, etc., will be continue (and remain untaxed) into the

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foreseeable future. Such income in- counted as income if documented. Gen- cludes certain military allowances, erally, however, such foster care in- child support payments, workers’ com- come is to be used only to balance the pensation benefits, disability retire- expenses of caring for the foster ment payments and certain types of child(ren) against any increased resid- public assistance payments. In such ual income requirements. cases, current income tax tables may (6) Military quarters allowance. With be used to determine an amount which respect to off-base housing (quarters) can be prudently employed to adjust allowances for service personnel on ac- the borrower’s actual income. This ad- tive duty, it is the policy of the De- justed or ‘‘grossed up’’ income may be partment of Defense to utilize avail- used to calculate the monthly debt-to- able on-base housing when possible. In income ratio, provided the analysis is order for a quarters allowance to be documented. Only the borrower’s ac- considered as continuing income, it is tual income may be used to calculate necessary that the applicant furnish the residual income. Care should be ex- written authorization from his or her ercised to ensure that the income is in commanding officer for off-base hous- fact tax-exempt. ing. This authorization should verify (5) Alimony, child support, mainte- that quarters will not be made avail- nance, workers’ compensation, foster care able and that the individual should payments. (i) If an applicant chooses to make permanent arrangements for reveal income from alimony, child sup- nonmilitary housing. A Department of port or maintenance payments (after Defense form, DD Form 1747, Status of first having been informed that any Housing Availability, is used by the such disclosure is voluntary pursuant Family Housing Office to advise per- to the Federal Reserve Board’s Regula- sonnel regarding family housing. The tion B (12 CFR part 202)), such pay- applicant’s quarters allowance cannot ments are considered as income to the be considered unless item b (Perma- extent that the payments are likely to nent) or d is completed on DD Form be consistently made. Factors to be 1747, dated October 1990. Of course, if considered in determining the likeli- the applicant’s income less quarters al- hood of consistent payments include, lowance is sufficient, there is no need but are not limited to: Whether the for assurance that the applicant has payments are received pursuant to a permission to occupy nonmilitary written agreement or court decree; the housing provided that a determination length of time the payments have been can be made that the occupancy re- received; the regularity of receipt; the quirements of the law will be met. availability of procedures to compel Also, authorization to obtain off-base payment; and the creditworthiness of housing will not be required when cer- the payor, including the credit history tain duty assignments would clearly of the payor when available under the qualify service personnel with families Fair Credit Reporting Act or other ap- for quarters allowance. For instance, plicable laws. However, the Fair Credit off-base housing authorizations need Reporting Act (15 U.S.C. 1681(b)) limits not be obtained for service personnel the permissible purposes for which stationed overseas who are not accom- credit reports may be ordered, in the panied by their families, recruiters on absence of written instructions of the detached duty, or military personnel consumer to whom the report relates, stationed in areas where no on-base to business transactions involving the housing exists. In any case in which no subject of the credit report or exten- off-base housing authorization is ob- sions of credit to the subject of the tained, an explanation of the cir- credit report. cumstances justifying its omission (ii) If the applicant chooses to reveal must be included with the loan applica- income related to workers’ compensation except when it has been estab- tion, it will be considered as income to lished by the VA facility of jurisdiction the extent it can be determined such that the waiting lists for on-base hous- income will continue. ing are so long that it is improbable (iii) Income received specifically for that individuals desiring to purchase the care of any foster child(ren) may be off-base housing would be precluded

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from doing so in the foreseeable future. sions for less than 1 year, it will rarely If stations make such a determination, be possible to demonstrate that the in- a release shall be issued to inform lend- come is stable for qualifying purposes; ers. such cases would require in-depth de- (7) Automobile (or similar) allowance. velopment. Generally, automobile allowances are (9) Self-employment. Generally, in- paid to cover specific expenses related come from self-employment is consid- to an applicant’s employment, and it is ered stable when the applicant has appropriate to use such income to off- been in business for at least 2 years. set a corresponding car payment. How- Less than 2 years of income from self- ever, in some instances, such an allow- employment cannot usually be consid- ance may exceed the car payment. ered stable unless the applicant has With proper documentation, income had previous related employment and/ from a car allowance which exceeds the or extensive specialized training. When car payment can be counted as effec- an applicant has been self-employed tive income. Likewise, any other simi- less than 1 year, it will rarely be pos- lar type of allowance which exceeds the sible to demonstrate that the income is specific expense involved may be added stable for qualifying purposes; such to gross income to the extent it is doc- cases would require in-depth develop- umented to exceed the actual expense. ment. The following documentation is (8) Commissions. When all or a major required for all self-employed bor- portion of the veteran’s income is de- rowers: rived from commissions, it will be nec- (i) A profit-and-loss statement for essary to establish the stability of such the prior fiscal year (12-month ac- income if it is to be considered in the counting cycle), plus the period year to loan analysis for the repayment of the date since the end of the last fiscal mortgage debt and/or short-term obli- year (or for whatever shorter period gations. In order to assess the value of records may be available), and balance such income, lenders should obtain sheet based on the financial records. written verification of the actual The financial statement must be suffi- amount of commissions paid to date, cient for a loan underwriter to deter- the basis for the payment of such com- mine the necessary information for missions and when commissions are loan approval and an independent audit paid; i.e., monthly, quarterly, semi- (on the veteran and/or the business) by annually, or annually. Lenders should a Certified Public Accountant will be also obtain signed and dated individual required if necessary for such deter- income tax returns, plus applicable mination; and schedules, for the previous 2 years, or (ii) Copies of signed individual infor whatever additional period is come tax returns, plus all applicable deemed necessary to properly dem- schedules for the previous 2 years, or onstrate a satisfactory earnings record. for whatever additional period is The length of the veteran’s employ- deemed necessary to properly dem- ment in the type of occupation for onstrate a satisfactory earnings record, which commissions are paid is also an must be obtained. If the business is a important factor in the assessment of corporation or partnership, copies of the stability of the income. If the vet- signed Federal business income tax re- eran has been employed for a relatively turns for the previous two years plus short time, the income should not nor- all applicable schedules for the cor- mally be considered stable unless the poration or partnership must be ob- product or service was the same or tained; and closely related to the product or serv- (iii) If the business is a corporation ice sold in an immediate prior position. or partnership, a list of all stock- Generally, income from commissions is holders or partners showing the inter- considered stable when the applicant est each holds in the business will be has been receiving such income for at required. Some cases may justify a least 2 years. Less than 2 years of in- written credit report on the business as come from commissions cannot usually well as the applicant. When the busi- be considered stable. When an appli- ness is of an unusual type and it is dif- cant has received income from commis- ficult to determine the probability of

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its continued operation, explanation as duties of the applicant’s present posi- to the function and purpose of the busi- tion, such duties may be construed as ness may be needed from the applicant adding weight to his or her present em- and/or any other qualified party with ployment experience and the income the acknowledged expertise to express from the veteran’s present employment a valid opinion. thus may be considered available for (10) Recently discharged veterans. Loan qualifying the loan, notwithstanding applications received from recently the fact that the applicant has been on discharged veterans who have little or the present job only a short time. This no employment experience other than same principle may be applied to vet- their military occupation and from erans recently retired from the service. veterans seeking VA-guaranteed loans In addition, when the veteran’s income who have retired after 20 years of ac- from retirement, in relation to the tive military duty require special at- total of the estimated shelter expense, tention. The retirement income of the long-term debts and amount available latter veterans in many cases may not for family support, is such that only be sufficient to meet the statutory in- minimal income from employment is come requirements for the loan necessary to qualify from the income amount sought. Many have obtained standpoint, it would be proper to re- full-time employment and have been solve the doubt in favor of the veteran. employed in their new jobs for a very It would be erroneous, however, to give short time. consideration to a veteran’s income (i) It is essential in determining from employment for a short duration whether veterans in these categories in a job requiring skills for which the qualify from the income standpoint for applicant has had no training or expe- the amount of the loan sought, that rience. the facts in respect to their present employment and retirement income be (iv) To illustrate the provisions of fully developed, and that each case be paragraph (f)(10), it would be proper to considered on its individual merits. use short-term employment income in (ii) In most cases the veteran’s cur- qualifying a veteran who had experi- rent income or current income plus his ence as an airplane mechanic in the or her retirement income is sufficient. military service and the individual’s The problem lies in determining employment after discharge or retire- whether it can be properly concluded ment from the service is in the same or that such income level will continue allied fields; e.g., auto mechanic or ma- for the foreseeable future. If the vet- chinist. This presumes, however, that eran’s employment status is that of a the verification of employment in- trainee or an apprentice, this will, of cluded a statement that the veteran course, be a factor. In cases of the self- was performing the duties of the job employed, the question to be resolved satisfactorily, the possibility of contin- is whether there are reasonable pros- ued employment was favorable and pects that the business enterprise will that the loan application is eligible in be successful and produce the required all other respects. An example of non- income. Unless a favorable conclusion qualifying experience is that of a vet- can be made, the income from such eran who was an Air Force pilot and source should not be considered in the has been employed in insurance sales loan analysis. on commission for a short time. Most (iii) If a recently discharged veteran cases, of course, fall somewhere be- has no prior employment history and tween those extremes. It is for this rea- the veteran’s verification of employ- son that the facts of each case must be ment shows he or she has not been on fully developed prior to closing the the job a sufficient time in which to be- loan automatically or submitting the come established, consideration should case to VA for prior approval. be given to the duties the veteran per- (11) Employment of short duration. The formed in the military service. When it provisions of paragraph (f)(7) of this can be determined that the duties a section are similarly applicable to ap- veteran performed in the service are plicants whose employment is of short similar or are in direct relation to the duration. Such cases will entail careful

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consideration of the employer’s con- copy of the rental agreement should be firmation of employment, probability obtained. It is the responsibility of the of permanency, past employment loan underwriter to be aware of the record, the applicant’s qualifications condition of the local rental market. for the position, and previous training, For instance, in areas where the rental including that received in the military market is very strong the absence of a service. In the event that such consid- lease should not automatically pro- erations do not enable a determination hibit the offset of the mortgage by the that the income from the veteran’s proposed rental income. current position has a reasonable like- (iii) Other rental property. If income lihood of continuance, such income from rental property will be used to should not be considered in the anal- qualify for the new loan, the docu- ysis. Applications received from per- mentation required of a self-employed sons employed in the building trades, applicant should be obtained together or in other occupations affected by cli- with evidence of cash reserves equaling matic conditions, should be supported 3 months PITI on the rental property. by documentation evidencing the ap- As for any self-employed earnings (see plicant’s total earnings to date and paragraph (f)(7) of this section), depre- covering a period of not less than 1 ciation claimed may be added back in year as well as signed and dated copies as income. In the case of a veteran who of complete income tax returns, includ- has no experience as a landlord, it is ing all schedules for the past 2 years or unlikely that the income from a rental for whatever additional period is property may be used to qualify for the deemed necessary to properly dem- new loan. onstrate a satisfactory earnings record. (13) Taxes and other deductions. De- If the applicant works out of a union, ductions to be applied for Federal in- evidence of the previous year’s earn- come taxes and Social Security may be ings should be obtained together with a obtained from the Employer’s Tax verification of employment from the Guide (Circular E) issued by the Inter- current employer. nal Revenue Service (IRS). (For vet- (12) Rental income—(i) Multi-unit sub- erans receiving a mortgage credit cer- ject property. When the loan pertains to tificate (MCC), see paragraph (f)(14) of a structure with more than a one-fam- this section.) Any State or local taxes ily dwelling unit, the prospective rent- should be estimated or obtained from al income will not be considered unless charts similar to those provided by IRS the veteran can demonstrate a reason- which may be available in those states able likelihood of success as a landlord, with withholding taxes. A determina- and sufficient cash reserves are verified tion of the amount paid or withheld for to enable the veteran to carry the retirement purposes should be made mortgage loan payments (principal, in- and used when calculating deductions terest, taxes, and insurance) without from gross income. In determining assistance from the rental income for a whether a veteran-applicant meets the period of at least 6 months. The deter- income criteria for a loan, some con- mination of the veteran’s likelihood of sideration may be given to the poten- success as a landlord will be based on tial tax benefits the veteran will real- documentation of any prior experience ize if the loan is approved. This can be in managing rental units or other col- done by using the instructions and lection activities. The amount of rent- worksheet portion of IRS Form W–4, al income to be used in the loan anal- Employee’s Withholding Allowance ysis will be based on 75 percent of the Certificate, to compute the total num- amount indicated on the lease or rental ber of permissible withholding allow- agreement, unless a greater percentage ances. That number can then be used can be documented. when referring to IRS Circular E and (ii) Rental of existing home. Proposed any appropriate similar State with- rental of a veteran’s existing property holding charts to arrive at the amount may be used to offset the mortgage of Federal and State income tax to be payment on that property, provided deducted from gross income. there is no indication that the property (14) Mortgage credit certificates. (i) The will be difficult to rent. If available, a Internal Revenue Code (26 U.S.C.) as

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amended by the Tax Reform Act of requires that lenders, in evaluating 1984, allows states and other political creditworthiness, shall consider, on the subdivisions to trade in all or part of applicant’s request, the credit history, their authority to issue mortgage rev- when available, of any account re- enue bonds for authority to issue ported in the name of the applicant’s MCCs. Veterans who are recipients of spouse or former spouse which the ap- MCCs may realize a significant reduc- plicant can demonstrate accurately re- tion in their income tax liability by reflects the applicant’s creditworthiness. ceiving a Federal tax credit for a per- In other than community property centage of their mortgage interest pay- states, if the spouse will not be con- ment on debt incurred on or after Jan- tractually obligated on the loan, Regu- uary 1, 1985. lation B prohibits any request for or (ii) Lenders must provide a copy of consideration of information about the the MCC to VA with the home loan ap- spouse concerning income, employ- plication. The MCC will specify the ment, assets or liabilities. In commu- rate of credit allowed and the amount nity property states, information con- of certified indebtedness; i.e., the in- cerning a spouse may be requested and debtedness incurred by the veteran to considered in the same manner as that acquire a principal residence or as a for the applicant. qualified home improvement or reha- (1) Adverse data. If the analysis devel- bilitation loan. ops any derogatory credit information (iii) For credit underwriting pur- and, despite such facts, it is deter- poses, the amount of tax credit allowed mined that the veteran and spouse are to a veteran under an MCC will be satisfactory credit risks, the basis for treated as a reduction in the monthly the decision must be explained. If a Federal income tax. For example, a veteran and spouse have debts out- veteran having a $600 monthly interest standing which have not been paid payment and an MCC providing a 30- timely, or which they have refused to percent tax credit would receive a $180 pay, the fact that the outstanding (30 percent × $600) tax credit each debts are paid after the acceptability month. However, because the annual of the credit is questioned or in antici- tax credit, which amounts to $2,160 (12 pation of applying for new credit does × $180), exceeds $2,000 and is based on a not, of course, alter the fact that the 30-percent credit rate, the maximum record for paying debts has been unsat- tax credit the veteran can receive is isfactory. With respect to unpaid debts, limited to $2,000 per year (Pub. L. 98– lenders may take into consideration a 369) or $167 per month ($2,000/12). As a veteran’s claim of bona fide or legal de- consequence of the tax credit, the in- fenses. Such defenses are not applica- terest on which a deduction can be ble when the debt has been reduced to taken will be reduced by the amount of judgment. Where a collection account the tax credit to $433 ($600¥$167). This has been established, if it is determined reduction should also be reflected when that the borrower is a satisfactory calculating Federal income tax. credit risk, it is not mandatory that (iv) For underwriting purposes, the such an account be paid off in order for amount of the tax credit is limited to a loan to be approved. Court-ordered the amount of the veteran’s maximum judgments, however, must be paid off tax liability. If, in the example in para- before a new loan is approved. graph (f)(14)(iii) of this section, the vet- (2) Bankruptcy. When the credit infor- eran’s tax liability for the year were mation shows that the borrower or only $1,500, the monthly tax credit spouse has been discharged in bank- would be limited to $125 ($1,500/12). ruptcy under the ‘‘straight’’ liquida- (g) Credit. The conclusion reached as tion and discharge provisions of the to whether or not the veteran and bankruptcy law, this would not in spouse are satisfactory credit risks itself disqualify the loan. However, in must also be based on a careful anal- such cases it is necessary to develop ysis of the available credit data. Regu- complete information as to the facts lation B (12 CFR part 202), promulgated and circumstances concerning the by the Federal Reserve Board pursuant bankruptcy. Generally speaking, when to the Equal Credit Opportunity Act, the borrower or spouse, as the case

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may be, has been regularly employed (4) Foreclosures. (i) When the credit (not self-employed) and has been dis- information shows that the veteran or charged in bankruptcy within the last spouse has had a foreclosure on a prior one to two years, it probably would not mortgage; e.g., a VA-guaranteed or be possible to determine that the bor- HUD-insured mortgage, this will not in rower or spouse is a satisfactory credit itself disqualify the borrower from ob- risk unless both of the following retaining the loan. Lenders and field sta- quirements are satisfied: tion personnel should refer to the pre- (i) The borrower or spouse has ob- ceding guidelines on bankruptcies for tained credit subsequent to the bank- cases involving foreclosures. As with a ruptcy and has met the credit pay- borrower who has been adjudicated ments in a satisfactory manner over a bankrupt, it is necessary to develop continued period; and complete information as to the facts (ii) The bankruptcy was caused by and circumstances of the foreclosure. circumstances beyond the control of (ii) When VA pays a claim on a VA- the borrower or spouse, e.g., unemploy- guaranteed loan as a result of a fore- ment, prolonged strikes, medical bills closure, the original veteran may be re- not covered by insurance. Divorce is quired to repay any loss to the Govern- not generally viewed as beyond the ment. In some instances VA may waive control of the borrower and/or spouse. the veteran’s debt, in part or totally, The circumstances alleged must be based on the facts and circumstances of verified. If a borrower or spouse is self- the case. However, guaranty entitle- employed, has been adjudicated bank- ment cannot be restored unless the rupt, and subsequently obtains a per- Government’s loss has been repaid in manent position, a finding as to satis- full, regardless of whether or not the factory credit risk may be made provided there is no derogatory credit indebt has been waived, compromised, or formation prior to self-employment, discharged in bankruptcy. Therefore, a there is no derogatory credit informa- veteran who is seeking a new VA loan tion subsequent to the bankruptcy, and after having experienced a foreclosure the failure of the business was not due on a prior VA loan will in most cases to misconduct. If a borrower or spouse have only remaining entitlement to has been discharged in bankruptcy apply to the new loan. The lender within the past 12 months, it will not should assure that the veteran has suf- generally be possible to determine that ficient entitlement for its secondary the borrower or spouse is a satisfactory marketing purposes. credit risk. (5) Federal debts. An applicant for a (3) Petition under Chapter 13 of Bank- Federally-assisted loan will not be con- ruptcy Code. A petition under chapter sidered a satisfactory credit risk for 13 of the Bankruptcy Code (11 U.S.C.) such loan if the applicant is presently filed by the borrower or spouse is indic- delinquent or in default on any debt to ative of an effort to pay their creditors. the Federal Government, e.g., a Small Some plans may provide for full pay- Business Administration loan, a U.S. ment of debts while others arrange for Guaranteed Student loan, a debt to the payment of scaled-down debts. Regular Public Health Service, or where there payments are made to a court-ap- is a judgment lien against the appli- pointed trustee over a 2- to 3-year pe- cant’s property for a debt owed to the riod (or up to 5 years in some cases). Government. The applicant may not be When the borrowers have made all pay- approved for the loan until the delin- ments in a satisfactory manner, they quent account has been brought cur- may be considered as having reestab- rent or satisfactory arrangements have lished satisfactory credit. When they been made between the borrower and apply for a home loan before comple- the Federal agency owed, or the judg- tion of the payout period, favorable ment is paid or otherwise satisfied. Of consideration may nevertheless be course, the applicant must also be able given if at least 12 months’ worth of to otherwise qualify for the loan from payments have been made satisfac- an income and remaining credit stand- torily and the Trustee or Bankruptcy point. Refinancing under VA’s interest Judge approves of the new credit. rate reduction refinancing provisions,

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however, is allowed even if the bor- any alimony and/or child support pay- rower is delinquent on the VA guaran- ments of the borrower and spouse must teed mortgage being refinanced. Prior be documented. Significant liabilities, approval processing is required in such to be deducted from the total income cases. in determining ability to meet the (6) Absence of credit history. The fact mortgage payments are accounts that, that recently discharged veterans may generally, are of a relatively long have had no opportunity to develop a term, i.e., 10 months or over. Other ac- credit history will not preclude a deter- counts for terms of less than 10 months mination of satisfactory credit. Simi- must, of course, be considered in deter- larly, other loan applicants may not mining ability to meet family ex- have established credit histories as a penses. Certainly, any severe impact on result of a preference for purchasing the family’s resources for any period of consumer items with cash rather than time must be considered in the loan credit. There are also cases in which analysis. For example, monthly pay- individuals may be genuinely wary of ments of $300 on an auto loan with a re- acquiring new obligations following maining balance of $1,500 would be in- bankruptcy, consumer credit coun- cluded in those obligations to be de- seling (debt proration), or other disrup- ducted from the total income regard- tive credit occurrence. The absence of less of the fact that the account can be the credit history in these cases will expected to pay out in 5 months. It is not generally be viewed as an adverse clear that the applicant will, in this factor in credit underwriting. However, case, continue to carry the burden of before a favorable decision is made for those $300 payments for the first, most cases involving bankruptcies or other critical months of the home loan. derogatory credit factors, efforts should be made to develop evidence of (10) Requirements for verification. If timely payment of non-installment the credit investigation reveals debts debts such as rent and utilities. It is or obligations of a material nature anticipated that this special consider- which were not divulged by the appli- ation in the absence of a credit history cant, lenders must be certain to obtain following bankruptcy would be the rare clarification as to the status of such case and generally confined to bank- debts from the borrower. A proper ruptcies that occurred over 3 years ago. analysis is obviously not possible un- (7) Consumer credit counseling plan. If less there is total correlation between a veteran, or veteran and spouse, have the obligations claimed by the bor- prior adverse credit and are partici- rower and those revealed by a credit re- pating in a Consumer Credit Coun- port or deposit verification. Con- seling plan, they may be determined to versely, significant debts and obliga- be a satisfactory credit risk if they tions reported by the borrower must be demonstrate 12 months’ satisfactory dated. If the credit report fails to pro- payments and the counseling agency vide necessary information on such ac- approves the new credit. If a veteran, counts, lenders will be expected to ob- or veteran and spouse, have good prior tain their own verifications of those credit and are participating in a Con- debts directly from the creditors. Cred- sumer Credit Counseling plan, such it reports and verifications must be no participation is to be considered a neu- more than 120 days old (180 days for tral factor, or even a positive factor, in new construction) to be considered determining creditworthiness. valid. For loans closed automatically, (8) Re-establishment of satisfactory this requirement will be considered credit. In circumstances not involving satisfied if the date of the credit report bankruptcy, satisfactory credit is gen- or verification is within 120 days (180 erally considered to be reestablished days for new construction) of the date after the veteran, or veteran and the note is signed. For prior approval spouse, have made satisfactory pay- loans, this requirement will be consid- ments for 12 months after the date of ered satisfied if the date of the credit the last derogatory credit item. report or verification is within 120 days (9) Long-term v. short-term debts. All of the date the application is received known debts and obligations including by VA. Of major significance are the

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applicant’s rental history and out- filiated consumer reporting agencies standing or recently retired mortgages, and independent consumer reporting if any, particularly prior VA loans. agencies. All credit reports obtained by Lenders should be sure ratings on such the lender must be submitted to VA. accounts are obtained; a written expla- (h) Borrower’s personal and financial nation is required when ratings are not status. The number and ages of depend- available. A determination is necessary ents have an important bearing on as to whether alimony and/or child sup- whether income after deduction of port payments are required. fixed charges is sufficient to support Verification of the amount of such ob- the family. Type and duration of em- ligations should be obtained, although ployment of both the borrower and documentation concerning an appli- spouse are important as an indication cant’s divorce should not be obtained of stability of their employment. The automatically unless it is necessary to amount of liquid assets owned by the verify the amount of any alimony or borrower or spouse, or both, is an im- child support liability indicated by the portant factor in determining that applicant. If in the routine course of they have sufficient funds to close the processing the loan application, how- loan, as well as being significant in ever, direct evidence is received (e.g., analyzing the overall qualifications for from the credit report) that an obliga- the loan. (It is imperative that ade- tion to pay alimony or child support quate cash assets from the veteran’s exists (as opposed to mere evidence own resources are verified to allow the that the veteran was previously di- payment (see § 36.4839(a)(3)) of any dif- vorced), the discrepancy between the ference between the sales price of the loan application and credit report can property and the loan amount, in addi- and should be fully resolved in the tion to that necessary to cover closing same manner as any other such dis- costs, if the sales price exceeds the rea- crepancy would be handled. When a pay sonable value established by VA.) stub or leave-and-earnings statement Verifications must be no more than 120 indicates an allotment, the lender days old (180 days for new construc- must investigate the nature of the al- tion) to be considered valid. For loans lotment(s) to determine whether the closed on the automatic basis, this re- allotment is related to a debt. Debts quirement will be considered satisfied assigned to an ex-spouse by a divorce if the date of the deposit verification is decree will not generally be charged within 120 days (180 days for new con- against a veteran-borrower. struction) of the date of the veteran’s (11) Job-related expenses. Known job- application to the lender. For prior ap- related expenses should be docu- proval loans, this requirement will be mented. This will include costs for any considered satisfied if the verification dependent care, significant commuting of employment is dated within 120 days costs, etc. When a family’s cir- of the date the application is received cumstances are such that dependent by VA. Current monthly rental or care arrangements would probably be other housing expense is an important necessary, it is important to determine consideration when compared to that the cost of such services in order to ar- to be undertaken in connection with rive at an accurate total of deductions. the contemplated housing purchase. (12) Credit reports. Credit reports ob- (i) Estimated monthly shelter expenses. tained by lenders on VA-guaranteed It is important that monthly expenses loan applications must be either a such as taxes, insurance, assessments three-file Merged Credit Report (MCR) and maintenance and utilities be esti- or a Residential Mortgage Credit Re- mated accurately based on property lo- port (RMCR). If used, the RMCR must cation and type of house; e.g., old or meet the standards formulated jointly new, large or small, rather than using by the Department of Veterans Affairs, or applying a ‘‘rule of thumb’’ to all Federal National Mortgage Associa- properties alike. Maintenance and util- tion, Federal Home Loan Mortgage ity amounts for various types of prop- Corporation, Federal Housing Adminis- erty should be realistically estimated. tration, Farmers Home Administra- Local utility companies should be con- tion, credit repositories, repository af- sulted for current rates. The age and

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type of construction of a house may accuracy of the information provided well affect these expenses. In the case to VA. of condominiums or houses in a (5) All credit reports secured by the planned unit development (PUD), the lender or other parties as identified in monthly amount of the maintenance paragraphs (j)(3) and (4) of this section assessment payable to a homeowners shall be provided to VA. If updated association should be added. If the credit reports reflect materially dif- amount currently assessed is less than ferent information than that in other the maximum provided in the cov- reports, such discrepancies must be ex- enants or master deed, and it appears plained by the lender and the ultimate likely that the amount will be insuffi- decision as to the effects of the discrep- cient for operation of the condominium ancy upon the loan application fully or PUD, the amount used will be the addressed by the underwriter. maximum the veteran could be (k) Lender certification. Lenders origi- charged. If it is expected that real es- nating loans are responsible for deter- tate taxes will be raised, or if any spe- mining and certifying to VA on the ap- cial assessments are expected, the in- propriate application or closing form creased or additional amounts should that the loan meets all statutory and be used. In special flood hazard areas, regulatory requirements. Lenders will include the premium for any required affirmatively certify that loans were flood insurance. made in full compliance with the law (j) Lender responsibility. (1) Lenders and loan guaranty regulations as pre- are fully responsible for developing all scribed in this section. credit information; i.e., for obtaining (1) Definitions. The definitions con- verifications of employment and de- tained in part 42 of this chapter and posit, credit reports, and for the accu- the following definitions are applicable racy of the information contained in in this section. the loan application. (i) Another appropriate amount. In determining the appropriate amount of a (2) Verifications of employment and lender’s civil penalty in cases where deposits, and requests for credit re- the Secretary has not sustained a loss ports and/or credit information must or where two times the amount of the be initiated and received by the lender. Secretary’s loss on the loan involved (3) In cases where the real estate does not exceed $10,000, the Secretary broker/agent or any other party re- shall consider: quests any of this information, the re- (A) The materiality and importance port(s) must be returned directly to the of the false certification to the deter- lender. This fact must be disclosed by mination to issue the guaranty or to appropriately completing the required approve the assumption; certification on the loan application or (B) The frequency and past pattern of report and the parties must be identi- such false certifications by the lender; fied as agents of the lender. and (4) Where the lender relies on other (C) Any exculpatory or mitigating parties to secure any of the credit or circumstances. employment information or otherwise (ii) Complaint. Complaint includes the accepts such information obtained by assessment of liability served pursuant any other party, such parties shall be to this section. construed for purposes of the submis- (iii) Defendant. Defendant means a sion of the loan documents to VA to be lender named in the complaint. authorized agents of the lender, regard- (iv) Lender. Lender includes the hold- less of the actual relationship between er approving loan assumptions pursu- such parties and the lender, even if dis- ant to 38 U.S.C. 3714. closure is not provided to VA under (2) Procedures for certification. (i) As a paragraph (j)(3) of this section. Any condition to VA issuance of a loan negligent or willful misrepresentation guaranty on all loans closed on or after by such parties shall be imputed to the October 27, 1994, and as a prerequisite lender as if the lender had processed to an effective loan assumption on all those documents and the lender shall loans assumed pursuant to 38 U.S.C. remain responsible for the quality and 3714 on or after November 17, 1997, the

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following certification shall accom- quate evidence, that the lender is lia- pany each loan closing or assumption ble, or serve a complaint on the lender package: stating: (i) The allegations of a false certifi- The undersigned lender certifies that the (loan) (assumption) application, all cation and of liability; verifications of employment, deposit, and (ii) The amount being assessed by the other income and credit verification docu- Secretary and the basis for the amount ments have been processed in compliance assessed; with 38 CFR part 36; that all credit reports (iii) Instructions on how to satisfy obtained or generated in connection with the the assessment and how to file an an- processing of this borrower’s (loan) (assump- swer to request a hearing, including a tion) application have been provided to VA; specific statement of the lender’s right that, to the best of the undersigned lender’s to request a hearing by filing an an- knowledge and belief the (loan) (assumption) meets the underwriting standards recited in swer and to be represented by counsel; chapter 37 of title 38 United States Code and and 38 CFR part 36; and that all information pro- (iv) That failure to file an answer vided in support of this (loan) (assumption) within 30 days of the complaint will re- is true, complete and accurate to the best of sult in the imposition of the assess- the undersigned lender’s knowledge and be- ment without right to appeal the as- lief. sessment to the Secretary. (ii) The certification shall be exe- (m) Hearing procedures. A lender hear- cuted by an officer of the lender au- ing on an assessment established pur- thorized to execute documents and act suant to this section shall be governed on behalf of the lender. by the procedures recited at 38 CFR (3) Penalty. Any lender who know- 42.8 through 42.47. ingly and willfully makes a false cer- (n) Additional remedies. Any assess- tification required pursuant to ment under this section may be in ad- § 36.4840(k)(2) shall be liable to the dition to other remedies available to United States Government for a civil VA, such as debarment and suspension penalty equal to two times the amount pursuant to 38 U.S.C. 3704 and 2 CFR of the Secretary’s loss on the loan in- parts 180 and 801 or loss of automatic volved or to another appropriate processing authority pursuant to 38 amount, not to exceed $10,000, which- U.S.C. 3702, or other actions by the ever is greater. Government under any other law in- (l) Assessment of liability. (1) Upon an cluding but not limited to title 18 assessment confirmed by the Under U.S.C. and 31 U.S.C. 3732. Secretary for Benefits, in consultation (Authority 38 U.S.C. 3703(c)(1), 3710(g)) with the Investigating Official, that a (The Office of Management and Budget has certification, as required in this sec- approved the information collection require- tion, is false, a report of findings of the ments of this section under control number Under Secretary for Benefits shall be 2900–0521.) submitted to the Reviewing Official setting forth: § 36.4841 Death or insolvency of hold- (i) The evidence that supports the al- er. legations of a false certification and of (a) Immediately upon the death of liability; the holder and without the necessity of (ii) A description of the claims or request or other action by the debtor statements upon which the allegations or the Secretary, all sums then stand- of liability are based; ing as a credit balance in a trust, or de- (iii) The amount of the VA demand to posit, or other account to cover taxes, be made; and insurance accruals, or other items in (iv) Any exculpatory or mitigating connection with the loan secured by circumstances that may relate to the the encumbered property, whether certification. stated to be such or otherwise des- (2) The Reviewing Official shall re- ignated, and which have not been cred- view all of the information provided ited on the note shall, nevertheless, be and will either inform the Under Sec- treated as a setoff and shall be deemed retary for Benefits and the Inves- to have been credited thereon as of the tigating Official that there is not ade- date of the last debit to such account,

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so that the unpaid balance of the note competently appraise and value within as of that date will be reduced by the a prescribed area the type of property amount of such credit balance: Pro- to which the approval relates. vided, that any unpaid taxes, insurance premiums, ground rents, or advances (Authority 38 U.S.C. 3703(c)(1), 3731) may be paid by the holder of the in- § 36.4843 Restriction on designated fee debtedness, at the holder’s option, and appraisers. the amount which otherwise would have been deemed to have been cred- (a) A designated fee appraiser shall ited on the note reduced accordingly. not make an appraisal, excepting of al- This paragraph shall be applicable terations, improvements, or repairs to whether the estate of the deceased real property entailing a cost of not holder is solvent or insolvent. more than $3,500, if such appraiser is an (b) The provisions of paragraph (a) of officer, director, trustee, employer, or this section shall also be applicable in employee of the lender, contractor, or the event of: vendor. (1) Insolvency of holder; (b) An appraisal made by a des- (2) Initiation of any bankruptcy or ignated fee appraiser shall be subject reorganization, or liquidation pro- to review and adjustment by the Sec- ceedings as to the holder, whether vol- retary. The amount determined to be untary or involuntary; proper upon any such review or adjust- (3) Appointment of a general or ancil- ment shall constitute the ‘‘reasonable lary receiver for the holder’s property; value’’ for the purpose of determining or in any case; or the eligibility of the related loan. (4) Upon the written request of the debtor if all secured and due insurance (Authority 38 U.S.C. 3703(c)(1), 3731) premiums, taxes, and ground rents have been paid, and appropriate provi- § 36.4845 Delegation of authority. sions made for future accruals. (a) Except as hereinafter provided, (c) Upon the occurrence of any of the each employee of the Department of events enumerated in paragraph (a) or Veterans Affairs heretofore or here- (b) of this section, interest on the note after appointed to, or lawfully filling, and on the credit balance of the depos- any position designated in paragraph its mentioned in paragraph (a) shall be (b) of this section is hereby delegated set off against each other at the rate authority, within the limitations and payable on the principal of the note, as conditions prescribed by law, to exer- of the date of last debit to the deposit cise the powers and functions of the account. Any excess credit of interest Secretary with respect to the guaranty shall be treated as a set-off against the or insurance of loans and the rights unpaid advances, if any, and the unpaid and liabilities arising therefrom, in- balance of the note. cluding but not limited to the adju- (d) The provisions of paragraphs (a), dication and allowance, disallowance, (b) and (c) of this section shall apply and compromise of claims; the collec- also to corporations. The dissolution tion or compromise of amounts due, in thereof by expiration of charter, by for- money or other property; the exten- feiture, or otherwise shall be treated as sion, rearrangement, or acquisition of is the death of an individual as pro- loans; the management and disposition vided in paragraph (a) of this section. of secured and unsecured notes and (Authority 38 U.S.C. 3703(c)(1), 3720) other property; and those functions expressly or impliedly embraced within § 36.4842 Qualification for designated paragraphs (2) through (6) of 38 U.S.C. fee appraisers. 3720(a). Incidental to the exercise and To qualify for approval as a des- performance of the powers and func- ignated fee appraiser, an applicant tions hereby delegated, each such em- must show to the satisfaction of the ployee is authorized to execute and de- Secretary that his or her character, ex- liver (with or without acknowledg- perience, and the type of work in which ment) for, and on behalf of, the Sec- he or she has had experience for at retary, evidence of guaranty or of in- least 5 years qualifies the applicant to surance credits and such certificates,

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forms, conveyances, and other instru- (d) Each Regional Office, Regional ments as may be appropriate in con- Office and Insurance Center, and Med- nection with the acquisition, owner- ical and Regional Office Center shall ship, management, sale, transfer, as- maintain and keep current a cumu- signment, encumbrance, rental, or lative list of all employees of that Of- other disposition of real or personal fice or Center who, since May 1, 1980, property, or, of any right, title, or in- have occupied the positions of Direc- terest therein, including, but not lim- tor, Loan Guaranty Officer, and Assist- ited to, contracts of sale, installment ant Loan Guaranty Officer. This list contracts, deeds, leases, bills of sale, will include each employee’s name, assignments, and releases; and to ap- title, date the employee assumed the prove disbursements to be made for position, and the termination date, if any purpose authorized by 38 U.S.C. applicable, of the employee’s tenure in chapter 37. such position. The list shall be avail- (b)(1) Designated positions are as fol- able for public inspection and copying lows: at the Regional Office, or Center, dur- (i) Under Secretary for Benefits. ing normal business hours. (ii) Director, Loan Guaranty Service. (e)(1) Authority is hereby delegated (iii) Director, Medical and Regional to the officers, designated in paragraph Office Center. (e)(2) of this section, of the entity performing loan servicing functions under (iv) Director, VA Regional Office and a contract with the Secretary to exe- Insurance Center. cute on behalf of the Secretary all doc- (v) Director, Regional Office. uments necessary for the servicing and (vi) Loan Guaranty Officer. termination of a loan made or acquired (vii) Assistant Loan Guaranty Offi- by the Secretary pursuant to 38 U.S.C. cer. chapter 37 (other than under sub- (2) The authority hereby delegated to chapter vi of that chapter). Documents employees of the positions designated executed under this paragraph include in paragraph (b)(1) of this section may, but are not limited to: Loan modifica- with the approval of the Under Sec- tion agreements, notices of default and retary for Benefits, be redelegated. other documents necessary for loan (c) Nothing in this section shall be foreclosure or termination, notices of construed— appointment or substitution of trust- (1) To authorize any such employee ees under mortgages or deeds of trust, to exercise the authority vested in the releases or satisfactions of mortgages Secretary under 38 U.S.C. 501 or or deeds of trust, acceptance of deeds- 3703(a)(2) or to sue, or enter appearance in-lieu of foreclosure, loan assumption for and on behalf of the Secretary, or agreements, loan assignments, deeds confess judgment against the Secretary tendered upon satisfaction or conver- in any court without the Secretary’s sion of an installment land sales con- prior authorization; or tract, and documents related to filing, (2) To include the authority to exer- pursuing and settling claims with in- cise those powers delegated to the surance companies relating to hazard Under Secretary for Benefits, or the coverage on properties securing loans Director, Loan Guaranty Service, being serviced. under §§ 36.4823(e), 36.4838 or 36.4846, Pro- (2) The designated officers are: vided, that, anything in the regulations (i) Vice President; concerning guaranty or insurance of (ii) Assistant Vice President; and loans to veterans to the contrary not- (iii) Assistant Secretary. withstanding, any evidence of guaranty (3) The Director, Loan Guaranty or insurance issued on or after July 1, Service, Washington, DC, shall main- 1948, by any of the employees des- tain a log listing all persons authorized ignated in paragraph (b) of this section to execute documents pursuant to or by any employee designated an au- paragraph (e) of this section and the thorized agent or a loan guaranty dates such persons held such authority, agent shall be deemed to have been together with certified copies of resolu- issued by the Secretary, subject to the tions of the board of directors of the defenses reserved in 38 U.S.C. 3721. entity authorizing such individuals to

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perform the functions specified in para- provisions of 38 U.S.C. chapter 37 and graph (e)(1) of this section. These this subpart: records shall be available for public in- (1) Any loan which is related to an spection and copying at the Office of enterprise in which more than 10 indi- the Director of VA Loan Guaranty viduals will participate; or Service, Washington, DC 20420. (2) Any loan to be made for the pur- (f)(1) Authority is hereby delegated chase or construction of residential to the officers, designated in paragraph units in any housing development, co- (f)(2) of this section, of the entity per- operative or otherwise, the title to forming property management and which development or to the individual sales functions under a contract with units therein is not to be held directly the Secretary to execute on behalf of by the veteran-participants, or which the Secretary all documents necessary contemplates the ownership or mainte- for the management and sales of resi- nance of more than three units or of dential real property acquired by the their major appurtenances in common. Secretary pursuant to 38 U.S.C. chap- (b) The issuance of such approval ter 37. Documents executed under this with respect to a residential develop- paragraph include but are not limited ment under paragraph (a)(2) of this sec- to: Sales contracts, deeds, documents tion also shall be subject to such condi- relating to removing adverse occu- tions and stipulation as in the judg- pants, and any documents relating to ment of the approving officer are pos- sales closings. The authorization to sible and proper to: execute deeds is limited to deeds other (1) Afford reasonable and feasible than general warranty deeds. protection to the rights of the Govern- (2) The designated officers are: ment as guarantor or insurer, and as (i) Senior Vice President; subrogee, and to each veteran-partici- (ii) Vice President; pant against loss of his or her respec- (iii) Assistant Vice President; tive equity consequent upon the failure (iv) Assistant Secretary; of other participants to discharge their (v) Director; obligations; (vi) Senior Manager; and (2) Provide for a reasonable and (vii) Regional Manager. workable plan for the operation and (3) The Director, Loan Guaranty management of the project; Service, Washington, DC, shall main- (3) Limit the personal liability of tain a log listing all persons authorized each veteran-participant to those sums to execute documents pursuant to allocable on a proper ratable basis to paragraph (f) of this section and the the purchase, cost, and maintenance of dates such persons held such authority, his or her individual unit or partici- together with certified copies of resolu- pating interest; and tions of the board of directors of the (4) Limit commercial features to entity authorizing such individuals to those reasonably calculated to promote perform the functions specified in para- the economic soundness of the project graph (f)(1) of this section. These and the living convenience of the par- records shall be available for public in- ticipants, retaining the essential char- spection and copying at the Office of acter of a residential project. the Director of VA Loan Guaranty Service, Washington, DC 20420. (c) No such project, development, or enterprise may be approved which in- (Authority: 38 U.S.C. 3720(a)(5)) volves an initial grouping of more than 500 veterans, or a cost of more than § 36.4846 Cooperative loans. five million dollars, unless it is conclu- (a) To be eligible for guaranty or in- sively shown to the satisfaction of the surance, any loan of the following approving officer that a greater num- types shall require prior approval of ber of veterans or dollar amount will the Under Secretary for Benefits, or assure substantial advantages to the the Director, Loan Guaranty Service, veteran-participants which could not who may issue such approval upon such be achieved in a smaller project. conditions and limitations deemed ap- (d) When approved as in this section propriate, not inconsistent with the provided, and upon performance of the

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conditions indicated in the prior ap- of, and the ability to apply industry- proval, proper guaranty certificate or accepted principles, methods, practices certificates may be issued in connec- and techniques of appraising, and the tion with the loan or loans to be guar- ability to competently determine the anteed on behalf of eligible veterans value of property within a prescribed participating in the project, develop- geographical area. The individual must ment or enterprise not to exceed in demonstrate the ability to review the total amount the sum of the guaranties work of others and to recognize devi- applied for by the individual partici- ations from accepted appraisal prin- pants and for which guaranty each par- ciples, practices, and techniques; errors ticipant is then eligible. in computations, and unjustifiable and (e) In lieu of guaranty as authorized unsupportable conclusions. in paragraph (d) of this section, insur- (3) Lenders that meet the require- ance shall be available on application ments of 38 U.S.C. 3702(d), and have a by the lender and all veterans con- staff appraisal reviewer determined ac- cerned. In such case the insurance ceptable by VA, will be authorized to credit shall be limited to 15 percent of review appraisals and make reasonable the obligation of the veteran applicant value determinations on properties (subject to available eligibility) and that will be security for VA guaranteed the total insurance credit in respect to loans. The lender’s authorization will the veterans’ loans involved in the be subject to a one-year probationary project shall not exceed 15 percent of period. Additionally, lenders must sat- the aggregate of the principal sums of isfy initial and subsequent VA office the individual indebtedness incurred by case review requirements prior to being the veterans participating in the allowed to determine reasonable value project for the purpose of acquiring without VA involvement. The initial their respective interests therein. office case review requirement must be (Authority: 38 U.S.C. 3703(c)(1)) satisfied in the VA regional office in whose jurisdiction the lender’s staff ap- § 36.4847 Lender Appraisal Processing praisal reviewer is located before the Program. LAPP authority may be utilized by (a) Delegation of authority to lenders to that lender in any other VA office’s ju- review appraisals and determine reason- risdiction. To satisfy the initial office able value. (1) To be eligible for delega- case review requirement, the first five tion of authority to review VA apprais- cases of each lender staff appraisal re- als and determine the reasonable value viewer involving properties in the re- of properties to be purchased with VA gional office location where the staff guaranteed loans, a lender must— appraisal reviewer is located will be (i) Have automatic processing au- processed by him or her up to the point thority under 38 U.S.C. 3702(d), and where he or she has made a reasonable (ii) Employ one or more staff ap- value determination and fully drafted, praisal reviewers acceptable to the but not issued, the lender’s notification Secretary. of reasonable value letter to the vet- (2) To qualify as a lender’s staff ap- eran. At that point, and prior to loan praisal reviewer an applicant must be a closing, each of the five cases will be full-time member of the lender’s per- submitted to the local VA office. After manent staff and may not be employed a staff review of each case, VA will by, or perform services for, any other issue a Certificate of Reasonable mortgagee. The individual must not Value, which the lender may use in engage in any private pursuits in which closing the loan automatically if it there will be, or appear to be, any con- meets all other requirements of the flict of interest between those pursuits VA. If these five cases are found to be and his/her duties, responsibilities, and acceptable by VA, the lender’s staff ap- performance as a Lender Appraisal praisal reviewer will be allowed to Processing Program (LAPP) staff ap- fully process subsequent appraisals for praisal reviewer. Three years of experi- properties located in that VA office’s ence is necessary to qualify as a lend- jurisdiction without prior submission er’s staff appraisal reviewer. That expe- to VA and issuance by VA of a Certifi- rience must demonstrate a knowledge cate of Reasonable Value. Lenders

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must also satisfy a subsequent VA of- considered detrimental to the subject prop- fice case review requirement in each erty, or VA’s interests, or to reach a pre- additional VA office location in which determined value for that property. Signature they desire to extend and utilize this of Staff Appraisal Reviewer. authority. Under this requirement, the (5) Other certifications required from lender must have first satisfied the ini- the lender will be specified with partial office case review requirement and ticularity in the separate instructions then must submit to the additional VA issued by the Secretary, as noted in office(s) the first case each staff ap- § 36.4847(b). praisal reviewer processes in the juris- (b) Instructions for LAPP Procedures. diction of that office. As provided The Secretary will publish separate in- under the initial office case review re- structions for processing appraisals quirement, VA office personnel will under the Lenders Appraisal Proc- issue a Certificate of Reasonable Value essing Program. Compliance with these for this case and subsequently deter- regulations and the separate instruc- mine the acceptability of the lender’s tions issued by the Secretary is deemed staff appraisal reviewer’s processing. If by VA to be the minimum exercise of VA finds this first case to be accept- due diligence in processing LAPP able, the lender’s staff appraisal re- cases. Due diligence is considered by viewer will be allowed to fully process VA to represent that care, as is to be subsequent cases in that additional VA properly expected from, and ordinarily office’s jurisdiction without prior sub- exercised by, reasonable and prudent mission to VA. The initial and subse- lenders who would be dependent on the quent office case review requirements property as security to protect its in- may be expanded by VA if acceptable vestment. performance has not been dem- (c) VA minimum property requirements. onstrated. After satisfaction of the ini- Lenders are responsible for deter- tial and subsequent office case review mining that the property meets VA requirements, routine reviews of LAPP minimum property requirements. The cases will be made by VA staff based separate instructions issued by the upon quality control procedures estab- Secretary will set forth the lender’s lished by the Under Secretary for Bene- ability to adjust, remove, or alter the fits. Such review will be made on a ran- fee appraiser’s or fee compliance in- dom sampling or performance related spector’s recommendations concerning basis. During the probationary period a VA minimum property requirements. high percentage of reviews will be Condominiums, planned-unit develop- made by VA staff. ments and leasehold estates must have (4) The following certification by the been determined acceptable by VA. A lender’s nominated staff appraisal re- condominium or planned-unit develop- viewer must be provided with the lend- ment which is acceptable to the De- er’s application for delegation of LAPP partment of Housing and Urban Devel- authority: opment or the Department of Agri- I hereby acknowledge and represent that culture may also be acceptable to VA. by signing the Uniform Residential Ap- (d) Adjustment of value recommenda- praisal Report (URAR), FHLMC (Federal tions. The amount of authority to Home Loan Mortgage Corporation) Form 70/ upwardly adjust the fee appraiser’s es- FNMA (Federal Notice Mortgage Associa- timated market value during the lend- tion) Form 1004, I am certifying, in all cases, that I have personally reviewed the appraisal er staff appraisal reviewer’s initial re- report. In doing so I have considered and uti- view of the appraisal report or to sub- lized recognized professional appraisal tech- sequently process an appeal of the niques, have found the appraisal report to lender’s established reasonable value have been prepared in compliance with appli- will be specified in the separate in- cable VA requirements, and concur with the structions issued by VA as noted in recommendations of the fee appraiser, who § 36.4847(b). The amount specified must was assigned by VA to the case. Further- not in any way be considered an admin- more, in those cases where clarifications or corrections have been requested from the VA istrative adjustment figure which may fee appraiser there has been no pressure or be applied indiscriminately and with- influence exerted on that appraiser to re- out valid basis or justification with the move or change information that might be sole purpose of reaching an amount

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necessary to complete the sale or mort- within it the data used in arriving at gage transaction. the decision to make the increase. All (1) Adjustment during initial review. such data shall be attached to the ap- Any adjustment during the staff appraisal report form and any addendum. praisal reviewer’s initial review of the (e) Notification. It will be the respon- appraisal report must be fully and sibility of the lender to notify the vet- clearly justified in writing on the ap- eran borrower in writing of the deter- praisal report form or, if necessary, on mination of reasonable value and re- an addendum. The basis for the adjust- lated conditions specific to the prop- ment must be adequate and reasonable erty and to provide the veteran with a by professional appraisal standards. If copy of the appraisal report. Any delay real estate market or other valid data in processing the notification of value was utilized in arriving at the decision must be documented. Any delay of to make the adjustment, such data more than five work days between the must be attached to the appraisal re- date of the lender’s receipt of the fee port. All adjustments, comments, cor- appraiser’s report and date of the noti- rections, justifications, etc., to the ap- fication of value to the veteran, with- praisal report must be made in a con- out reasonable and documented extenu- trasting color, be clearly legible, and ating circumstances, will not be ac- signed and dated by the staff appraisal ceptable. A copy of the lender notifica- reviewer. tion letter to the veteran and the ap- (2) Processing appeals. The authority praisal report must be forwarded to the provided under 38 U.S.C. 3731(d) which VA office of jurisdiction at the same permits a lender to obtain a VA fee time the veteran is notified. In addi- panel appraiser’s report which VA is tion, the original appraisal report, re- obligated to consider in an appeal of lated appraisal documentation, and a the established reasonable value shall copy of the reasonable value deter- not apply to cases processed under the mination notification to the veteran authority provided by this section. All must be submitted to the VA with the appeals of VA fee appraisers’ estimated request for loan guaranty. market values or lenders’ reasonable (f) Indemnification. When the Sec- value determinations above the retary has incurred a loss as a result of amount specified in the separate in- a payment of claim under guaranty and structions issued by VA must be sub- in which the Secretary determines an mitted, along with the lender’s rec- increase made by the lender under ommendations, if any, to VA for proc- § 36.4847(d) was unwarranted, or arbi- essing and final determination. Unless trary and capricious, the lender shall otherwise authorized in the separate indemnify the Secretary to the extent instructions lenders must also submit the Secretary determines such loss was appeals, regardless of the amount, to caused, or increased, by the increase in VA in all cases where the staff ap- value. praisal reviewer has made an adjust- (g) Affiliations. A lender affiliated ment during their initial review of the with a real estate firm builder, land de- appraisal report to the fee appraiser’s veloper or escrow agent as a subsidiary market value estimate. The fee ap- division, investment or any other enti- praiser’s estimated market value or ty in which it has a financial interest lender’s reasonable value determina- or which it owns may not use this au- tion may be increased only when such thority for any cases involving the af- increase is clearly warranted and fully filiate unless the lender demonstrates supported by real estate market or to the Secretary’s satisfaction that the other valid data considered adequate lender and its affiliate(s) are essen- and reasonable by professional ap- tially separate entities that operate praisal standards and the lender’s staff independently of each other, free of all appraisal reviewer clearly and fully cross-influences (e.g., a formal cor- justifies the reasoning and basis for the porate agreement exists which specifi- increase in writing on the appraisal re- cally sets forth this fact). port form or an addendum. The staff (h) Quality control plans. The lender appraisal reviewer must date and sign must have an effective self-policing or the written justification and must cite quality control system to ensure the

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adequacy and quality of their LAPP incompetence (i.e., conduct which dem- staff appraisal reviewer’s processing onstrates an insufficient knowledge of and, that its activities do not deviate industry accepted appraisal principles, from high standards of integrity. The techniques and practices; or the lack of quality control system must include technical competence to review ap- frequent, periodic audits that specifi- praisal reports and make value deter- cally address the appraisal review ac- minations in accordance with those re- tivity. These audits may be performed quirements); substantive or repetitive by an independent party, or by the errors (i.e., any error(s) of a nature lender’s independent internal audit di- that would materially or significantly vision which reports directly to the affect the determination of reasonable firm’s chief executive officer. The lend- value or condition of the property; or a er must agree to furnish findings and number or series of errors that, consid- information under this system to VA ered individually, may not signifi- on demand. While the quality control cantly impact the determination of personnel need not be appraisers, they reasonable value or property condition, should have basic familiarity with ap- but which when considered in the ag- praisal theory and techniques and the gregate would establish that appraisal ability to prescribe appropriate correc- reviews or LAPP case processing are tive action(s) in the appraisal review being performed in a careless or neg- process when discrepancies or problems ligent manner), or continued instances are identified. The basic elements of of disregard for VA requirements after the system will be described in sepa- they have been called to the lender’s rate instructions issued by the Sec- attention. retary. Copies of the lender’s quality (1) Withdrawal of authority by the control plan or self-policing system ev- Loan Guaranty Officer may be either idencing appraisal related matters for an indefinite or a specified period of must be provided to the VA office of ju- time. For any withdrawal longer than risdiction with the lender’s application 90 days, a reapplication for lender au- for LAPP authority. thority to process appraisals under (i) Fees. The Secretary may require these regulations will be required. mortgagees to pay an application fee Written notice will be provided at least and/or annual fees, including additional 30 days in advance of withdrawal unless fees for each branch office authorized the Government’s interests are exposed to process cases under the authority to immediate risk from the lender’s ac- delegated under this section, in such tivities in which case the withdrawal amounts and at such times as the Sec- will be effected immediately. The no- retary may require. tice will clearly and specifically set (j) Withdrawal of lender authority. The forth the basis and grounds for the ac- authority for a lender to determine tion. There is no right to a formal reasonable value may be withdrawn by hearing to contest the withdrawal of the Loan Guaranty Officer when proper LAPP processing privileges. However, cause exists. A lender’s authority to if within 15 days after receiving notice make reasonable value determinations the lender requests an opportunity to shall be withdrawn when the lender no contest the withdrawal, the lender may longer meets the basic requirements submit, in person, in writing, or for delegating the authority, or when it through a representative, information can be shown that the lender’s reason- and argument to the Loan Guaranty able value determinations have not Officer in opposition to the withdrawal. been made in accordance with VA regu- The Loan Guaranty Officer will make a lations, requirements, guidelines, in- recommendation to the Regional Office structions or applicable laws, or when Director who shall make the deter- there is adequate evidence to support mination as to whether the action reasonable belief by VA that a par- should be sustained, modified or re- ticular unacceptable act, practice, or scinded. The lender will be informed in performance by the lender or the lend- writing of the decision. er’s staff has occurred. Such acts, prac- (2) The lender has the right to appeal tices or performance include, but are the Regional Office Director’s decision not limited to: Demonstrated technical to the Under Secretary for Benefits. In

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the event of such an appeal, the Under (1) To be eligible for delegation of au- Secretary for Benefits will review all thority to review VA liquidation ap- relevant material concerning the mat- praisals and determine the reasonable ter and make a determination that value for liquidation purposes on prop- shall constitute final agency action. If erties secured by VA guaranteed or in- the lender’s submission of opposition sured loans, a lender must: raises a genuine dispute over facts ma- (i) Have automatic processing au- terial to the withdrawal of LAPP authority under 38 U.S.C. 3702(d), and thority, the lender will be afforded an (ii) Employ one or more Staff Ap- opportunity to appear with a rep- praisal Reviewers (SAR) acceptable to resentative, submit documentary evi- the Secretary. dence, present witnesses and confront (2) To qualify as a servicer’s staff ap- any witness the Veterans Benefits Ad- praisal reviewer an applicant must be a ministration presents. The Under Sec- full-time member of the servicer’s per- retary for Benefits will appoint a hear- manent staff and may not be employed ing officer or panel to conduct the by, or perform services for, any other hearing. When such additional pro- mortgagee. The individual must not ceedings are necessary, the Under Sec- engage in any private pursuits in which retary for Benefits shall base the deter- there will be, or appear to be, any con- mination on the facts as found, to- flict of interest between those pursuits gether with any information and argu- and his/her duties, responsibilities, and ment submitted by the lender. performance as a Servicer Appraisal (3) In actions based upon a conviction Processing Program (SAPP) staff ap- or civil judgment, or in which there is praisal reviewer. Three years of ap- no genuine dispute over material facts, praisal related experience is necessary the Under Secretary for Benefits shall to qualify as a servicer’s staff appraisal make a decision on the basis of all the reviewer. That experience must dem- information in the administrative onstrate knowledge of, and the ability record, including any submission made to apply industry-accepted principles, by the lender. methods, practices and techniques of (4) Withdrawal of the LAPP author- appraising, and the ability to com- ity will require that VA make subse- petently determine the value of prop- quent determinations of reasonable erty. The individual must demonstrate value for the lender. Consequently, VA the ability to review the work of others staff will review each appraisal report and to recognize deviations from ac- and issue a Certificate of Reasonable cepted appraisal principle, practices, Value which can then be used by the and techniques, error in computations, lender to close loans on either the prior and unjustifiable and unsupportable VA approval or automatic basis. conclusions. (5) Withdrawal by VA of the lender’s (3) Servicers that have a staff ap- LAPP authority does not prevent VA praisal reviewer determined acceptable from also withdrawing automatic proc- to VA, will be authorized to review liq- essing authority or taking debarment uidation appraisals and make reason- or suspension action based upon the able value determinations for liquida- same conduct by the lender. tion purposes on properties that are the security for VA guaranteed or in- (Authority: 38 U.S.C. 3731) sured loans. Additionally, servicers (The Office of Management and Budget has must satisfy initial VA office case re- approved the information collections review requirements prior to being al- quirements of this section under control lowed to determine reasonable value numbers 2900–0045 and 2900–0513.) without VA involvement. The initial office case review requirement must be § 36.4848 Servicer Appraisal Proc- satisfied in the VA regional loan center essing Program. in whose jurisdiction the servicer’s (a) Delegation of authority to servicers staff appraisal reviewer is located be- to review liquidation appraisals and de- fore the SAPP authority may be uti- termine reasonable value. Based on the lized by that servicer in any other VA reasonable value, the servicer will be office’s jurisdiction. To satisfy the ini- able to determine net value. tial office case review requirement, the

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first five cases of each servicer staff ap- servicer who would be dependent on the praisal reviewer involving properties in property as security to protect its in- the regional office location where the vestment. staff appraisal reviewer is located will (c) Adjustment of value recommenda- be processed by him or her up to the tions. The amount of authority to point where he or she has made a rea- upwardly adjust the fee appraiser’s es- sonable value determination and fully timated market value during the drafted, but not issued, the servicer’s servicer staff appraisal reviewer’s ini- notice of value. At that point, and tial review of the appraisal report or to prior to loan termination, each of the subsequently process an appeal of the five cases will be submitted to the VA servicer’s established reasonable value regional loan center having jurisdic- will be specified in the separate in- tion over the property. After a staff re- structions issued by VA as noted in view of each case, VA will issue a no- § 36.4848(b). The amount specified must tice of value which the servicer may not in any way be considered an admin- use to compute the net value of the istrative adjustment figure which may property for liquidation purposes. If be applied indiscriminately and with- these five cases are found to be accept- out valid basis or justification. able by VA, the servicer’s staff ap- (1) Adjustment during initial review. praisal reviewer will be allowed to Any adjustment during the staff ap- fully process subsequent appraisals for praisal reviewer’s initial review of the properties regardless of jurisdictional appraisal report must be fully and location without prior submission to clearly justified in writing on the ap- VA and issuance by VA of a notice of praisal report form or, if necessary, on value. Where the servicer’s reviewer an addendum. The basis for the adjust- cannot readily meet the jurisdictional ment must be adequate and reasonable review requirement, the SAR applicant by professional appraisal standards. If may request that VA expand the geo- real estate market or other valid data graphic area of consideration. VA will was utilized in arriving at the decision accommodate such requests if prac- to make the adjustment, such data ticable. The initial office case review must be attached to the appraisal re- requirement may be expanded by VA if port. All adjustments, comments, cor- acceptable performance has not been rections, justifications, etc., to the ap- demonstrated. After satisfaction of the praisal report must be made in a con- initial office case review requirement, trasting color, be clearly legible, and routine reviews of SAPP cases will be signed and dated by the staff appraisal made by VA staff based upon quality reviewer. control procedures established by the (2) Processing appeals. The authority Undersecretary for Benefits. Such re- provided under 38 U.S.C. 3731(d) which view will be made on a random sam- permits a lender to obtain a VA fee pling or performance related basis. panel appraiser’s report which VA is (4) Certifications required from the obligated to consider in an appeal of servicer will be specified with particu- the established reasonable value shall larity in the separate instructions not apply to cases processed under the issued by the Secretary, as noted in authority provided by this section. All § 36.4848(b). appeals of VA fee appraiser’s estimated (b) Instructions for SAPP Procedures. market values or servicer’s reasonable The Secretary will publish separate in- value determinations above the structions for processing appraisals amount specified in the separate in- under the Servicer Appraisal Proc- structions issued by VA must be sub- essing Program. Compliance with these mitted, along with the servicer’s rec- regulations and the separate instruc- ommendations, if any, to VA for proc- tions issued by the Secretary is deemed essing and final determination. Unless by VA to be the minimum exercise of otherwise authorized in the separate due diligence in processing SAPP instructions servicers must also submit cases. Due diligence is considered by appeals, regardless of the amount, to VA to represent that care, as is to be VA in all cases where the staff ap- properly expected from, and ordinarily praisal reviewer has made an adjust- exercised by, a reasonable and prudent ment during their initial review of the

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appraisal report to the fee appraiser’s servicer’s independent internal audit market value estimate. The fee ap- division which reports directly to the praiser’s estimated market value or firm’s chief executive officer. The servicer’s reasonable value determina- servicer must agree to furnish findings tion may be increased only when such and information under this system to increase is clearly warranted and fully VA on demand. While the quality con- supported by real estate market or trol personnel need not be appraisers, other valid data considered adequate they should have basic familiarity with and reasonable by professional ap- appraisal theory and techniques and praisal standards and the servicer’s the ability to prescribe appropriate staff appraisal reviewer clearly and corrective action(s) in the appraisal re- fully justifies the reasoning and basis view process when discrepancies or for the increase in writing on the ap- problems are identified. The basic ele- praisal report form or an addendum. ments of the system will be described The staff appraisal reviewer must date in separate instructions issued by the and sign the written justification and Secretary. Copies of the lender’s qual- must cite within it the data used in ar- ity control plan or self-policing system riving at the decision to make the in- evidencing appraisal related matters crease. All such data shall be attached must be provided to the VA office of ju- to the appraisal report form and any risdiction with the servicer’s applica- addendum. tion of SAPP authority. (d) Indemnification. When the Sec- (g) Fees. The Secretary will require retary has incurred a loss as a result of servicers to pay a $100.00 application a payment of claim under guaranty and fee for each SAR the servicer nomi- in which the Secretary determines an nates for approval. The application fee increase made by the servicer under will also apply if the SAR begins work § 36.4848(c) was unwarranted, or arbi- for another servicer. trary and capricious, the lender shall (h) Withdrawal of servicer authority. indemnify the Secretary to the extent The authority for a servicer to deter- the Secretary determines such loss was mine reasonable value may be with- caused or increased, by the increase in drawn by the Loan Guaranty Officer value. when proper cause exists. A servicer’s (e) Affiliations. A servicer affiliated authority to make reasonable value de- with a real estate firm, builder, land terminations shall be withdrawn when developer or escrow agent as a sub- the servicer no longer meets the basic sidiary division, or in any other entity requirements for delegating the au- in which it has a financial interest or thority, or when it can be shown that which it owns may not use the author- the servicer’s reasonable value deter- ity for any cases involving the affiliate minations have not been made in ac- unless the servicer demonstrates to the cordance with VA regulations, require- Secretary’s satisfaction that the ments, guidelines, instructions or ap- servicer and its affiliate(s) are essen- plicable laws, or when there is ade- tially separate entities that operate quate evidence to support reasonable independently of each other, free of all belief by VA that a particular unac- cross-influences (e.g., a formal cor- ceptable act, practice, or performance porate agreement exists which specifi- by the servicer or the servicer’s staff cally sets forth this fact). has occurred. Such acts, practices, or (f) Quality control plans. The servicer performance include, but are not lim- must have an effective self-policing or ited to: Demonstrated technical incom- quality control system to ensure the petence (i.e., conduct which dem- adequacy and quality of their SAPP onstrates an insufficient knowledge of staff appraisal reviewer’s processing industry accepted appraisal principles, and, that its activities do not deviate techniques and practices; or the lack of from high standards of integrity. The technical competence to review ap- quality control system must include praisal reports and make value deter- frequent, periodic audits that specifi- minations in accordance with those re- cally address the appraisal review ac- quirements); substantive or repetitive tivity. These audits may be performed errors (i.e., any error(s) of a nature by an independent party, or by the that would materially or significantly

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affect the determination of reasonable pear with a representative, submit doc- value or condition of the property; or a umentary evidence, present witnesses number or series of errors that, consid- and confront any witness the Veterans ered individually, may not signifi- Benefits Administration presents. The cantly impact the determination of Undersecretary for Benefits will ap- reasonable value or property condition, point a hearing officer or panel to con- but which when considered in the ag- duct the hearing. When such additional gregate would establish that appraisal proceedings are necessary, the Under- reviews or SAPP case processing are secretary for Benefits shall base the de- being performed in a careless or neg- termination on the facts as found, to- ligent manner), or continued instances gether with any information and argu- of disregard for VA requirements after ment submitted by the servicer. they have been called to the servicer’s (3) In actions based upon a conviction attention. or civil judgment, or in which there is (1) Withdrawal of authority by the no genuine dispute over material facts, Loan Guaranty Officer may be either the Undersecretary for Benefits shall for an indefinite or a specified period of make a decision on the basis of all the time. For any withdrawal longer than information in the administrative 90 days a reapplication for servicer au- record, including any submission made thority to process appraisals under by the servicer. these regulations will be required. (4) Withdrawal of the SAPP author- Written notice will be provided at least ity will require that VA make subse- 30 days in advance of withdrawal unless quent determinations of reasonable the Government’s interests are exposed value for the servicer. Consequently, to immediate risk from the servicer’s VA staff will review each appraisal re- activities in which case the withdrawal port and issue a Notice of Value which will be effected immediately. The no- can then be used by the servicer to tice will clearly and specifically set compute the net value of properties for forth the basis and grounds for the ac- liquidation purposes. tion. There is no right to a formal (5) Withdrawal by VA of the hearing to contest the withdrawal of servicer’s SAPP authority does not SAPP processing privileges. However, prevent VA from also withdrawing if within 15 days after receiving notice automatic processing authority or tak- the servicer requests an opportunity to ing debarment or suspension action contest the withdrawal, the servicer based upon the same conduct of the may submit, in person, in writing, or servicer. through a representative, information (Authority 38 U.S.C. 3703(c)(1), 3731 and 3732) and argument to the Loan Guaranty Officer in opposition to the withdrawal. (The Office of Management and Budget has The Loan Guaranty Officer will make a approved the information collection require- recommendation to the Regional Loan ments in this section under control numbers 2900–0045 and 2900–0513.) Center Director who shall make the determination as to whether the action § 36.4849 Waivers, consents, and ap- should be sustained, modified or re- provals; when effective. scinded. The servicer will be informed No waiver, consent, or approval rein writing of the decision. quired or authorized by the regulations (2) The servicer has the right to ap- concerning guaranty or insurance of peal the Regional Loan Center Direc- loans to veterans shall be valid unless tor’s decision to the Undersecretary for in writing signed by the Secretary or Benefits. In the event of such an ap- the subordinate officer to whom au- peal, the Undersecretary for Benefits thority has been delegated by the Sec- will review all relevant material con- retary. cerning the matter and make a determination that shall constitute final (Authority 38 U.S.C. 3703(c)(1)) agency action. If the servicer’s submission of opposition raises a genuine dis- § 36.4850 Servicing procedures for pute over facts material to the with- holders. drawal of SAPP authority, the servicer (a) Establishment of loan servicing pro- will be afforded an opportunity to ap- gram. The holder of a loan guaranteed

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or insured by the Secretary shall de- by the pertinent provisions of the Real velop and maintain a loan servicing Estate Settlement Procedures Act as program which follows accepted indus- administered by the Department of try standards for servicing of similar Housing and Urban Development. type conventional loans. The loan serv- (e) Escrow accounts. A holder of a loan icing program established pursuant to guaranteed or insured by the Secretary this section may employ different serv- may collect periodic deposits from the icing approaches to fit individual bor- borrower for taxes and/or insurance on rower circumstances and avoid estab- the security and maintain a tax and in- lishing a fixed routine. However, it surance escrow account provided such must incorporate each of the provi- a requirement is authorized under the sions specified in paragraphs (b) terms of the security instruments. In through (l) of this section. maintaining such accounts, the holder (b) Procedures for providing informa- shall comply with the pertinent provi- tion. (1) Loan holders shall establish sions of the Real Estate Settlement procedures to provide loan information Procedures Act. to borrowers, arrange for individual (f) System for servicing delinquent loan consultations upon request and loans. In addition to the requirements maintain controls to assure prompt re- of the Real Estate Settlement Proce- sponses to inquiries. One or more of the dures Act, concerning the duties of the following means of making informa- loan servicer to respond to borrower in- tion readily available to borrowers is quiries, to protect the borrower’s cred- required. it rating during a payment dispute pe- (i) An office staffed with trained riod, and to pay damages and costs for servicing personnel with access to loan noncompliance, holders shall establish account information located within 200 a system for servicing delinquent loans miles of the property. which ensures that prompt action is (ii) Toll-free telephone service or ac- taken to collect amounts due from bor- ceptance of collect telephone calls at rowers and minimize the number of an office capable of providing needed loans in a default status. The holder’s information. servicing system must include the fol- (2) All borrowers must be informed of lowing: the system available for obtaining an- (1) An accounting system which swers to loan inquiries, the office from promptly alerts servicing personnel which the needed information may be when a loan becomes delinquent; obtained, and reminded of the system (2) A collection staff which is trained at least annually. in techniques of loan servicing and (c) Statement for income tax purposes. counseling delinquent borrowers to ad- Before February 1st of each calendar vise borrowers how to cure delin- year, the holder shall furnish to the quencies, protect their equity and cred- borrower a statement of the interest it rating and, if the default is insol- paid and, if applicable, a statement of uble, pursue alternatives to fore- the taxes disbursed from the escrow ac- closure; count during the preceding year. At (3) Procedural guidelines for indi- the borrower’s request, the holder shall vidual analysis of each delinquency; furnish a statement of the escrow ac- (4) Instructions and appropriate con- count sufficient to enable the borrower trols for sending delinquent notices, as- to reconcile the account. sessing late charges, handling partial (d) Change of servicing. Whenever payments, maintaining servicing his- servicing of a loan guaranteed or in- tories and evaluating repayment pro- sured by the Secretary is transferred posals; from one holder to another, notice of (5) Management review procedures such transfer by both the transferor for evaluating efforts made to collect and transferee, the form and content of the delinquency and the response from such notice, the timing of such notice, the borrower before a decision is made the treatment of payments during the to initiate action to liquidate a loan; period of such transfer, and damages (6) Procedures for reporting delin- and costs for failure to comply with quencies of 90 days or more and loan these requirements shall be governed terminations to major consumer credit

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bureaus as specified by the Secretary § 36.4815, within 45 calendar days after and for informing borrowers that such such payment was due; or action will be taken; and (2) In the case of any other default, (7) Controls to ensure that all notices within 75 calendar days after such pay- required to be given to the Secretary ment was due. on delinquent loans are provided time- (B) The letter required by paragraph ly and in such form as the Secretary (g)(1)(iv)(A) must be mailed no later shall require. than 7 calendar days after the payment (g) Collection actions. (1) Holders shall is delinquent for the time period stated employ collection techniques which in paragraph (g)(1)(iv)(A) and shall: provide flexibility to adapt to the indi- (1) Provide the borrower with a toll- vidual needs and circumstances of each free telephone number and, if available, an e-mail address for contacting borrower. A variety of collection tech- the servicer; niques may be used based on the hold- (2) Explain loss mitigation options er’s determination of the most effec- available to the borrower; tive means of contact with borrowers (3) Emphasize that the intent of serv- during various stages of delinquency. icing is to retain home ownership However, at a minimum the holder’s whenever possible; and collection procedures must include the (4) Contain the following language: following actions: (i) An effort, concurrent with the ini- The delinquency of your mortgage loan is tial late payment notice to establish a serious matter that could result in the loss of your home. If you are the veteran whose contact with the borrower(s) by tele- entitlement was used to obtain this loan, phone. When talking with the bor- you can also lose your entitlement to a fu- rower(s), the holder should attempt to ture VA home loan guaranty. If you are not determine why payment was not made already working with us to resolve the delin- and emphasize the importance of re- quency, please call us to discuss your work- mitting loan installments as they come out options. You may be able to make spe- due. cial payment arrangements that will reinstate your loan. You may also qualify for a (ii) A letter to the borrower(s) if pay- repayment plan or loan modification. ment has not been received within 30 VA has guaranteed a portion of your loan days after it is due and telephone con- and wants to ensure that you receive every tact could not be made. This letter reasonable opportunity to bring your loan should emphasize the seriousness of the current and retain your home. VA can also delinquency and the importance of tak- answer any questions you have regarding your entitlement. If you have access to the ing prompt action to resolve the de- Internet and would like to obtain more infor- fault. It should also notify the bor- mation, you may access the VA web site at rower(s) that the loan is in default, www.va.gov. You may also learn where to state the total amount due and advise speak to a VA Loan Administration rep- the borrower(s) how to contact the resentative by calling 1–800–827–1000. holder to make arrangements for cur- (2) The holder must provide a valid ing the default. explanation of any failure to perform (iii) In the event the holder has not these collection actions when reporting established contact with the bor- loan defaults to the Secretary. A pat- rower(s) and has not determined the fi- tern of such failure may be a basis for nancial circumstances of the bor- sanctions under 2 CFR parts 180 and rower(s) or established a reason for the 801. default or obtained agreement to a re- (h) Conducting interviews with delin- payment plan from the borrower(s), quent borrowers. When personal contact then a face-to-face interview with the with the borrower(s) is established, the borrower(s) or a reasonable effort to ar- holder shall solicit sufficient informa- range such a meeting is required. tion to properly evaluate the prospects (iv)(A) A letter to the borrower if for curing the default and whether the payment has not been received: granting of forbearance or other relief (1) In the case of a default occurring assistance would be appropriate. At a within the first 6 months following minimum, the holder must make a rea- loan closing or the execution of a modi- sonable effort to establish the fol- fication agreement pursuant to lowing:

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(1) The reason for the default and (3) The indicated reason(s) for de- whether the reason is a temporary or fault; and permanent condition; (4) The date and result of each prop- (2) The present income and employ- erty inspection. ment of the borrower(s); (k) Quality control procedures. No (3) The current monthly expenses of later than 180 days after the effective the borrower(s) including household date of this regulation, each loan hold- and debt obligations; er shall establish internal controls to (4) The current mailing address and periodically assess the quality of the telephone number of the borrower(s); servicing performed on loans guaran- and teed by the Secretary and assure that (5) A realistic and mutually satisfac- all requirements of this section are tory arrangement for curing the de- being met. Those procedures must pro- fault. vide for a review of the holder’s serv- (i) Property inspections. (1) The holder icing activities at least annually and shall make an inspection of the prop- include an evaluation of delinquency erty securing the loan whenever it be- and foreclosure rates on loans in its comes aware that the physical condi- portfolio which are guaranteed by the tion of the security may be in jeop- Secretary. As part of its evaluation of ardy. Unless a repayment agreement is delinquency and foreclosure rates, the in effect, a property inspection shall holder shall: also be made at the following times: (1) Collect and maintain appropriate (i) Before the 60th day of delinquency data on delinquency and foreclosure or before initiating action to liquidate rates to enable the holder to evaluate a loan, whichever is earlier; and effectiveness of its collection efforts; (ii) At least once each month after (2) Determine how its VA delin- liquidation proceedings have been quency and foreclosure rates compare started unless servicing information with rates in reports published by the shows the property remains owner-oc- industry, investors and others; and, cupied. (2) Whenever a holder obtains infor- (3) Analyze significant variances be- mation which indicates that the prop- tween its foreclosure and delinquency erty securing the loan is abandoned, it rates and those found in available re- shall make appropriate arrangements ports and publications and take appro- to protect the property from vandalism priate corrective action. and the elements. Thereafter, the hold- (l) Provision of Data. Holders shall er shall schedule inspections at least provide available statistical data on monthly to prevent unnecessary dete- delinquency and foreclosure rates and rioration due to vandalism, or neglect. their analysis of such data to the Sec- With respect to any loan more than 60 retary upon request. calendar days delinquent, if the prop- (Authority 38 U.S.C. 3703(c)(1)) erty is abandoned, this fact must be reported to the Secretary as required in (The Office of Management and Budget has approved the information collection require- § 36.4817(c)(10) and immediate action ments in this section under Control Number should be initiated by the servicer to 2900–0530.) terminate the loan once the abandon- ment has been confirmed. § 36.4851 Minimum property and con- (j) Collection records. The holder shall struction requirements. maintain individual file records of col- No loan for the purchase or construc- lection action on delinquent loans and tion of residential property shall be eli- make such records available to the gible for guaranty or insurance unless Secretary for inspection on request. such property complies or conforms Such collection records shall show: with those standards of planning, con- (1) The dates and content of letters struction, and general acceptability and notices which were mailed to the that may be applicable thereto and pre- borrower(s); scribed by the Secretary pursuant to 38 (2) Dated summaries of each personal U.S.C. 3704(a). servicing contact and the result of same; (Authority 38 U.S.C. 3703(c)(1))

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§ 36.4852 Authority to close loans on lender), the firm must submit docu- the automatic basis. mentation confirming that it has a VA (a) Supervised lender authority. Super- Lender ID number and has originated a vised lenders of the classes described in minimum of ten VA loans, excluding 38 U.S.C. 3702(d)(1) and (2) are author- IRRRLs, over the past two years. If ac- ized by statute to process VA guaran- tive for less than two years, the agent teed home loans on the automatic must have originated at least 25 VA basis. This category of lenders includes loans. The required documentation is a any Federal land bank, national bank, copy of the VA letter approving the ap- State bank, private bank, building and plicant lender as an agent for the spon- loan association, insurance company, soring lender; a copy of the corporate credit union or mortgage and loan resolution, describing the functions the company that is subject to examina- agent was to perform, submitted to VA tion and supervision by an agency of by the sponsoring lender; and a letter the United States or of any State or by from a senior officer of the sponsoring any State. lender indicating the number of VA (b) Non-supervised lender authority. loans submitted by the agent each year Non-supervised lenders of the class de- and that the loans have been properly scribed in 38 U.S.C. 3702(d)(3) must documented and submitted in compli- apply to the Secretary for authority to ance with VA requirements and proce- process loans on the automatic basis. dures. Each of the minimum requirements (2) Underwriter. A senior officer of the listed below must be met by applicant applicant lender must nominate a full- lenders. time qualified employee(s) to act in the (1) Experience. The applicant lender applicant lender’s behalf as under- must meet one of the following experi- writer(s) to personally review and ence requirements: make underwriting decisions on VA (i) The applicant lender must have loans to be closed on the automatic been actively engaged in originating basis. VA loans for at least two years, have a (i) Nominees for underwriter must VA Lender ID number and have origi- have a minimum of three years experi- nated and closed a minimum of ten VA ence in processing, pre-underwriting or loans within the past two years, ex- underwriting mortgage loans. At least cluding interest rate reduction refi- one recent year of this experience must nance loans (IRRRLs), that have been have included making underwriting de- properly documented and submitted in cisions on VA loans. (Recent is defined compliance with VA requirements and as within the past three years.) A VA procedures; or nomination and current resume, out- (ii) The applicant lender must have a lining the underwriter’s specific experi- VA ID number and, if active for less ence with VA loans, must be submitted than two years, have originated and for each underwriter nominee. closed at least 25 VA loans, excluding (ii) Alternatively, if an underwriter IRRRLs, that have been properly docu- does not have the experience outlined mented and submitted in compliance above, the underwriter must submit with VA requirements and procedures; documentation verifying that he or she or is a current Accredited Residential Un- (iii) Each principal officer of the ap- derwriter (ARU) as designated by the plicant lender, who is actively involved Mortgage Bankers Association (MBA). in managing origination functions, (iii) If an underwriter is not located must have a minimum of two recent in the lender’s corporate office, then a years’ management experience in the senior officer must certify that the un- origination of VA loans. This experi- derwriter reports to and is supervised ence may be with the current or prior by an individual who is not a branch employer. For the purposes of this re- manager or other person with produc- quirement, principal officer is defined tion responsibilities. as president or vice president; or (iv) All VA-approved underwriters (iv) If the applicant lender has been must attend a 1-day (eight-hour) train- operating as an agent for a non-super- ing course on underwriter responsibil- vised automatic lender (sponsoring ities, VA underwriting requirements,

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and VA administrative requirements, that must be paid within the same 1- including the usage of VA forms, with- year time frame. in 90 days of approval (if VA is unable (B) The VA determination of whether to make such training available within a lender has the required minimum 90 days, the underwriter must attend working capital is based on the balance the first available training). Imme- sheet of the lender’s annual audited fi- diately upon approval of a VA under- nancial statement. Therefore, either writer, the office of jurisdiction will the balance sheet must be classified to contact the underwriter to schedule distinguish between current and fixed this training at a VA regional office assets and between current and long- (VARO) of the underwriter’s choice. term liabilities or the information This training is required for all newly must be provided in a footnote to the approved VA underwriters, including statement. those who qualified for approval based (ii) Net worth. Lenders must show evi- on an ARU designation, as well as VA- dence of a minimum of $ 250,000 in ad- approved underwriters who have not justed net worth. Net worth is a meas- underwritten VA-guaranteed loans in ure of an applicant lender’s solvency, the past 24 months. Furthermore, and or its ability to exist in the long run, at the discretion of any VARO in whose quantified by the payment of long-term jurisdiction the lender is originating debts. Net worth as defined by gen- VA loans, VA-approved underwriters erally accepted accounting principles who consistently approve loans that do (GAAP) is total assets minus total li- not meet VA credit standards may be abilities. Adjusted net worth for VA required to retake this training. purposes is the same as the adjusted (3) Underwriter certification. The lend- net worth required by the Department er must certify that all underwriting of Housing and Urban Development decisions as to whether to accept or re- (HUD), net worth less certain unac- ject a VA loan will be made by a VA- ceptable assets including: approved underwriter. In addition each (A) Any assets of the lender pledged VA-approved underwriter will be re- to secure obligations of another person quired to certify on each VA loan that or entity. he or she approves that the loan has (B) Any asset due from either officers been personally reviewed and approved or stockholders of the lender or related by the underwriter. entities, in which the lender’s officers (4) Financial requirements. Each appli- or stockholders have a personal inter- cation must include the most recent est, unrelated to their position as an annual financial statement audited and officer or stockholder. certified by a certified public account- (C) Any investment in related enti- ant (CPA). If the date of the annual fi- ties in which the lender’s officers or nancial statement precedes that of the stockholders have a personal interest application by more than six months, unrelated to their position as an officer the lender must also attach a copy of or stockholder. its latest internal financial statement. (D) That portion of an investment in Lenders are required to meet either the joint ventures, subsidiaries, affiliates working capital or the minimum net and/or other related entities which is worth financial requirement as defined carried at a value greater than equity, below. as adjusted. ‘‘Equity as adjusted’’ (i) Working capital. A minimum of means the book value of the related en- $50,000 in working capital must be dem- tity reduced by the amount of unac- onstrated. ceptable assets carried by the related (A) Working capital is a measure of entity. an applicant lender’s liquidity, or the (E) All intangibles, such as goodwill, ability to pay its short-term debts. covenants not to compete, franchisee Working capital is defined as the ex- fees, organization costs, etc., except cess of current assets over current li- unamortized servicing costs carried at abilities. Current assets are defined as a value established by an arm’s-length cash or other liquid assets convertible transaction and presented in accord- into cash within a 1-year period. Cur- ance with generally accepted account- rent liabilities are defined as debts ing principles.

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(F) That portion of an asset not read- (8) Other considerations. All applica- ily marketable and for which appraised tions will also be reviewed in light of values are very subjective, carried at a the following considerations: value in excess of a substantially dis- (i) There must be no factors that in- counted appraised value. Assets such as dicate that the firm would not exercise antiques, art work and gemstones are the care and diligence required of a subject to this provision and should be lender originating and closing VA carried at the lower of cost or market. loans on the automatic basis; and (G) Any asset that is principally used (ii) In the event the applicant lender, for the personal enjoyment of an offi- any member of the board of directors, cer or stockholder and not for normal or any principal officer has ever been business purposes. Adjusted net worth debarred or suspended by any Federal agency or department, or any of its di- must be calculated by a CPA using an rectors or officers has been a director audited and certified balance sheet or officer of any other lender or cor- from the lender’s latest financial state- poration that was so debarred or sus- ments. ‘‘Personal interest’’ as used in pended, or if the lender applicant ever this section indicates a relationship be- had a servicing contract with an inves- tween the lender and a person or entity tor terminated for cause, a statement in which that specified person (e.g., of the facts must be submitted with the spouse, parent, grandparent, child, application for automatic authority. brother, sister, aunt, uncle or in-law) (9) Quality control system. In order to has a financial interest in or is em- be approved as a non-supervised lender ployed in a management position by for automatic-processing authority, the lender. the lender must implement a written (5) Lines of credit. The lender appli- quality control system which ensures cant must have one or more lines of compliance with VA requirements. The credit aggregating at least $ 1 million. lender must agree to furnish findings The identity of the source(s) of ware- under its systems to VA on demand. house lines of credit must be submitted The elements of the quality control to VA and the applicant must agree system must include the following: that VA may contact the named (i) Underwriting policies. Each office of source(s) for the purpose of verifying the lender shall maintain copies of VA the information. A line of credit must credit standards and all available VA be unrestricted, that is, funds are underwriting guidelines. available upon demand to close loans (ii) Corrective measures. The system and are not dependent on prior investor should ensure that effective corrective approval. A letter from the com- measures are taken promptly when de- pany(ies) verifying the unrestricted ficiencies in loan originations are iden- line(s) of credit must be submitted tified by either the lender or VA. Any with the application for automatic au- cases involving major discrepancies thority. which are discovered under the system must be reported to VA. (6) Permanent investors. If the lender (iii) System integrity. The quality con- customarily sells loans it originates, it trol system should be independent of must have a minimum of two perma- the mortgage loan production function. nent investors. The names, addresses (iv) Scope. The review of underwriting and telephone numbers of the perma- decisions and certifications must in- nent investors must be submitted with clude compliance with VA under- the application. writing requirements, sufficiency of (7) Liaison. The lender applicant must documentation and soundness of under- designate an employee and an alter- writing judgments. nate to be the primary liaison with VA. (v) Appraisal quality. For lenders ap- The liaison officers should be thor- proved for the Lender Appraisal Proc- oughly familiar with the lender’s en- essing Program (LAPP), the quality tire operation and be able to respond to control system must specifically con- any query from VA concerning a par- tain provisions concerning the ade- ticular VA loan or the firm’s auto- quacy and quality of real property ap- matic authority. praisals. While the lender’s quality

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control personnel need not be apprais- porate resolution must indicate that it ers, they should have basic familiarity will not seek to influence the lender to with appraisal theory and techniques give their loans more favorable under- so that they can select appropriate writing consideration. cases for review if discretionary sam- (B) Letters from permanent investors pling is used, and prescribe appropriate indicating the percentage of all VA corrective action(s) in the appraisal re- loans based on the affiliate’s produc- view process when discrepancies or tion originated by the lender over a 1- problems are identified. Copies of the year period that are past due 90 days or lender’s quality control plan or self-po- more. This delinquency ratio must be licing system evidencing appraisal re- no higher than the national average for lated matters must be provided to the the same period for all mortgage loans. VA office of jurisdiction. (ii) When a lender wants its auto- (10) Courtesy closing. The lender appli- matic authority extended to additional cant must certify to VA that it will not States, the lender must indicate how it close loans on an automatic basis as a plans to originate VA loans in those courtesy or accommodation for other States. Unless a lender proposes a tele- mortgage lenders, whether or not such marketing plan, VA requires that a lenders are themselves approved to lender have a presence in the State, close on an automatic basis without that is, a branch office, an agent rela- the express approval of VA. However, a tionship, or that it is a reasonable dis- lender with automatic authority may tance from one of its offices in an adja- close loans for which information and cent State, i.e., 50 miles. If the request supporting credit data have been devel- is based on an agency relationship, the oped on its behalf by a duly authorized documentation outlined in paragraph agent. (b)(13) must be submitted with the re- (11) Probation. Lenders meeting these quest for extension. requirements will be approved to close (13) Use of agents. A lender using an VA loans on an automatic basis for a 1- agent to perform a portion of the work year period. At the end of this period, involved in originating and closing a the lender’s quality of underwriting, VA-guaranteed loan on an automatic the completeness of loan submissions, basis must take full responsibility by compliance with VA requirements and certification for all acts, errors and procedures, and the delinquency and omissions of the agent or other entity foreclosure rates will be reviewed. and its employees for the work per- (12) Extensions of automatic authority. formed. Any such acts, errors or omis- When a lender wants its automatic au- sions will be treated as those of the thority extended to another State, the lender and appropriate sanctions may request must be submitted, with the be imposed against the lender and its fee designated in paragraph (e)(5) of agent. Lenders requesting an agent this section, to the VA regional office must submit the following documenta- having jurisdiction in the State where tion to the VA regional office having the lender’s corporate office is located. jurisdiction for the lender’s corporate (i) When a lender wants its automatic office: authority to include loans involving a (i) A corporate resolution certifying real estate brokerage and/or a residen- that the lender takes full responsi- tial builder or developer in which it has bility for all acts, errors and omissions a financial interest, owns, is owned by, of the agent that it is requesting. The or with which it is affiliated, the fol- corporate resolution must also identify lowing documentation must be sub- the agent’s name and address, and the mitted: geographic area in which the agent will (A) A corporate resolution from the be originating and/or closing VA loans; lender and each affiliate indicating whether the agent is authorized to that they are separate entities oper- issue interest rate lock-in agreements ating independently of each other. The on behalf of the lender; and outline the lender’s corporate resolution must in- functions the agent is to perform. Al- dicate that it will not give more favor- ternatively, the lender may submit a able underwriting consideration to its blanket corporate resolution which affiliate’s loans, and the affiliate’s cor- sets forth the functions of any and all

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agents and identifies individual agents (e) Lender fees. To participate as a VA by name, address, and geographic area automatic lender, non-supervised lend- in separate letters which refer to the ers of the class described in 38 U.S.C. blanket resolution. 3702(d)(3) shall pay fees as follows: (ii) When the VA regional office hav- (1) $500 for new applications; ing jurisdiction for the lender’s cor- (2) $200 for reinstatement of lapsed or porate office acknowledges receipt of terminated automatic authority; the lender’s request in writing, the (3) $100 for each underwriter ap- agent is thereby authorized to origi- proval; nate VA loans on the lender’s behalf. (4) $100 for each agent approval; (5) A minimum fee of $100 for any (Authority: 38 U.S.C. 501(a), 3702(d)) other VA administrative action pertaining to a lender’s status as an auto- (c) Reporting responsibility. A lender matic lender; approved to close loans on the auto- (6) $200 annually for certification of matic basis who subsequently fails to home offices; and meet the requirements of this section (7) $100 annually for each agent re- must report to VA the circumstances newal. surrounding the deficiency and the re- (f) Supervised lender fees. Supervised medial action to be taken to cure it. lenders of the classes described in para- Failure to advise VA in a timely man- graphs (d)(1) and (d)(2) of 38 U.S. Code ner could result in a lender’s loss of its 3702 participating in VA’s Loan Guar- approval to close VA loans on the auto- anty Program shall pay fees as follows: matic basis. (1) $100 fee for each agent approval; and (Authority: 38 U.S.C. 501(a), 3702(d)) (2) $100 annually for each agent renewal. (d) Annual recertification. Non-supervised lenders of the class described in (Authority: 38 U.S.C. 501(a) and 3703(c)(1)) 38 U.S.C. 3702(d)(3) must be recertified annually for authority to process loans (g) LAPP fees. Lenders participating on the automatic basis. The following in VA’s Lender Appraisal Processing minimum annual recertification re- Program shall pay a fee of $100 for ap- quirements must be met by each lender proval of each staff appraisal reviewer. approved for automatic authority: (Authority 38 U.S.C. 3703(c)(1)) (1) Financial requirements. A lender must submit, within 120 days following § 36.4853 Withdrawal of authority to the end of its fiscal year, an audited close loans on the automatic basis. and certified financial statement with (a)(1) As provided in 38 U.S.C. 3702(e), a classified balance sheet or a separate the authority of any lender to close footnote for adjusted net worth to VA loans on the automatic basis may be Central Office (264) for review. The withdrawn by the Secretary at any same minimum financial requirements time upon 30 days notice. The auto- described in § 36.4852(b)(5) must be matic processing authority of both su- maintained and verified annually in pervised and non-supervised lenders order to be recertified for automatic may be withdrawn for engaging in authority. practices which are imprudent from a (2) Processing annual lender data. The lending standpoint or which are preju- VA regional office having jurisdiction dicial to the interests of veterans or for the lender’s corporate office will the Government but are of a lesser de- mail an annual notice to the lender re- gree than would warrant complete sus- questing current information on the pension or debarment of the lender lender’s personnel and operation. The from participation in the program. lender is required to complete the form (2) Automatic-processing authority and return it with the appropriate an- may be withdrawn at any time for fail- nual renewal fees to the VA regional ure to meet basic qualifying and/or an- office. nual recertification criteria. (i) Non-supervised lenders. (A) Auto- (Authority: 38 U.S.C. 501(a), 3702(d)) matic authority may be withdrawn for

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lack of a VA-approved underwriter, (ii) The lender fails to disclose to VA failure to maintain $50,000 in working significant obligations or other infor- capital or $250,000 in adjusted net mation so material to the veteran’s worth, or failure to file required finan- ability to repay the loan that undue cial information. risk to the Government results; (B) During the 1-year probationary (iii) Employment or deposit period for newly approved lenders, verifications are allowed to be automatic authority may be tempo- handcarried by applicant or otherwise rarily or permanently withdrawn for mishandled, resulting in the submis- any of the reasons set forth in this sec- sion of significant misinformation to tion regardless of whether deficiencies VA; previously have been brought to the at- (iv) Substantiated complaints are retention of the probationary lender. ceived that the lender misrepresented (ii) Supervised lenders. Automatic au- VA requirements to veterans to the thority will be withdrawn for loss of detriment of their interests (e.g., vet- status as an entity subject to examina- eran was dissuaded from seeking a tion and supervision by a Federal or lower interest rate based on lender’s State supervisory agency as required incorrect advice that such options were by 38 U.S.C. 3702(d). precluded by VA requirements); (v) Closing documentation shows in- (Authority: 38 U.S.C. 3702(d)) stances of improper charges to the vet- (3) Automatic processing authority eran after the impropriety of such may also be withdrawn for any of the charges has been called to the lender’s causes for debarment set forth in 2 attention by VA, or refusal to refund CFR parts 180 and 801. such charges after notification by VA; (b) Authority to close loans on the or automatic basis may also be tempo- (vi) There are other instances of lend- rarily withdrawn for a period of time er actions which are prejudicial to the under the following schedule. interests of veterans such as deliberate (1) Withdrawal for 60 days may occur delays in scheduling loan closings. when: (3) Withdrawal for a period of from (i) Automatic loan submissions show one year to three years may occur deficiencies in credit underwriting, when: such as use of unstable sources of in- (i) The lender fails to properly dis- come to qualify the borrower, ignoring burse loans (e.g., loan disbursement significant adverse credit items affect- checks returned due to insufficient ing the applicant’s creditworthiness, funds); etc., after such deficiencies have been (ii) There is involvement by the lend- repeatedly called to the lender’s atten- er in the improper use of a veteran’s tion; entitlement (e.g., knowingly permit- (ii) Employment or deposit ting the veteran to violate occupancy verifications are handcarried by appli- requirements, lender involvement in cants or otherwise improperly per- sale of veteran’s entitlement, etc.). mitted to pass through the hands of a (4) A continuation of actions that third party; have led to previous withdrawal of (iii) Automatic loan submissions are automatic authority justifies with- consistently incomplete after such de- drawal of automatic authority for the ficiencies have been repeatedly called next longer period of time. to the lender’s attention by VA; or (5) Withdrawal of automatic proc- (iv) There are continued instances of essing authority does not prevent a disregard of VA requirements after lender from processing VA guaranteed they have been called to the lender’s loans on the prior approval basis. attention. (6) Action by VA to remove a lender’s (2) Withdrawal for 180 days may automatic authority does not prevent occur when: VA from also taking debarment or sus- (i) Loans are closed automatically pension action based on the same con- which conflict with VA credit stand- duct by the lender. ards and which would not have been (7) VA field facilities are authorized made by a lender acting prudently; to withdraw automatic privileges for 60

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days, based on any of the violations set information in the administrative forth in paragraphs (b)(1) through (b)(3) record. of this section, for non-supervised lend- (Authority: 38 U.S.C. 3703(c)(1)) ers without operations in other stations’ jurisdictions. All determinations (The Office of Management and Budget has approved the information collection require- regarding withdrawal of automatic au- ments in this section under control numbers thority for longer periods of time or 2900–0574.) multi-jurisdictional lenders must be made in Central Office. § 36.4854 Estate of veteran in real (c) VA will provide 30 days notice of property. a withdrawal of automatic authority in (a) The title of the estate in the real- order to enable the lender to either ty acquired by the veteran, wholly or close or obtain prior approval for a partly with the proceeds of a guaran- loan on which processing has begun. teed or insured loan, or owned by him There is no right to a formal hearing to and on which construction, or repairs, contest the withdrawal of automatic or alterations or improvements are to processing privileges. However, if with- be made, shall be such as is acceptable in 15 days after receiving notice the to informed buyers, title companies, and attorneys, generally, in the com- lender requests an opportunity to con- munity in which the property is situ- test the withdrawal, the lender may ated, except as modified by paragraph submit in person, in writing, or (b) of this section. Such estate shall be through a representative, information not less than: and argument in opposition to the (1) A fee simple estate therein, legal withdrawal. or equitable; or (d) If the lender’s submission in oppo- (2) A leasehold estate running or re- sition raises a dispute over facts mate- newable at the option of the lessee for rial to the withdrawal of automatic au- a period of not less than 14 years from thority, the lender will be afforded an the maturity of the loan, or to any ear- opportunity to appear with a rep- lier date at which the fee simple title resentative, submit documentary evi- will vest in the lessee, which is assign- dence, present witnesses, and confront able or transferable, if the same be sub- any witnesses VA presents. The Under jected to the lien; however, a leasehold Secretary for Benefits will appoint a estate which is not freely assignable hearing officer or panel to conduct the and transferable will be considered an hearing. acceptable estate if it is determined by (e) A transcribed record of the pro- the Under Secretary for Benefits, or ceedings shall be made available at the Director, Loan Guaranty Service: cost to the lender, upon request, unless (i) That such type of leasehold is cus- the requirement for a transcript is tomary in the area where the property waived by mutual agreement. is located, (ii) That a veteran or veterans will be (f) In actions based upon a conviction prejudiced if the requirement for free or civil judgment, or in which there is assignability is adhered to; and no genuine dispute over material facts, (iii) That the assignability and other the Under Secretary for Benefits shall provisions applicable to the leasehold make a decision on the basis of all the estate are sufficient to protect the in- information in the administrative terests of the veteran and the Govern- record, including any submission made ment and are otherwise acceptable; or by the lender. (3) A life estate, provided that the re- (g) In actions in which additional mainder and reversionary interests are proceedings are necessary to determine subjected to the lien; or disputed material facts, written find- (4) A beneficial interest in a rev- ings of fact will be prepared by the ocable Family Living Trust that en- hearing officer or panel. The Under sures that the veteran, or veteran and Secretary for Benefits shall base the spouse, have an equitable life estate, decision on the facts as found, together provided the lien attaches to any re- with any information and argument mainder interest and the trust arrange- submitted by the lender and any other ment is valid under State law.

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(b) Any such property or estate will election to sell, stating the price, not fail to comply with the require- terms of sale, and the identity of the ments of paragraph (a) of this section proposed vendee. by reason of the following: (iii) Any property subject to a re- (1) Encroachments; striction on the owner’s right to con- (2) Easements; vey to any party of the owner’s choice, (3) Servitudes; which restriction is established by a (4) Reservations for water, timber, or document recorded on or after Decem- subsurface rights; or ber 1, 1976, will not qualify as security (5) Sale and lease restrictions: for a guaranteed or insured loan. A pro- (i) Except as to condominiums, the hibition or restriction on leasing an in- right in any grantor or cotenant in the dividual unit in a condominium will chain of title, or a successor of either, not cause the condominium estate to to purchase for cash, which right was fail to qualify as security for such loan, established by an instrument recorded provided the restriction is in accord- prior to December 1, 1976, and by the ance with § 36.4862(c). terms thereof is exercisable only if: (iv) Notwithstanding the provisions (A) An owner elects to sell; of paragraphs (b)(5)(i), (ii), and (iii) of (B) The option price is not less than this section, a property shall not be the price at which the then owner is considered ineligible pursuant to para- willing to sell to another; and graph (a) of this section if: (C) Exercised within 30 days after no- (A) The veteran obtained the prop- tice is mailed by registered mail to the erty under a State or local political address of optionee last known to the subdivision program designed to assist then owner of the then owner’s election low-or moderate-income purchasers, to sell, stating the price and the iden- and as a condition the purchaser must tity of the proposed vendee; agree to one or more of the following (ii) A condominium estate estab- restrictions: lished by the filing for record of the Master Deed, or other enabling docu- (1) If the property is resold within a ment before December 1, 1976 will not time period as established by local law fail to comply with the requirements of or ordinance, after the purchaser ac- paragraph (a) of this section by reason quires title, the purchaser must first of: offer the property to the government (A) Prohibition against leasing a unit housing agency, or a low-or moderate- for a period of less than 6 months. income purchaser designated by such (B) The existence of a right of first agency, provided the option to pur- option to purchase or right to provide chase is exercised within 90 days after a substitute buyer reserved to the con- notice by the purchaser to the agency dominium association provided such of intention to sell. option or right is exercisable only if: (2) If the property is resold within a (1) An owner elects to sell; time period as established by local law (2) The option price is not less than or ordinance after the purchaser ac- the price at which the then owner is quires title, a governmental agency willing to sell to another; may specify a maximum price which (3) The terms and conditions under the veteran may receive for the prop- which the option price is to be paid are erty upon resale; or identical to or are not less favorable to (3) Such other restriction approved the owner than the terms and condi- by the Secretary designed to insure ei- tions under which the owner was will- ther that a property acquired under ing to sell to the owner’s prospective such program again be made available buyer; and to low-or moderate-income purchasers, (4) Notice of the association’s deci- or to prevent a private purchaser from sion to exercise the option must be obtaining a windfall profit on the re- mailed to the owner by registered or sale of such property, while assuring certified mail within 30 days after no- that the purchaser has a reasonable op- tice is mailed by registered or certified portunity to dispose of the property mail to the address of the association without undue difficulty at a reason- last known to the owner of the owner’s able price.

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(4) The sale price of a property under paragraph, insofar as they may materi- any of the restrictions of paragraph ally affect the value of the property for (b)(5)(iv)(A) of this section shall not be the purpose for which it is used, are less than the lowest of the following: taken into account in the appraisal of The price designated by the owner as reasonable value required by 38 U.S.C. the asking price; the appraised value of chapter 37. the property; or the original purchase (c) The following limitations on the price of the property, increased by a quantum or quality of the estate or factor reflecting all or a reasonable property shall be deemed for the pur- portion of the increased costs of hous- poses of paragraph (b) of this section to ing or the percentage increase in me- have been taken into account in the dian income in the area between the appraisal of residential property and date of original purchase and resale, determined by the Secretary as not plus the reasonable value or actual materially affecting the reasonable costs of any capital improvements value of such property: made by the owner plus a reasonable (1) Building or use restrictions. Pro- real estate commission less the cost of vided: necessary repairs required to place the (i) No violation exists, property in saleable condition; or other (ii) The proposed use by a veteran reasonable formula approved by the does not presage a violation of a condi- Secretary. The veteran must be fully tion affording a right of reverter, and informed and consent in writing to the (iii) Any right of future modification housing restrictions. A copy of the vet- contained in the building or use re- eran’s consent statement must be for- strictions is not exercisable, by its own warded with the application for home terms, until at least 10 years following loan guaranty or the report of a home the date of the loan. loan processed on the automatic basis. (2) Violations of racial and creed restrictions. Violations of a restriction (Authority: 38 U.S.C. 3703(c)) based on race, color, creed, or national (B) A recorded restriction on title de- origin, whether or not such restriction signed to provide housing for older per- provides for reversion or forfeiture of sons, provided that the restriction is title or a lien for liquidated damages in acceptable under the provisions of the the event of a breach. Fair Housing Act, title VIII of the Civil (3) Violations of building or use restric- Rights Act of 1968, as amended by the tions of record. Violations of building or Fair Housing Amendments Act of 1988, use restrictions of record which have 42 U.S.C. 3601 et seq. The veteran must existed for more than 1 year, are not be fully informed and consent in writ- the subject of pending or threatened ing to the restrictions. A copy of the litigation, and which do not provide for veteran’s consent statement must be a reversion or termination of title, or forwarded with the application for condemnation by municipal authori- home loan guaranty or the report of a ties, or, a lien for liquidated damages home loan processed on the automatic which may be superior to the lien of basis. the guaranteed or insured mortgage. (4) Easements. (i) Easements for pub- (Authority: 38 U.S.C. 501, 3703(c)(1)) lic utilities along one or more of the (6) Building and use restrictions property lines and easements for drain- whether or not enforceable by a re- age or irrigation ditches, provided the verter clause if there has been no exercise of the rights thereof do not breach of the conditions affording a interfere with the use of any of the right to an exercise of the reverter; buildings or improvements located on (7) Any other covenant, condition, re- the subject property. striction, or limitation approved by the (ii) Mutual easements for joint drive- Secretary in the particular case. Such ways located partly on the subject approval shall be a condition precedent property and partly on adjoining prop- to the guaranty or insurance of the erty, provided the agreement is re- loan; Provided, That the limitations on corded in the public records. the quantum or quality of the estate or (iii) Easements for underground con- property that are indicated in this duits which are in place and which do

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not extend under any buildings in the from the borrower that he or she has subject property. an interest in the property not less (5) Encroachments. (i) On the subject than that prescribed in § 36.4854(a). property by improvements on the adjoining property where such encroach- (Authority 38 U.S.C. 3703(c)(1)) ments do not exceed 1 foot within the subject boundaries, provided such en- § 36.4856 Tax, special assessment and croachments do not touch any build- other liens. ings or interfere with the use or enjoy- Tax liens, special assessment liens, ment of any building or improvement and ground rents shall be disregarded on the subject property. with respect to any requirement that (ii) By hedges or removable fences be- loans shall be secured by a lien of spec- longing to subject or adjoining prop- ified dignity. With the prior approval erty. of the Secretary, Under Secretary for (iii) Not exceeding 1 foot on adjoining Benefits, or Director, Loan Guaranty property by driveways belonging to Service, liens retained by nongovern- subject property, provided there exists mental entities to secure assessments a clearance of at least 8 feet between or charges for municipal type services the buildings on the subject property and facilities clearly within the public and the property line affected by the encroachment. purpose doctrine may be disregarded. (6) Variations of lot lines. Variations In determining whether a loan for the between the length of the subject prop- purchase or construction of a home is erty lines as shown on the plot plan or secured by a first lien the Secretary other exhibits submitted to Depart- may also disregard a superior lien cre- ment of Veterans Affairs and as shown ated by a duly recorded covenant run- by the record or possession lines, pro- ning with the realty in favor of a pri- vided such variations do not interfere vate entity to secure an obligation to with the current use of any of the im- such entity for the homeowner’s share provements on the subject property of the costs of the management, oper- and do not involve a deficiency of more ation, or maintenance of property, than 2 percent with respect to the services or programs within and for the length of the front line or more than 5 benefit of the development or commu- percent with respect to the length of nity in which the veteran’s realty is lo- any other line. cated, if the Secretary determines that (Authority: 38 U.S.C. 3703(c)) the interests of the veteran-borrower and of the Government will not be prej- § 36.4855 Loans, first, second, or unse- udiced by the operation of such cov- cured. enant. In respect to any such superior Loans for the purchase of real prop- lien to be created after June 6, 1969, the erty or a leasehold estate as limited in Secretary’s determination must have the regulations concerning guaranty or been made prior to the recordation of insurance of loans to veterans, or for the covenant. the alteration, improvement, or repair thereof, and for more than $1,500 and (Authority: 38 U.S.C. 3703(d)(3)) more than 40 percent of the reasonable value of such property or estate prior § 36.4857 Combination residential and thereto shall be secured by a first lien business property. on the property or estate. Loans for If otherwise eligible, a loan for the such alteration, improvement, or repurchase or construction of a combina- pairs for more than $1,500 but 40 per- tion of residential property and busi- cent or less of the prior reasonable ness property which the veteran pro- value of the property shall be secured poses to occupy in part as a home will by a lien reasonable and customary in be eligible under 38 U.S.C. 3710, if the the community for the type of alter- property is primarily for residential ation, improvement, or repair financed. purposes and no more than one busi- Those for $1,500 or less need not be se- ness unit is included in the property. cured, and in lieu of the title examination the lender may accept a statement (Authority: 38 U.S.C. 3703(c)(1))

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§ 36.4858 [Reserved] original guaranteed or insured obligation: Provided further, that the liens of § 36.4859 Supplemental loans. successive supplemental loans may be (a) Any loan for the alteration, re- of lesser dignity so long as they are impair, improvement, extension, replace- mediately junior to the lien of the last ment, or expansion of a home, with re- previous guaranteed or insured obliga- spect to which a guaranteed or insured tion having a lien of required dignity. obligation of the borrower is currently (d) Upon providing or extending guar- outstanding, may be reported for guaranty or insurance coverage in respect anty or insurance coverage, if such to any such supplemental loan, the loan is made by the holder of the cur- rights of the Secretary to the proceeds rently outstanding obligation, notwith- of the sale of security shall be subordi- standing the fact no guaranty entitle- nate to the right of the holder to sat- ment remains available to the bor- isfy therefrom the indebtedness out- rower; Provided, that if no entitlement standing on the original and supple- remains available the maximum amount payable on the revised guar- mental loans. anty shall not exceed the amount pay- (Authority: 38 U.S.C. 3703(c)(1), 3710(b)(6)) able on the original guaranty on the date of closing the supplemental loan, § 36.4860 Condominium loans—gen- and the percentage of guaranty shall be eral. based upon the proportion the said (a) Authority—applicability of other maximum amount bears to the aggre- loan guaranty regulations, 38 CFR Part gate indebtedness, or, in the case of an 36. A loan to an eligible veteran to pur- insured loan, no additional credit to chase a one-family residential unit in a the holder’s insurance account may be condominium housing development or made: Provided further, that the prior approval of the Secretary shall be re- project shall be eligible for guaranty or quired if: insurance to the same extent and on (1) The loan will be made by a lender the same terms as other loans under 38 who is not the holder of the currently U.S.C. 3710 provided the loan conforms guaranteed or insured obligation; or to the provisions of chapter 37, title 38 (2) The loan will be made by a lender U.S.C., except for sections 3711 (direct not of a class specified in 38 U.S.C. loans), and 3727 (structural defects). 3702(d); or The loan must also conform to the oth- (3) An obligor liable on the currently erwise applicable provisions of the reg- outstanding obligation will be released ulations concerning the guaranty or in- from personal liability. surance of loans to veterans. Sections (b) In any case in which the unpaid 36.4857, 36.4859, and 36.4869 shall not be balance of the prior loan currently out- applicable. standing is combined or consolidated (b) Definitions. On and after July 1, with the amount of the supplemental 1979, the following definitions shall be loan, the entire aggregate indebtedness applicable to each condominium loan shall be repayable in full within the entitled to be guaranteed or insured, maximum maturity currently pre- and shall be applicable to such loans scribed by statute for the original loan. previously guaranteed or insured to the No supplemental loan for the repair, al- extent that no legal rights vested teration, or improvement of residential property will be eligible for guaranty thereunder are impaired. Whenever or insurance unless such repair, alter- used in 38 U.S.C. chapter 37 or this sub- ation, or improvement substantially part, unless the context otherwise re- protects or improves the basic liv- quires, the terms defined in this para- ability or utility of the property in- graph shall have the meaning stated. volved. (1) Affiliate of declarant. Affiliate of (c) Such loans shall be secured as re- declarant means any person or entity quired in § 36.4855: Provided, that a lien which controls, is controlled by, or is of lesser dignity than therein specified under common control with, a declar- will suffice if the lien obtained is im- ant. mediately junior to the lien of the

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(i) A person or entity shall be consid- project; maintain sales offices, man- ered to control a declarant if that per- agement offices and rental units; exer- son or entity is a general partner, offi- cise easements through the common cer, director, or employee of the de- elements for the purpose of making im- clarant who: provements within the condominium; (A) Directly or indirectly or acting in or exercise control of the owner’s asso- concert with one or more persons, or ciation. Declarant is further defined as through one or more subsidiaries, any sponsor of a project or affiliate of owns, controls, or holds with power to the declarant who is acting on behalf of vote, or holds proxies representing, or exercising the rights of the declar- more than 20 percent of the voting ant. shares of the declarant; (5) Existing—declarant in control or (B) Controls in any manner the elec- marketing units. A condominium in tion of a majority of the directors of which all onsite or offsite improve- the declarant; or ments were completed or the conver- (C) Has contributed more than 20 per- sion was completed prior to appraisal cent of the capital of the declarant. by the Department of Veterans Affairs, (ii) A person or entity shall be con- but the declarant is in control of the sidered to be controlled by a declarant owners’ association and/or is currently if the declarant is a general partner, of- marketing units for initial transfer to ficer, director, or employee of that per- individual unit owners. son or entity who: (6) Existing—resale. A condominium in (A) Directly or indirectly or acting in which all onsite or offsite improve- concert with one or more persons or ments were completed, or the conver- through one or more subsidiaries, sion was completed prior to appraisal owns, controls, or holds with power to by the Department of Veterans Affairs, vote, or holds proxies representing, and the declarant is no longer in con- more than 20 percent of the voting trol of the owners’ association and/or shares of that person or entity; marketing units for initial transfer to (B) Controls in any manner the elec- individual unit owners. tion of a majority of the directors of that person or entity; or (7) Expandable condominium. A project (C) Has contributed more than 20 per- which may be increased in size by the cent of the capital of that person or en- declarant. An expandable condominium tity. is constructed in phases (or stages). (2) Condominium. Unless otherwise After each phase is completed and con- provided by State law, a condominium stituted, the common estates are is a form of ownership in which the merged. Each unit owner, thereby, buyer receives title to a three dimen- gains an individual interest in all of sional air space containing the indi- the facilities of the common estate. vidual living unit together with an un- (8) Foreclosure. Foreclosure shall divided interest or share in the owner- mean the termination of a lien by ei- ship of common elements (restatement ther judicial or nonjudicial procedures of § 36.4801, Condominium). in accordance with local law or the vol- (3) Conversion condominium. Condo- untary transfer of property by a deed- minium projects not originally built in-lieu of foreclosure or similar proce- and sold as condominiums but subse- dures. quently converted to the condominium (9) High rise condominium. A condo- form of ownership. minium project which is a multi-story (4) Declarant. Any person who has ex- elevator building. ecuted a declaration or an amendment (10) Horizontal condominium. A condo- to a declaration to add additional real minium project in which generally no estate to the project or any successors part of a living unit extends over or or assigns of the declarant who offers under another living unit. to sell or sells units in the condo- (11) Low rise condominium. A condominium project and who assumes de- minium project in which all or a part clarant rights in the project including of a living unit extends over or under the right to: Add, convert or withdraw another living unit, e.g., garden apart- real estate from the condominium ment or walk-up project.

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(12) Proposed condominium. A condo- such arrangement must not be pre- minium project that is to be concluded by applicable State law. structed or is under construction. In the case of a condominium conversion, (Authority: 38 U.S.C. 3710(a)(6)) the declarant proposes to convert a (b) Estate of unit owner. The legal es- building or buildings to the condo- tate of each unit owner must comply minium form of ownership, or the de- with the provisions of § 36.4854. The dec- clarant is in the process of converting laration or equivalent document shall the building or buildings to the condo- allocate an undivided interest in the minium form of ownership. common elements to each unit. Such (13) Series condominium. A number of interest may be allocated equally to adjoining but separately constituted each unit, may be proportionate to condominiums. An association of own- that unit’s relative size or value, or ers is established for each project, and may be allocated according to any other specified criteria provided that each association is responsible for the method chosen is equitable and maintenance and upkeep of the com- reasonable for that condominium. mon elements in its own project. Cross- easements between the separate con- (Authority: 38 U.S.C. 3703(c)(1), (d)(3), dominiums may be created to permit 3710(a)(6)) members of the separate condomin- (c) Condominium documentation—(1) iums to use the common areas of the Compliance with applicable law. The dec- other condominiums. laration, bylaws and other enabling (c) Project approval. Prior to Depart- documentation shall conform to the ment of Veterans Affairs guaranty of laws governing the establishment and an individual unit loan in a condo- maintenance of condominium regimes minium, the legal documentation es- within the jurisdiction in which the tablishing the condominium project or condominium is located, and to all development must be approved by the other laws which apply to the condo- Secretary. minium. (2) Recordation. The declaration and (Authority: 38 U.S.C. 3703(c)(1), (d)(3), all amendments or modifications 3710(a)(6)) thereof shall be placed of record in the manner prescribed by the appropriate § 36.4861 Acceptable ownership ar- jurisdiction. If recording of plats, rangements and documentation. plans, or bylaws or equivalent docu- (a) Types of condominium ownership. ments and all amendments or modi- The following types of basic ownership fications thereof is the prevailing prac- arrangements are generally acceptable tice or is required by law within the ju- provided they are established in com- risdiction where the project is located, pliance with the applicable condo- then such documents shall be placed of minium law of the jurisdiction(s) in record. If the bylaws are not recorded, which the condominium is located: then covenants, restrictions and other (1) Ownership of units by individual matters requiring record notice should owners coupled with an undivided in- be contained in the declaration or equivalent document. terest in all common elements. (3) Availability. The owner’s associa- (2) Ownership of units by individual tion shall be required to make avail- owners coupled with an undivided in- able to unit owners, lenders and the terest in general common elements and holders, insurers and guarantors of the specified limited common elements. first mortgage on any unit, current (3) Individual ownership of units cou- copies of the declaration, bylaws and pled with an undivided interest in the other rules governing the condo- general common elements and/or lim- minium, and other books, records and ited common elements, with title to financial statements of the owners’ as- additional property for common use sociation. The owners’ association also vested in an association of unit owners, shall be required to make available to with mandatory membership by unit prospective purchasers current copies owners or owners’ associations. Any of the declaration, bylaws, other rules

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governing the condominium, and the any other limitations and criteria that most recent annual audited financial would be necessary or appropriate statement, if such is prepared. ‘‘Avail- under the particular circumstances. able’’ as used in this paragraph (c)(3) Such conditions, time restraints and shall at least mean available for in- other limitations must be reasonable spection, upon request, during normal in light of the overall plan for the con- business hours or under other reason- dominium. In an expandable project, able circumstances. additional phases which are not re- (4) Amendments to documents after De- quired to be built may be described in partment of Veterans Affairs project ap- the development plan in very general proval. While the declarant is in con- terms, or the declaration may provide trol of the owners’ association, amend- that the declarant makes no assur- ments to the declaration, bylaws or ances concerning the construction, other enabling documentation must be building types, architectural style and approved by the Secretary. The declar- size of the units, etc. of these phases. ant should have proposed amendments However, the minimum number of reviewed prior to recordation. This pro- units to be built should be that which vision does not apply to amendments would be adequate to reasonably sup- which annex additional phases to the port the common elements. (See condominium regime in accordance § 36.4864(a)(6).) with a general plan of development (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) (§§ 36.4864(a)(3) and 36.4865(b)(6)). (The Office of Management and Budget has (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) approved the information collection requirements in this section under control number (d) Real property descriptions in the 2900–0448.) declaration—(1) Clarity—conformity with the law of the jurisdiction. The descrip- § 36.4862 Rights and restrictions. tion of the units, common elements, (a) Declarant’s rights and restrictions— any recreational facilities and other (1) Disclosure and reasonableness of re- related amenities, and any limited served rights. Any right reserved by the common elements shall be clear and in declarant must be reasonable and set conformity with the law of the juris- forth in the declaration. diction where the project is located. (2) Examples of reserved rights of de- Responsibility for maintenance and re- clarant, sponsor, or affiliate of declarant pair of all portions of the condominium which are usually unacceptable. Binding shall be set forth clearly. the owners’ association either directly (2) Developmental plan—proposed con- or indirectly to any of the following dominiums. The declaration or other le- agreements is not acceptable unless gally enforceable and binding docu- the owners’ association shall have a ment must state in a reasonable man- right of termination thereof which is ner the overall development plan of the exercisable without penalty at any condominium, including building time after transfer of control, upon not types, architectural style and the size more than 90 days’ notice to the other of the units for those phases of the con- party thereto: dominium which are required to be (i) Any management contract, em- built. Under the applicable provisions ployment contract or lease of rec- of the declaration or such other legally reational or parking areas or facilities. enforceable and binding document, the (ii) Any contract or lease, including development of the required portion of franchises and licenses, to which a de- the condominium must be consistent clarant is a party. with the overall plan, except that the (iii) The requirements of paragraphs declarant may reserve the right to (a)(2)(i) and (ii) of this section do not change the overall plan or decide not apply to acceptable ground leases. to construct planned units or improve- (3) Examples of reserved rights which ments to the common elements if the are usually acceptable. The following declaration sets forth the conditions rights in the common elements may required to be satisfied prior to the ex- usually be reserved by the declarant ercise of that right the time within for a reasonable period of time, subject which the right may be exercised, and to a concomitant obligation to restore:

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(i) Easement over and upon the com- charges, costs, and attorney’s fee, shall mon elements and upon lands appur- also be the personal obligation of the tenant to the condominium for the pur- person who was the owner of such unit pose of completing improvements for at the time the assessment fell due. which provision is made in the declara- The personal obligation for delinquent tion, but only if access thereto is oth- assessments shall not pass to succes- erwise not reasonably available. sors in title or interest unless assumed (ii) Easement over and upon the com- by them, or required by applicable law. mon elements for the purpose of mak- Common expenses as used in this sub- ing repairs required pursuant to the division shall mean expenditures made declaration or contracts of sale made or liabilities incurred by or on behalf of with unit purchasers. the owners’ association, together with (iii) Right to maintain facilities in any assessments for the creation and the common areas which are identified maintenance of reserves. in the declaration and which are rea- (ii) Reserves and working capital. sonably necessary to market the units. There shall be in new or proposed con- These may include sales and manage- dominium projects (including conver- ment offices, model units, parking sions) a provision for an adequate re- areas, and advertising signs. serve fund for the periodic maintenance, repair and replacement of the (Authority: 38 U.S.C. 3704(c)(1), 3710(a)(6)) common elements, which fund shall be (b) Owners’ association’s rights and re- maintained out of regular assessments strictions—(1) Right of entry upon units for common expenses. Additionally, a and limited common elements. The own- working capital fund must be estab- ers’ association shall be granted a right lished for the initial months of the of entry upon unit premises and any project operations equal to at least a 2 limited common elements to effect months’ estimated common area emergency repairs, and a reasonable charge for each unit. right of entry thereupon to effect other (iii) Priority of lien. Any assessment repairs, improvements, replacement or lien must be subordinate to any De- maintenance as necessary. partment of Veterans Affairs guaran- (2) Power to grant rights and restric- teed mortgage except as provided in tions in common elements. The owners’ § 36.4856. A lien for common expense association should be granted other charges and assessments shall not be rights, such as the right to grant util- affected by any sale or transfer of a ity easements under, through or over unit except that a sale or transfer pur- the common elements, which are rea- suant to a foreclosure of a first mort- sonably necessary to the ongoing de- gage shall extinguish a subordinate velopment and operation of the project. lien for common expense charges and (3) Responsibility for damage to common assessments which became payable elements and units. A provision may be prior to such sale or transfer. Any such made in the declaration or bylaws for sale or transfer pursuant to a fore- allocation of responsibility for dam- closure shall not relieve the purchaser ages resulting from the exercise of any or transferee of a unit from liability of the above rights. for, nor the unit so sold or transferred (4) Assessments—(i) Levy and collec- from the lien of, any common expense tion. The declaration or its equivalent charges thereafter becoming due. shall describe the authority of the owners’ association to levy and enforce the (Authority: 38 U.S.C. 3703(c)(1), (d)(3), collection of general and special assess- 3710(a)(6)) ments for common expenses and shall (c) Unit owners’ rights and restric- describe adequate remedies for failure tions—(1) Obligation to pay expenses. The to pay such common expenses. The declaration or equivalent document common expenses assessed against any shall establish a duty on each unit unit, with interest, late charges, costs owner, including the declarant, to pay and a reasonable attorney’s fee shall be a proportionate share of common ex- a lien upon such unit in accordance penses upon being assessed therefor by with applicable law. Each such assess- the owners’ association. Such share ment, together with interest, late may be allocated equally to each unit,

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may be proportionate to that unit’s between boundaries shown on the plats, common element interest, relative size plans or in the deed and those of the or value, or may be allocated according building. The declaration should pro- to any other specified criteria provided vide reasonable limits on the extent of that the method chosen is equitable any such revised boundary(ies) created and reasonable for that condominium. by the overlap of units, common ele- (2) Voting rights. The declaration or ments, and limited common elements equivalent document shall allocate a resulting from such encroachments. portion of the votes in the association (5) Right of first refusal. The right of a to each unit. Such portion may be allo- unit owner to sell, transfer, or other- cated equally to each unit, may be pro- wise convey his or her unit in a condo- portionate to that unit’s common ex- minium shall not be subject to any pense liability, common element interest, relative size or value, or may be al- right of first refusal or similar restric- located according to any other speci- tion if the declaration or similar docu- fied criteria provided that the method ment is recorded on or after December is equitable and reasonable for that 1, 1976. If the declaration was recorded condominium. The declaration may prior to December 1, 1976, the right of provide different criteria for alloca- first refusal must comply with tions of votes to the units on par- § 36.4854(b)(5)(ii); Provided, however, re- ticular specified matters and may also strictions on the basis of age or restric- provide different percentages of re- tions established by a State, Terri- quired unit owner approvals for such torial, or local government agency as particular specified matters. part of a program for providing assist- (3) Ingress and egress of unit owners. ance to low- and moderate-income pur- There may not be any restriction upon chasers shall be governed by any unit owner’s right of ingress and § 36.4854(b)(5)(iv). egress to his or her unit. (4) Encroachments—(i) Easements for (Authority: 38 U.S.C. 3703(c)) encroachments. In the event any portion of the common elements encroaches (6) Leasing restrictions. Except as pro- upon any unit or any unit encroaches vided in this paragraph, there shall be upon the common elements or another no prohibition or restriction on a con- unit as a result of the construction, re- dominium unit owner’s right to lease construction, repair, shifting, settle- his or her unit. The following restric- ment, or movement of any portion of tions are acceptable: the improvements, a valid easement (i) A requirement that leases have a for the encroachment and for the main- minimum initial term of up to 1 year; tenance of the same shall exist so long or as the encroachment exists. The dec- (ii) Age restrictions or restrictions laration may provide, however, reason- imposed by State or local housing au- able limits on the extent of any ease- thorities which are allowable under ment created by the overlap of units, § 36.4809(e) or § 36.4854(b)(5)(iv). common elements, and limited com- (d) Rights of action. The owners’ asso- mon elements resulting from such en- ciation and any aggrieved unit owner croachments; or should be granted a right of action (ii) Monuments as boundaries. If per- against unit owners for failure to com- mitted by the governing law within the ply with the provisions of the declara- jurisdiction where the project is located, the existing physical boundaries tion, bylaws, or equivalent documents, of a unit or a common element or the or with decisions of the owners’ asso- physical boundaries of a unit or a com- ciation which are made pursuant to au- mon element reconstructed in substan- thority granted the owners’ association tial accordance with the original plats in such documents. Unit owners should and plans thereof become its bound- have similar rights of action against aries rather than the metes and bounds the owners’ association. expressed in the deed, plat or plan, re- (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) gardless of settling or lateral movement of the building, or minor variance

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§ 36.4863 Miscellaneous legal require- (d) Policies for bylaws. The bylaws of ments. the condominium should be suffi- (a) Declarant transfer of control of ciently detailed for the successful gov- owners’ association—(1) Standards for ernance of the condominium by unit transfer of control. The declarant shall owners. Among other things, such doc- relinquish all special rights, expressed uments should contain adequate provi- or implied, through which the declar- sions for the election and removal of ant may directly or indirectly control, directors and officers. direct, modify, or veto any action of (e) Insurance and related require- the owners’ association, its executive ments—(1) Insurance. The holder shall board, or a majority of unit owners, require hazard and flood insurance and control of the owners’ association policies to be procured and maintained shall pass to the owners of units within in accordance with § 36.4829. Because of the project, not later than the earlier the nature of condominiums, addi- of the following: tional types of insurance coverages— (i) 120 days after the date by which 75 such as tort liability insurance for in- percent of the units have been con- juries sustained on the premises, per- veyed to unit purchasers, sonal liability insurance for directors (ii) The last date of a specified period and officers managing association af- of time following the first conveyance fairs, boiler insurance, etc.—should be to a unit purchaser; such period of time considered in appropriate cir- is to be reasonable for the particular cumstances. project. The maximum acceptable pe- (2) Fidelity bond coverage. The secur- riod usually will be from 3 to 5 years ing of appropriate fidelity bond cov- for single-phased condominium regimes erage is recommended but not required, and 5 to 7 years for expandable con- for any person or entity handling funds dominiums, or of the owners’ association, including, (iii) On a case basis, modifications or but not limited to, employees of the variations of the requirements of para- professional managers. Such fidelity graphs (a)(1)(i) and (ii) of this section bonds should name the association as will be acceptable, particularly in cir- an obligee, and be written in an cumstances involving very large condo- amount equal to at least the estimated minium developments. maximum of funds, including reserve (2) Declarant’s unit votes after transfer funds, in the custody of the owners’ as- of control. The requirements of para- sociation or the management agent at graph (a)(1) of this section shall not af- any given time during the term of the fect the declarant’s rights, as a unit fidelity bond. However, the bond should owner, to exercise the votes allocated not be less than a sum equal to 3 to units which the declarant owns. months’ aggregate assessments on all (3) Unit owners’ participation in man- units plus reserve funds. agement. Declarant should provide for (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) and foster early participation of unit owners in the management of the § 36.4864 Documentation and related project. requirements—flexible condomin- (b) Taxes. Unless otherwise provided iums and condominiums with off- by State law, real estate taxes must be site facilities. assessed and be lienable only against (a) Expandable condominiums. The fol- the individual units, together with lowing policies apply to condominium their undivided interests in the com- regimes which may be increased in size mon elements, and not against the by the declarant: multifamily structure. The owners’ as- (1) The declarant’s right to expand sociation usually owns no real estate, the regime must be fully described in so it has no obligation concerning ad the declaration. The declaration must valorem taxes. Unless taxes are as- contain provisions adequate to ensure sessed only against the individual that future improvements to the con- units, a tax lien could amount to more dominium will be consistent with ini- than the value of any particular unit in tial improvements in terms of quality the structure. of construction. The declarant must (c) [Reserved] build each phase in accordance with an

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approved general plan for the total de- (6) Each expandable project shall velopment (§ 36.4861(d)(2)) supported by have a specified maximum number of detailed plats and plans of each phase units which will give each unit owner a prior to the construction of the par- minimum percentage of interest in the ticular phase. common elements. Each project shall (2) The reservation of a right to ex- also have a specified minimum number pand the condominium regime, the of units which will give each unit method of expansion and the result of owner a maximum percentage of inter- an expansion must not affect the statu- est in the common elements. The min- tory validity of the condominium re- imum number of units to be built gime or the validity of title to the should be that which would be ade- units. quate to reasonably support the com- (3) The declaration or equivalent doc- mon elements. The maximum number ument must contain a covenant that of units to be built should be that the condominium regime may not be which would not overload the capacity amended or merged with a successor of the common facilities. The max- condominium regime without prior imum possible percentage(s) and the written approval of the Secretary. The minimum possible percentage(s) of un- declarant may have the proposed legal divided interest in the common ele- documentation to accomplish the ments for each type of unit must be merger reviewed prior to recordation. stated in the declaration or equivalent However, the Secretary’s final approval document. of the merger will not be granted until (7) The declaration or equivalent doc- the successor condominium has been ument shall set forth clearly the basis legally established and construction for reallocation of unit owner’s owner- completed. The declarant may add ship interests, common expense liabil- phases to an expandable condominium ities and voting rights in the event the regime without the prior approval of number of units in the condominium is the Secretary if the phasing imple- increased. Such reallocation shall be ments a previously approved general according to the applicable criteria set plan for the total development. A copy forth in §§ 36.4861(b) and 36.4862(c)(1) and of the amendment to the declaration or (2). other annexation document which adds (8) The declarant’s right to expand each phase must be submitted to the the condominium must be for a reason- Secretary in accordance with able period of time with a specific end- § 36.4865(b)(6). ing date. The maximum acceptable pe- (4) Liens arising in connection with riod will usually be from 5 to 7 years the declarant’s ownership of, and con- after the date of recording the declara- struction of improvements upon, the tion. On a case basic, longer periods of property to be added must not ad- expansion rights will be acceptable, versely affect the rights of existing particularly in circumstances involv- unit owners, or the priority of first ing sizable condominium develop- mortgages on units in the existing con- ments. dominium property. All taxes, assess- (b) Series projects. (1) Each phase in ments, mechanic’s liens, and other the series approach is to be considered charges affecting such property, cov- as a separate project. A separate set of ering any period prior to the addition legal documents must be filed for each of the property, must be paid or other- phase or project that relates to the wise satisfactorily provided for by the condominium within its own boundary. declarant. The declaration for each phase must (5) The declarant must purchase (at describe the particular project as a declarant’s own expense) a general li- part of the whole development area, ability insurance policy in an amount but subject only the one phase to the not less than $1 million for each occur- condominium regime. A separate unit rence, to cover any liability which ratio must be established that would owners of previously sold units are ex- relate each unit to all units of the par- posed to as a result of further condo- ticular condominium for purposes of minium project development. ownership in the common areas, voting

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rights and assessment liability. A sepa- thorities require total code compliance rate association may be created to gov- on the entire structure when a building ern the affairs of each condominium. is being converted to the condominium Each phase is subject to a separate form of ownership. In those areas presale requirement. where local standards are nonexistent, (2) In the case of proposed projects, inferior to, or in conflict with Depart- or projects under construction, the dec- ment of Veterans Affairs objectives, a laration should state the number of certification will be required from a total units that the developer intends registered professional architect and/or to build on other sections of the devel- registered engineer certifying that the opment area. plans and specifications conform to one (c) Other flexible condominiums. Con- of the national building codes which is dominiums containing withdrawable typical of similar construction meth- real estate (contractable condomin- ods and standards for condominiums iums) and condominiums containing used in the area. Those portions of the convertible real estate (portions of the condominium conversion which are not condominium within which additional being altered, improved or repaired units or limited common elements, or must be appraised in accordance with both, may be created) will be consid- paragraph (a) of this section. ered acceptable provided the flexible (2) Horizontal condominiums. Depart- condominium complies with the ment of Veterans Affairs policies and § 36.4800 series. procedures applicable to single-family (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) residential construction shall also apply to horizontal condominiums. (The Office of Management and Budget has Proposed or existing (declarant in con- approved the information collection requirements of this section under control number trol or marketing units) horizontal 2900–0448.) condominium conversions shall comply with current local building codes for § 36.4865 Appraisal requirements. alterations and improvements or re- (a) Existing resale condominiums. Upon pairs made to convert the building to acceptance by the local office of the or- the condominium form of ownership ganizational documents, the project unless local authorities require total and unit(s) proposed as security for code compliance on the entire struc- guaranteed financing shall be ap- ture when a building is being converted praised to ensure that they meet MPRs to the condominium form of ownership. (Minimum Property Requirements) and In those areas where local standards are safe, sanitary, and structurally are nonexistent, inferior to, or in con- sound. The Department of Veterans Af- flict with Department of Veterans Af- fairs MPRs for existing construction fairs objectives, a certification will be apply to all existing resale condomin- required from a professional architect iums including conversions, except and/or registered engineer certifying that water, heating, ventilating, air that the plans and specifications con- conditioning and sewer service may be form to one of the national building supplied from a central source. codes which is typical of similar construction methods and standards for (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6), condominiums used in the area. Those (b)(5)) portions of the condominium conversion which are not being altered, im- (b) Proposed condominiums or existing proved or repaired must be appraised in condominiums with declarant in control accordance with paragraph (a) of this or marketing units—(1) Low rise and high section. rise condominiums. Low rise and high rise condominiums shall comply with (Authority: 38 U.S.C. 3703(c)(1)) local building codes. Only the alterations, improvements, or repairs to low (3) Unit completion. All units in the rise and high rise buildings proposed to individual project or phase must be be converted to the condominium form substantially completed except for cus- of ownership must comply with current tomer preference items, such as inte- local building codes, unless local au- rior finishes, appliances or equipment.

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(4) Common element completion. All styles, etc. In condominium conver- amenities of the condominium (to in- sions, the information brochure must clude offsite community facilities), list the major structural and mechan- that are to be considered in the unit ical components and the estimated re- value, must be bound legally to the maining useful life of the components. condominium regime. All such amen- A brief explanation must be furnished ities as well as the common elements in the brochure explaining that certain of the project, must be substantially major structural or mechanical compo- completed and available for use by the nents may require replacement within unit owners. In large multi-phase a specified time period. If the declarant projects, the declarant should con- has elected to place funds into a condo- struct common elements in a manner minium reserve fund for replacement consistent with the addition of units to of a major component under the provi- support the entire development. The sions of § 36.4865(b)(7), the amount of Secretary, in appropriate cases, may the contribution into the reserve fund approve the placement of adequate must be specified in the information funds by the declarant in an escrow or brochure. otherwise earmarked account or accept a letter of credit or surety bond to as- (6) Evidence of proper phasing. In an sure completion of amenities and allow expandable or flexible condominium, closing of VA-guaranteed (or insured) evidence of the addition of each phase loans. Such funds must be adequate to in accordance with a previously ap- assure completion of the amenities free proved general plan of development and clear of all liens. must be submitted to the Secretary prior to the guaranty of the first loan (Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6)) in the added area. (5) Information brochure/public offering (7) Additional condominium conversion statement. When units are being sold by requirements. (i) The declarant of any the declarant (not applicable to re- condominium project must furnish sales), an information brochure/public structural and mechanical common offering statement must be given to element component statements on the veteran buyers prior to the time a present condition of all accessible down payment is received and an structural and mechanical components agreement is signed, unless State law material to the use and enjoyment of authorized receipt of the down pay- the condominium. These statements ment and delivery of the information must be completed by a registered pro- brochure followed by a period in which fessional engineer and/or architect purchasers may cancel the purchase prior to the guaranty of the first unit agreement without penalty for a speci- loan in the project. Each statement fied number of days. Information bro- must also give an estimate of the ex- chures must be written in simple terms pected useful life of the roof, elevators, to inform buyers that the association heating and cooling, plumbing and does not provide owner’s contents and electrical systems assuming normal personal liability policies which are maintenance. A minimum of 10 years the owner’s responsibility. In the event estimated remaining useful life is re- the development is expandable, series, quired on all structural and mechan- etc., there must be full disclosure of ical components. In the alternative, the impact of the total development the declarant may contribute an plan. In expandable, series or other amount of funds to the condominium projects with more than one phase, the reserve fund equal to a minimum of 1⁄10 information brochure must disclose (one-tenth) of the estimated costs of fully later development rights, and the replacement of a major structural or general plans of the declarant for addi- mechanical component (as determined tional phases. If the declarant makes by an independent registered profes- no assurance concerning phases which sional architect or engineer) for each are not required to be built, the declar- year of estimated remaining useful life ant should state that no assurances are less than 10 years, e.g. 7 years remain- given concerning construction, unit ing useful life equals a 3⁄10 required de- sizes, building types, architectural clarant contribution to the reserve

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fund of the component’s estimated re- (2) Multiphase—proposed or existing de- placement cost. The noted statements clarant in control. The requirements of and remaining useful life requirement paragraph (c)(1) of this section shall are not applicable to existing resale apply to each individual phase of a conversion projects when the declarant multiphase development, taking into is no longer marketing units and/or in consideration that each individual control of the association. Expandable phase must be capable of self-support or series condominium conversions rein the event that the developer does quire engineering and architectural not complete all planned phases. statements on each stage or phase. (d) Warranty. Except in condominium (ii) In declarant controlled projects, conversion projects, each CRV (Certifi- a statement(s) by the local author- cate of Reasonable Value) issued by the ity(ies) of the adequacy of offsite utili- Secretary relating to a proposed or ex- ties servicing the site (e.g., sanitary or isting not previously occupied dwelling water) is required. If a local author- unit in a condominium project shall be ity(ies) declines to issue such a state- subject to the express condition that ment(s), a statement(s) may be ob- the builder, seller, or the real party in tained from a registered professional interest in the transaction shall deliver engineer. If local authority(ies) de- to the veteran purchasing the dwelling clines to issue such a statement(s), a unit with the aid of a guaranteed or in- statement(s) may be obtained from a sured loan a warranty against defects registered professional engineer. for the unit and common elements. The (c) Presale requirements: unit shall be warranted for 1 year from the date of settlement or the date of (1) Proposed construction or existing de- occupancy (whichever first occurs). clarant in control. Bona fide agreements The common elements shall be war- of sale must have been executed by ranted for 2 years from the date each of purchasers other than the declarant the common elements is completed and (who are obligated contractually to available for use by the unit owners, or complete the purchase) of 70 percent of 2 years from the date the first unit is the total number of units in the conveyed to a unit owner other than project. Lenders shall certify as to sat- the declarant, whichever is later, in isfaction of the presale requirement the particular phase of the condo- prior to VA guaranty of the first unit minium containing the common ele- loan. When a declarant can dem- ment. For these purposes, defects shall onstrate that a lower percentage would be those items reasonably requiring be justified, the Secretary, on an indi- the repair, renovation, restoration, or vidual case basis, may approve a replacement of any of the components presale requirement of less than 70 per- constituting the unit or common ele- cent. Reduction of the 70 percent ments. Items of maintenance relating presale requirement will be considered to the unit or common elements are when: not covered by the warranty. No cer- (i) Strong initial sales demonstrate a tificate of guaranty or insurance credit ready market, or shall be issued unless a copy of such (ii) The declarant will provide cash warranty, duly receipted by the pur- assets or acceptable bonds for payment chaser, is submitted with the loan pa- of full common area assessments to the pers. owners’ association until such assess- (e) Ownership and operation of offsite ments are assumed by unit purchasers, facilities—(1) Title requirements. Evi- or dence must be presented that the off- (iii) Subsequent phases of an overall site facility owned by an owners’ asso- development are being undertaken in a ciation with mandatory membership by proven market area, or condominium unit owners or condo- (iv) Previous experience in similar minium unit owners’ associations has projects in the same market area indi- been completed and conveyed free of cates strong market acceptance, or encumbrances by the declarant for the (v) The development is in a market benefit of the unit owners with title in- area that has repeatedly indicated ac- sured by an owner’s title policy or ceptance of such projects. other acceptable title evidence. Offsite

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facilities conveyed to a nonprofit cor- ers’ association to pay its equitable as- poration are the preferred method of sessment to the offsite facility must offsite facilities ownership; however, result in an enforceable lien. the Secretary will consider other forms (3) Declarant payment of offsite facility of ownership on an individual case in a series project. Until the declarant basis. has completed all of the intended con- (2) Mandatory membership. The dec- dominium phases in a total condo- laration of the condominium (each con- minium development or established dominium in a series development) and each condominium regime by filing a the legal documentation of the cor- separate declaration in a series devel- poration or association which owns the opment, the balance of the total sum of offsite facility must provide the fol- the expenses of the offsite facility not lowing: (i) The owner of a condominium unit covered by the assessment against the is automatically a member of the off- unit owners should be assessed against site facility corporation or association and be payable by the declarant com- and that upon the sale of the unit, mencing on the first day of the first membership is transferred automati- month after the first unit is conveyed cally to the new owner/purchaser. It is to a homeowner in the first phase. If also acceptable if each condominium this balance is not paid, it must be- owners’ association (in lieu of each income a lien against those parcels of dividual unit owner) is automatically a land in the development area which are member of the offsite facility corpora- owned by the declarant. The collection tion or association coupled with use of such debt and enforcement of such rights for each of the unit owners or lien may be by foreclosure or such residents. If membership in an offsite other remedies afforded the corpora- owners’ association is voluntary, no tion or association under local law. credit in the CRV valuation may be (f) Professional management. Many given for such offsite amenities. condominiums are small enough and (ii) Each member of the offsite facil- their common areas so minimal that ity corporation or association must be professional management is not nec- entitled to a representative vote at essary. VA does not have a require- meetings of the offsite facility corpora- ment for professional management of tion or association. If the individual condominiums. The powers given to condominium owners’ association is a the owners’ association by the declara- member of the offsite facility corporation or association, each condominium tion and bylaws are fundamentally for owners’ association must be entitled to ‘‘use control’’ and maintenance of the a representative vote at meetings of undivided interest all of the owners the offsite facility corporation or asso- have in the common areas. These pow- ciation. ers normally include management (iii) Each member must agree by ac- which may, if desired, be delegated to a ceptance of the unit deed to pay a professional manager. However, if the share of the expenses of the offsite fa- board of directors wants professional cility corporation or association as as- management, the management agree- sessed by the corporation or associa- ment must be terminable for cause tion for upkeep, insurance, reserve upon 30 days’ notice, and run for a rea- fund for replacements, maintenance sonable period of from 1 to 3 years and and operation of the offsite facility. be renewable for consent of the associa- The share of said expenses shall be de- tion and the management. (Manage- termined equitably. Failure to pay ment contracts negotiated by the de- such assessment must result in a lien clarant should not exceed 2 years.) against the individual unit in the same (g) Commercial areas. With respect to manner as unpaid assessments by the existing and proposed condominiums, association of owners of the condo- commercial areas within condominium minium. If each condominium owners’ association is a member of the offsite facility in lieu of individual unit owners, failure of the condominium own-

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developments are acceptable, but such (b) On requests for appraisal of indi- interests will be considered in value. vidual proposed construction received (Authority: 38 U.S.C. 3703(c)(2), 3710(a)(6)) on or after November 21, 1962, the prescribed nondiscrimination certification (The Office of Management and Budget has will be required if the builder is to sell approved the information collection requirements in this section under control number the veteran the lot on which the dwell- 2900–0448.) ing is to be constructed, but will not be required if: § 36.4867 Requirement of construction (1) The veteran owns the lot; or warranty. (2) The lot is being acquired by the Each certificate of reasonable value veteran from a seller other than the issued by the Secretary relating to a builder and there is no identity of in- proposed or newly constructed dwelling terest between the builder and the sell- unit, except those covering one-family er of the lot. residential units in condominium hous- (c) Each builder, sponsor or other ing developments or projects within seller requesting approval of site and the purview of §§ 36.4860 through 36.4865, subdivision planning shall be required shall be subject to the express condi- to furnish a certification, in the form tion that the builder, seller, or the real prescribed by the Secretary, that nei- party in interest in the transaction ther it nor anyone authorized to act for shall deliver to the veteran con- it will decline to sell any property in- structing or purchasing such dwelling cluded in such request to a prospective with the aid of a guaranteed or insured purchaser because of his or her race, loan a warranty, in the form prescribed by the Secretary, that the property has color, religion, sex or national origin. been completed in substantial con- Site and subdivision analysis will not formity with the plans and specifica- be commenced by the Department of tions upon which the Secretary based Veterans Affairs prior to receipt of the valuation of the property, includ- such certification. ing any modifications thereof, or (d) No commitment shall be issued changes or variations therein, approved and no loan shall be guaranteed or in- in writing by the Secretary, and no sured under 38 U.S.C. chapter 37 unless certificate of guaranty or insurance the veteran certifies, in such form as credit shall be issued unless a copy of the Secretary shall prescribe, that such warranty duly receipted by the (1) Neither he/she, nor anyone au- purchaser is submitted with the loan thorized to act for him/her, will refuse papers. to sell or rent, after the making of a (Authority: 38 U.S.C. 3703(c)(1), 3705) bona fide offer, or refuse to negotiate for the sale or rental of, or otherwise § 36.4868 Nondiscrimination and equal make unavailable or deny the dwelling opportunity in housing certification or property covered by this loan to any requirements. person because of race, color, religion, (a) Any request for a master certifi- sex, or national origin; cate of reasonable value on proposed or (2) He/she recognizes that any restric- existing construction, and any request tive covenant on the property relating for appraisal of individual existing to race, color, religion, sex or national housing not previously occupied, which origin is illegal and void and any such is received on or after November 21, covenant is specifically disclaimed; and 1962, will not be assigned for appraisal (3) He/she understands that civil ac- prior to receipt of a certification from tion for preventive relief may be the builder, sponsor or other seller, in brought by the Attorney General of the the form prescribed by the Secretary, United States in any appropriate U.S. that neither it nor anyone authorized to act for it will decline to sell any District Court against any person re- property included in such request to a sponsible for a violation of the applica- prospective purchaser because of his or ble law. her race, color, religion, sex or na- (Authority: 38 U.S.C. 3703(c)(1)) tional origin.

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§ 36.4869 Correction of structural de- waste, which seriously affects the liv- fects. ability of the dwelling. (a) The purpose of this section is to (4) The applicant has made reason- specify the types of assistance that the able efforts to obtain correction of Secretary may render pursuant to 38 such structural defect by the builder, U.S.C. 3727 to an eligible borrower who seller, or other person or firm respon- has been unable to secure satisfactory sible for the construction of the dwell- correction of structural defects in a ing. dwelling encumbered by a mortgage se- (d) In those instances in which the curing a guaranteed, insured or direct Secretary determines that assistance loan, and the terms and conditions under this section is appropriate and under which such assistance will be necessary the Secretary may take any rendered. of the following actions: (b) A written application for assist- (1) Pay such amount as is reasonably ance in the correction of structural de- necessary to correct the defect, or fects shall be filed by a borrower under (2) Pay the claim of the borrower for a guaranteed, insured or direct loan reimbursement of the borrower’s ex- with the Director of the Department of penses for correcting or obtaining cor- Veterans Affairs office having loan ju- rection of the defect, or risdiction over the area in which the (3) Acquire title to the property upon dwelling is located. The application terms acceptable to the borrower and must be filed not later than 4 years the holder of the guaranteed or insured after the date on which the first direct, loan. guaranteed or insured mortgage loan (e) To the extent of any expenditure on the dwelling was made, guaranteed made by the Secretary pursuant to or insured by the Secretary. A bor- paragraph (d) of this section the Sec- rower under a direct, guaranteed or in- retary shall be subrogated to any legal sured mortgage loan on the same rights the borrower or applicant de- dwelling which was made, guaranteed scribed in paragraph (c)(2) of this sec- or insured subsequent to the first such tion may have against the builder, sell- loan shall be entitled to file an applica- er, or other persons arising out of the tion if it is filed not later than 4 years structural defect or defects. after the date on which such first loan (f) The borrower shall not be entitled, was made, guaranteed or insured by as a matter of right, to receive the as- the Secretary. sistance in the correction of structural (c) An applicant for assistance under defects provided in this section. Any this section must establish that: determination made by the Secretary (1) The applicant is the owner of a in connection with a borrower’s appli- one- to four-family dwelling which was cation for assistance shall be final and inspected during construction by the conclusive and shall not be subject to Department of Veterans Affairs or the judicial or other review. Authority to Federal Housing Administration. act for the Secretary under this section (2) The applicant is an original vet- is delegated to the Under Secretary for eran-borrower on an outstanding guar- Benefits. anteed, insured or direct loan secured (g) For the purpose of this section, by a mortgage on such dwelling which the term ‘‘structural defects seriously was made, guaranteed or insured on or affecting livability’’ shall in no event after May 8, 1968. The Secretary may, be deemed to include— however, recognize an applicant who is (1) Defects of any nature in a dwell- not the original veteran-borrower but ing in respect to which the applicant who contracted to assume such bor- for assistance under this section was rower’s personal obligation thereunder, the builder or general contractor, or if the Secretary determines that such (2) Structural features, improve- recognition would be in the best inter- ments, amenities, or equipment which ests of the Government in the par- were not taken into account in the ticular case. Secretary’s determination of reason- (3) There exists in such dwelling a able value. structural defect, not the result of fire, earthquake, flood, windstorm, or (Authority: 38 U.S.C. 3703(c)(1), 3727)

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§ 36.4870 Advertising and solicitation cluded in the transfer is past due more requirements. than one calendar month at the time of Any advertisement or solicitation in transfer there shall be transferred from any form (e.g., written, electronic, the insurance account of the transferor oral) from a private lender concerning to the insurance account of the trans- housing loans to be guaranteed or in- feree an amount equal to the original sured by the Secretary: percentage credited to the insurance (a) Must not include information account in respect to each loan being falsely stating or implying that it was transferred applied to the unpaid bal- issued by or at the direction of VA or ance of such loans, or to the purchase any other department or agency of the price, whichever is the lesser. United States, and (b) Transfers between insurance ac- (b) Must not include information counts in a manner or under conditions falsely stating or implying that the not provided in paragraph (a) of this lender has an exclusive right to make section must have the prior approval of loans guaranteed or insured by VA. the Secretary. (c) Where loans are transferred with (Authority: 38 U.S.C. 3703(c)(1)) recourse or under a guaranty or repur- § 36.4875 Insured loan and insurance chase agreement no insurance credit account. will be transferred or insurance account affected and no reports will be (a) Loans otherwise eligible may be required. insured when purchased by a lender eli- (d) In all cases of transfer of loans gible under 38 U.S.C. 3703(a) if the pur- from one insured financial institution chaser (lender) submits with the loan to another insured institution, except report evidence of an agreement, gen- as provided in paragraph (c) of this sec- eral or special, made prior to the clos- tion, a report on a prescribed form exe- ing of the loan, to purchase such loan cuted by the parties and showing their subject to its being insured. agreement with regard to the transfer (b) A current account shall be main- of insurance credits shall be made to tained in the name of each insured the Secretary. lender or purchaser. The account shall be credited with the appropriate (Authority: 38 U.S.C. 3703(c)(1)) amounts available for the payment of losses on insured loans made or pur- § 36.4878 Debits and credits to insur- chased. The account shall be debited ance account under § 36.4820. with appropriate amounts on account In the event that an insured loan is of transfers, purchases under § 36.4820, transferred under the provisions of or payment of losses. The Secretary § 36.4820, there shall be charged to the may on 6 months’ notice close any insurance account of the transferor a lender’s insurance account. Such ac- sum equal to the amount paid trans- count after expiration of the 6-month feror on account of the indebtedness period shall be available only as to less the current market value of the loans embraced therein. property transferred as security there- (c) Amounts received or recovered by for as determined by an appraiser des- the Secretary or the holder with re- ignated by the Secretary, or the spect to a loan after payment of an in- amount chargeable to such insurance sured claim thereon will not restore account in the event of a transfer any amount to the holder’s insurance under § 36.4877, whichever sum is the account. greater. The credit to the insurance account of the transferee will be com- (Authority: 38 U.S.C. 3703(a)(2)) puted in accordance with § 36.4877(a). § 36.4877 Transfer of insured loans. (Authority: 38 U.S.C. 3703(c)(1)) (a) In cases involving the transfer from one insured financial institution § 36.4879 Payment of insurance. to another insured institution of loans (a) Upon the continuance of a default which are transferred without re- for a period of three months, the holder course, guaranty, or repurchase agree- may proceed to establish the net loss, ment, if no payment on any loan in- after giving the notices prescribed in

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§§ 36.4817 and 36.4850 if security is avail- constructing housing thereon for sale able. The net loss shall be reported to to eligible veterans with financing the Secretary with proper claim, which is to be guaranteed or insured or whereupon the holder shall be entitled made under the provisions of 38 U.S.C. to payment of the claim within the chapter 37, or the builder, sponsor or amount then available for such pay- developer of housing to be constructed ment under the payee’s related insur- for sale to eligible veterans with fi- ance account. Subject to the provisions nancing which is to be guaranteed or of the paragraph (b) of this section and insured or made under the provisions of to § 36.4875(b) a supplemental claim for 38 U.S.C. chapter 37. any balance of an insurance loss may (b) The provisions of Executive Or- be filed at any time within 5 years ders 11246 and 11375 and the rules and after the date of the original claim. regulations of the Secretary of Labor (b) The basis of the claim for an in- are applicable to: sured loss shall consist in the unreal- (1) Each Master Certificate of Rea- ized principal or the amount paid for sonable Value or extension or modi- the obligation, if less, plus unrealized fication thereof relating to proposed interest to the date of claim or the construction issued on or after July 22, date of sale whichever is earlier, and 1963; those expenses, if any, allowable under (2) Each individual Certificate of § 36.4814, but subject to proper credits Reasonable Value or extension or because of payments, set-off, proceeds modification thereof relating to proof security or otherwise, provided that posed construction issued on or after if there is no liquidation of security July 22, 1963, except as provided in the claim shall not include an accrual paragraph (c)(2) of this section; of interest for a period in excess of 6 (3) Each Special Conditions Letter or months from the date of the first modification thereof issued on or after uncured default. July 22, 1963, in respect to site approval of land to be improved by a builder, (Authority: 38 U.S.C. 3703(c)(1)) sponsor or developer for the construc- § 36.4880 Reports of insured institution of housing thereon; and tions. (4) Each direct loan fund reservation An insured financial institution shall commitment or extension thereof make such reports respecting its insur- issued to builders on or after July 22, ance accounts as the Secretary may 1963. from time to time require, not more (c) The provisions of Executive Or- frequently than semiannually. ders 11246 and 11375 and the rules and regulations of the Secretary of Labor (Authority: 38 U.S.C. 3703(c)(1)) are not applicable to: (1) Grants under chapter 21, title 38, § 36.4890 Purpose. U.S.C.; Sections 36.4890 through 36.4893 are (2) Individual Certificates of Reason- promulgated to achieve the aims of the able Value issued on or after July 22, applicable provisions of Executive Or- 1963, if: ders 11246 and 11375 and the regulations (i) The certificate relates to existing of the Secretary of Labor with respect properties, either previously occupied to federally assisted construction con- or unoccupied; or tracts. (ii) The certificate relates to proposed construction and— § 36.4891 Applicability. (A) A veteran was named in the re- (a) For the purposes of the home loan quest for appraisal, or guaranty and insurance and direct loan (B) A veteran contracted for the con- programs of the Department of Vet- struction or purchase of the home prior erans Affairs, the term ‘‘applicant for to issuance of the certificate, or Federal assistance’’ or ‘‘applicant’’ in (C) The property was listed in the Part III of Executive Order 11246, shall Schedule of Reasonable Values on an mean the builder, sponsor or developer outstanding Master Certificate of Rea- of land to be improved by such builder, sonable Value issued prior to July 22, sponsor or developer for the purpose of 1963;

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(3) Any contract or subcontract for (2) The contractor will, in all solicitations construction work not exceeding or advertisements for employees placed by or $10,000; and on behalf of the contractor, state that all (4) Any other contract or subcontract qualified applicants will receive consideration for employment without regard to which is exempted or excepted by the race, color, religion, sex or national origin. regulations of the Secretary of Labor. (3) The contractor will send to each labor (Authority: 38 U.S.C. 3703(c)(1)) union or representative of workers with which he has a collective bargaining agree- § 36.4892 Certification requirements. ment or other contract or understanding, a notice to be provided advising the said labor In any case in which §§ 36.4890 union or workers’ representative of the con- through 36.4893 are applicable, as set tractor’s commitments under section 202 of forth in § 36.4891, no action will be Executive Order 11246 of September 24, 1965, taken by the Department of Veterans and shall post copies of the notice in con- Affairs on any request for appraisal re- spicuous places available to employees and lating to proposed construction, site applicants for employment. approval of land to be improved by a (4) The contractor will comply with all builder, sponsor or developer for the provisions of Executive Order 11246 of Sep- construction of housing thereon, or for tember 24, 1965, and of the rules, regulations and relevant orders of the Secretary of a direct loan fund reservation commit- Labor. ment unless the builder, sponsor or de- (5) The contractor will furnish all informa- veloper has furnished the Department tion and reports required by Executive Order of Veterans Affairs a signed certifi- 11246 of September 24, 1965, and by the rules, cation in form as follows: regulations and orders of the Secretary of Labor, or pursuant thereto, and will permit To induce the Department of Veterans Af- access to his books, records and accounts by fairs to act on any request submitted by or the administering agency and the Secretary on behalf of the undersigned for site approval of Labor for purposes of investigation to as- of land to be improved for the construction certain compliance with such rules, regula- of housing thereon to be financed with loans tions and orders. guaranteed, insured or made by the Depart- ment of Veterans Affairs, or for establish- (6) In the event of the contractor’s non- ment by the Department of Veterans Affairs compliance with the nondiscrimination of reasonable value relating to proposed con- clauses of this contract or with any of the struction or for direct loan fund reservation said rules, regulations or orders, this con- commitments, the undersigned hereby tract may be canceled, terminated or sus- agrees that it will incorporate or cause to be pended in whole or in part and the con- incorporated into any contract for construc- tractor may be declared ineligible for further tion work or modification thereof, as defined Government contracts or federally assisted in the rules and regulations of the Secretary construction contracts in accordance with of Labor relating to the land or housing in- procedures authorized in Executive Order cluded in its request to the Department of 11246 of September 24, 1965, and such other Veterans Affairs the following equal oppor- sanctions may be imposed and remedies in- tunity clause: voked as provided in Executive Order 11246 of During the performance of this contract September 24, 1965, or by rule, regulation or the contractor agrees as follows: order of the Secretary of Labor, or as other- (1) The contractor will not discriminate wise provided by law. against any employee or applicant for em- (7) The contractor will include the provi- ployment because of race, color, religion, sex sions of paragraphs (1) through (7) in every or national origin. The contractor will take subcontract or purchase order unless ex- affirmative action to ensure that applicants empted by rules, regulations or orders of the are employed, and that employees are treat- Secretary of Labor issued pursuant to sec- ed during employment without regard to tion 204 of Executive Order 11246 of Sep- their race, color, religion, sex or national or- tember 24, 1965, so that such provisions will igin. Such action shall include, but not be be binding upon each subcontractor or ven- limited to the following: Employment, up- dor. The contractor will take such action grading, demotion or transfer; recruitment with respect to any subcontract or purchase or recruitment advertising; layoff or termi- order as the administering agency may di- nation; rates of pay or other forms of com- rect as a means of enforcing such provisions, pensation; and selection for training, includ- including sanctions for noncompliance: Pro- ing apprenticeship. The contractor agrees to vided, however, That in the event a con- post in conspicuous places, available to em- tractor becomes involved in, or is threatened ployees and applicants for employment, no- with, litigation with a subcontractor or ven- tices to be provided setting forth the provi- dor as a result of such direction by the agen- sions of this nondiscrimination clause. cy, the contractor may request the United

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States to enter into such litigation to pro- § 36.4893 Complaint and hearing protect the interests of the United States. cedure. Except in special cases and in subcontracts (a) Upon receipt of a written com- for the performance of construction work at the site of construction, the clause is not re- plaint signed by the complainant to quired to be inserted in subcontracts below the effect that any person, firm or enti- the second tier. Subcontracts may incor- ty has violated the undertakings re- porate by reference the equal opportunity ferred to in § 36.4892, such person, firm clause. or other entity shall be invited to dis- The undersigned further agrees that it will cuss the matter in an informal hearing be bound by the above equal opportunity with the Director of the Department of clause in any federally assisted construction Veterans Affairs regional office or cen- work which it performs itself other than ter. through the permanent work force directly (b) If the existence of a violation is employed by an agency of Government. denied by the person, firm or other en- The undersigned agrees that it will cooper- tity against which a complaint has ate actively with the administering agency been made, the Director or designee and the Secretary of Labor in obtaining the shall conduct such inquiries and hear- compliance of contractors and subcontrac- ings as may be deemed appropriate for tors with the equal opportunity clause and the purpose of ascertaining the facts. the rules, regulations and relevant orders of (c) If it is found that the person, firm the Secretary of Labor, that it will furnish or other entity against which a com- the administering agency and the Secretary of Labor such information as they may re- plaint has been made has not violated quire for the supervision of such compliance, the undertakings referred to in and that it will otherwise assist the admin- § 36.4892, the parties shall be so noti- istering agency in the discharge of the agen- fied. cy’s primary responsibility for securing com- (d) If it is found that there has been pliance. The undersigned further agrees that a violation of the undertakings re- it will refrain from entering into any con- ferred to in § 36.4892, the person, firm or tract or contract modification subject to Ex- other entity in violation shall be re- ecutive Order 11246 with a contractor quested to attend a conference for the debarred from, or who has not demonstrated purpose of discussing the matter. Fail- eligibility for, Government contracts and ure or refusal to attend such a con- federally assisted construction contracts ference shall be proper basis for the ap- pursuant to Part II, Subpart D of Executive Order 11246 and will carry out such sanctions plication of sanctions. and penalties for violation of the equal op- (e) The conference arranged for dis- portunity clause as may be imposed upon the cussing a violation shall be conducted contractors and subcontractors by the ad- in an informal manner and shall have ministering agency or the Secretary of as its primary objective the elimi- Labor pursuant to Part II, Subpart D of Ex- nation of the violation. If the violation ecutive Order 11246. is eliminated and satisfactory assur- In addition, the undersigned agrees that if ances are received that the person, it fails or refuses to comply with these un- firm or other entity in violation will dertakings such failure or refusal shall be a comply with the undertakings pursu- proper basis for cancellation by the Depart- ant to § 36.4892 in the future, the parties ment of Veterans Affairs of any outstanding concerned shall be so notified. master certificates of reasonable value or in- (f) Failure or refusal to comply and dividual certificates of reasonable value re- give satisfactory assurances of future lating to proposed construction, except in respect to cases in which an eligible veteran compliance with the equal employment has contracted to purchase a property in- opportunity requirements shall be cluded on such certificates, and for the rejec- proper basis for applying sanctions. tion of future requests submitted by the un- The sanctions shall be applied in ac- dersigned or on his or her behalf for site ap- cordance with the provisions of Execu- proval, appraisal services, and direct loan tive Order 11246 as amended and the fund reservation commitments until satis- regulations of the Secretary of Labor. factory assurance of future compliance has (g) Upon written application, a com- been received from the undersigned, and for plainant or a person, firm or other en- referral of the case to the Department of tity against which a complaint has Justice for appropriate legal proceedings. been filed may apply to the Under Sec- (Authority: 38 U.S.C. 3703(c)(1)) retary for Benefits for a review of the

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action taken by a Director. Upon re- from private insurers that do not participate ceiving such application, the Under in the NFIP. Secretary for Benefits may designate a • At a minimum, flood insurance pur- representative or representatives to chased must cover the lesser of: (1) the outstanding principal balance of the conduct an informal hearing and to loan; or make a report of findings. The Under (2) the maximum amount of coverage al- Secretary for Benefits may, after a re- lowed for the type of property under the view of such report, modify or reverse NFIP. an action taken by a Director. Flood insurance coverage under the NFIP (h) Reinstatement of restricted per- is limited to the overall value of the prop- sons, firms or other entities shall be erty securing the loan minus the value of the land on which the property is located. within the discretion of the Under Sec- • Federal disaster relief assistance (usu- retary for Benefits and under such ally in the form of a low-interest loan) may terms as the Under Secretary for Bene- be available for damages incurred in excess fits may prescribe. of your flood insurance if your community’s participation in the NFIP is in accordance (Authority 38 U.S.C. 3703(c)(1)) with NFIP requirements. ll Flood insurance coverage under the APPENDIX A TO PART 36—SAMPLE FORM NFIP is not available for the property secur- OF NOTICE OF SPECIAL FLOOD HAZ- ing the loan because the community in ARDS AND AVAILABILITY OF FEDERAL which the property is located does not par- DISASTER RELIEF ASSISTANCE ticipate in the NFIP. In addition, if the non- participating community has been identified We are giving you this notice to inform for at least one year as containing a special you that: flood hazard area, properties located in the The building or mobile home securing the community will not be eligible for Federal loan for which you have applied is or will be disaster relief assistance in the event of a located in an area with special flood hazards. Federally-declared flood disaster. The area has been identified by the Director of the Federal Emergency Management (Authority: 42 U.S.C. 4104a) Agency (FEMA) as a special flood hazard [62 FR 5534, Feb. 6, 1997] area using FEMA’s Flood Insurance Rate Map or the Flood Hazard Boundary Map for the following community: llll. This area PART 38—NATIONAL CEMETERIES has at least a one percent (1%) chance of a OF THE DEPARTMENT OF VET- flood equal to or exceeding the base flood ERANS AFFAIRS elevation (a 100-year flood) in any given year. During the life of a 30-year mortgage Sec. loan, the risk of a 100-year flood in a special 38.600 Definitions. flood hazard area is 26 percent (26%). 38.601 Advisory Committee on Cemeteries Federal law allows a lender and borrower and Memorials. jointly to request the Director of FEMA to 38.602 Names for national cemeteries and review the determination of whether the features. property securing the loan is located in a 38.603 Gifts and donations. special flood hazard area. If you would like 38.617 Prohibition of interment or memori- to make such a request, please contact us for alization of persons who have been con- further information. victed of Federal or State capital crimes. ll The community in which the property 38.618 Findings concerning commission of a securing the loan is located participates in capital crime where a person has not the National Flood Insurance Program been convicted due to death or flight to (NFIP). Federal law will not allow us to avoid prosecution. make you the loan that you have applied for 38.620 Persons eligible for burial. if you do not purchase flood insurance. The 38.621 Disinterments. flood insurance must be maintained for the 38.629 Outer burial receptacle allowance. life of the loan. If you fail to purchase or 38.630 Headstones and markers. renew flood insurance on the property, Fed- 38.631 Graves marked with a private head- eral law authorizes and requires us to pur- stone or marker. chase the flood insurance for you at your ex- 38.632 Headstone and marker application pense. process. • Flood insurance coverage under the NFIP 38.633 Group memorial monuments. may be purchased through an insurance AUTHORITY: 38 U.S.C. 501(a), 2306, unless agent who will obtain the policy either di- otherwise noted. rectly through the NFIP or through an insurance company that participates in the SOURCE: 70 FR 4769, Jan. 31, 2005, unless NFIP. Flood insurance also may be available otherwise noted.

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