Federal Register, Volume 79 Issue 90 (Friday, May 9, 2014)

[Federal Register Volume 79, Number 90 (Friday, May 9, 2014)]
[Rules and Regulations]
[Pages 26620-26628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-10600]

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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AO65

Loan Guaranty: Ability-To-Repay Standards and Qualified Mortgage
Definition Under the Truth in Lending Act

AGENCY: Department of Veterans Affairs.

ACTION: Interim final rule.

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SUMMARY: This document amends the Department of Veterans Affairs (VA)
Loan Guaranty regulations to implement provisions of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, requiring that VA
define the types of VA loans that are ``qualified mortgages'' for the
purposes of the new Ability to Repay provisions of the Truth in Lending
Act. This rule establishes which VA-guaranteed loans are to be
considered ``qualified mortgages'' and have either safe harbor
protection or the presumption that the borrower is able to repay a
loan, in accordance with the new Ability to Repay provisions. The rule
does not change VA's regulations or policies with respect to how
lenders are to originate mortgages, except to the extent lenders want
to make qualified mortgages.

DATES: Effective Date: This interim final rule is effective May 9,
2014.
Comment Date: Comments must be received on or before June 9, 2014.
While the standard comment period is 60 days, in order for VA to
provide thorough responses to all comments and publish the final
regulation as soon as possible with a target date of within 90 days of
the publication of this interim final rule, we are limiting the period
for comments to 30 days. VA believes it is important to publish the
final rule soon because of the certainty the final rule will provide
veterans and lenders. See below for further explanation.

ADDRESSES: Written comments may be submitted through
www.Regulations.gov; by mail or hand-delivery to Director, Regulation
Policy and Management (02REG), Department of Veterans Affairs, 810
Vermont Ave. NW., Room 1068, Washington, DC 20420; or by fax to (202)
273-9026. Comments should indicate that they are submitted in response
to ``RIN 2900-AO65--Loan Guaranty: Ability-to-Repay Standards and
Qualified Mortgage Definition under the Truth in Lending Act.'' Copies
of comments received will be available for public inspection in the
Office of Regulation Policy and Management, Room 1068, between the
hours of 8:00 a.m. and 4:30 p.m., Monday through Friday (except
holidays). Please call (202) 461-4902 (this is not a toll-free number)
for an appointment. In addition, during the comment period, comments
may be viewed online through the Federal Docket Management System
(FDMS) at www.Regulations.gov.

FOR FURTHER INFORMATION CONTACT: John Bell III, Assistant Director for
Loan Policy and Valuation (262), Veterans Benefits Administration,
Department of Veterans Affairs, 810 Vermont Avenue NW., Washington, DC
20420, (202) 632-8786. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), Public Law 111-203, 124 Stat.
1376 (2010), became law on July 21, 2010. The Dodd-Frank Act
established as an independent agency the Consumer Financial Protection
Bureau (CFPB) and charged it with implementing many reforms to Federal
oversight of residential mortgage lending, including a requirement that
lenders be able to demonstrate that borrowers are reasonably able to
repay their mortgage loans at the time the loans are made. Public Law
111-203, Sec. 1411. As directed by the Dodd-Frank Act, the CFPB has
issued rules regarding implementation of the Truth in Lending Act
(TILA), 15 U.S.C. 1601, et seq. The CFPB rules became effective January
10, 2014. The CFPB has amended the rules, as explained below, several
times since initial publication.
The Dodd-Frank Act also requires various Federal agencies to define
which of their loans are qualified mortgages for the purposes of
sections 129B and 129C of TILA and authorizes such agencies to exempt
streamlined refinances from certain income verification requirements.
Public Law 111-203, Secs. 1411 and 1412. In compliance with sections
1411 and 1412 of the Dodd-Frank Act, VA is in this rulemaking defining
qualified mortgage to mean any loan guaranteed, insured, or made by VA,
with certain limitations on streamlined refinances, also known as
Interest Rate Reduction Refinance Loans (IRRRLs). The terms
``streamlined refinance'' and ``IRRRL'' are used interchangeably in
this rule. VA is also specifying income verification requirements for
IRRRLs.

Note on Comments and Publication of Final Rule

VA believes it is important to publish a final rule promptly after
the publication of this interim final rule. Veterans want full
assurance that the

[[Page 26621]]

home loan benefit will remain easy to utilize, and lenders want the
certainty that comes with a final rule. As such, VA will review
comments as they are received. Once the comment period closes, VA will
exercise all reasonable efforts to publish the final rule as quickly as
possible, with a goal of closing out the full rulemaking process within
90 days of publication of this interim final rule.

General Definitions of Qualified Mortgage

Section 1412 of the Dodd-Frank Act amended section 129C of TILA, 15
U.S.C. 1601, et seq., to include a definition of a ``qualified
mortgage.'' Public Law 111-203, Sec. 1412. Although the qualified
mortgage definition applies generally to loans subject to TILA, a
number of Federal agencies, including VA, are required to prescribe
rules defining the types of loans they insure, guarantee, or
administer, as the case may be, that are qualified mortgages. Id. Such
rules may revise, add to, or subtract from the criteria used to define
a qualified mortgage under section 129C of TILA, upon a finding that
they are consistent with the purposes of TILA's provisions respecting
the borrower's ability to repay in sections 129B and 129C. Id.
On January 30, 2013, the CFPB published its revision of Regulation
Z, in which, among other things, it established a definition of
``Qualified Mortgage.'' 78 FR 6407. That CFPB final rulemaking also
generally prohibits a creditor from making a mortgage loan unless the
creditor determines that the consumer will have the ability to repay
the loan. Id. at 6415.
The rule further identified two types of qualified mortgages. Id.
at 6408. One type enjoys a rebuttable presumption that the creditor
making the loan satisfied the borrower's ability-to-repay requirements.
Id. With these types of loans, the presumption favors the assertion
that the creditor complied with the ability-to-repay requirements
unless the borrower proves--based on information that the creditor was
aware of at the time the loan was made--that the consumer would be left
with insufficient residual income or assets to meet living expenses
after paying the mortgage and other debts. Id. The other type, safe
harbor qualified mortgages, are those that are considered to have
conclusively met all requirements of a qualified mortgage and a
borrower's ability to repay a loan. Id.

Subsequent Regulatory Changes to Qualified Mortgage Definition

The issues CFPB must regulate are some of the most complex problems
faced in the lending industry today. VA recognizes that CFPB must act
nimbly to address myriad issues affecting many facets of the housing
finance industry and that, while VA is an important part of the
industry, VA's market share is relatively small.
CFPB rules published on January 30, 2013, created a temporary
qualified mortgage applicable to VA-guaranteed loans, among other
agency guaranteed loans. Under these rules, VA-guaranteed loans could
be qualified mortgages even if they did not meet the 43 percent debt-
to-income ratio applicable to many other types of qualified mortgages.
78 FR 6617.
CFPB has issued multiple rulemaking documents related to its
original final rule, including (1) a concurrent proposal, published on
January 30, 2013 (78 FR 6621); (2) a proposed revision to the final
rule, published on April 18, 2013 (78 FR 23171); (3) a final rule
official interpretation, published on June 12, 2013 (78 FR 35430); (4)
a final rule official interpretation, published on July 24, 2013 (FR 78
FR 44686); (5) a final rule amendment, published October 1, 2013 (78 FR
60442); and (6) an interim final rule, published on October 23, 2013
(78 FR 62993).
Some VA stakeholders have expressed uncertainty regarding the
impact of these amendments on the requirements for VA-guaranteed loans
to be qualified mortgages under CFPB's regulations. For instance, the
concurrent proposal published on January 30, 2013, stated that CFPB was
proposing to exempt from the ability to repay requirements streamlined
refinances made pursuant to a program administered by VA and other
Federal agencies. See 78 FR 6623. However, the CFPB did not adopt this
exemption in its final rule published on June 12, 2013, stating that
the exemption from the ability to repay requirements for streamlined
refinances was unnecessary in light of the temporary qualified mortgage
provisions. See 78 FR 35471-3. CFPB explained in the preamble to its
rule that while it did not believe that an exemption for streamlined
refinances was appropriate: ``[Under] the temporary qualified mortgage
provisions in Sec. 1026.43(e)(4), for instance, creditors need only
comply with the documentation and underwriting requirements established
by the respective Federal agencies, and need not apply the 43 percent
debt-to-income ratio or follow the documentation and underwriting
procedures applicable to the general category of qualified mortgages
under Sec. 1026.43(e)(3) and appendix Q.'' 78 FR 35473. The Bureau
noted, however, that under Sec. 1026.43(e)(4), a loan that is eligible
to be purchased, guaranteed, or insured by one of the Federal agencies
(including VA), would still need to meet certain minimum requirements
imposed by the Dodd-Frank Act, including the prohibitions on certain
``higher-risk loan terms,'' loan terms exceeding 30 years, or excessive
points and fees. Id.
The CFPB published a further amendment on July 24, 2013, revising
the temporary qualified mortgage provision applicable to loans eligible
for government-sponsored enterprise (GSE) and federal agency purchase,
insurance, or guaranty, including VA guaranty. Where the original
provision, published on January 30, 2013, required that such a loan be
``eligible to be guaranteed by the U.S. Department of Veterans
Affairs,'' 78 FR 6587, the revised provision required that the loan be
``eligible to be guaranteed, except with regard to matters wholly
unrelated to ability to repay, by the U.S. Department of Veterans
Affairs,'' 78 FR 44718 (emphasis added). The amendment also revised the
CFPB's official commentary to this provision. As revised, comment
43(e)(4)-4 states that the provision ``requires only that the creditor
determine that the loan is eligible (i.e., meets the criteria) for [VA]
. . . guarantee . . . at consummation.'' 78 FR 44727. The comment
further identifies methods for determining eligibility: ``A valid
underwriting recommendation by [an automated underwriting system] that
relies on an Agency underwriting tool,'' ``compliance with the
standards in the . . . Agency written guide in effect at the time,''
``a written agreement between the creditor . . . and a[n] . . .
Agency'' permitting variations, and ``an individual loan waiver granted
by the . . . Agency to the creditor.'' Id. However, ``[i[n using any of
the[se] methods . . ., the creditor need not satisfy standards that are
wholly unrelated to assessing a consumer's ability to repay that the
creditor is required to perform.'' Id. For ease of reading, VA will
refer to this change as the ``July Revision.''
In the same rule, CFPB revised Appendix Q. Appendix Q provides the
standards by which a creditor must assess a borrower's debts and income
to determine whether the borrower's debt-to-income exceeds 43 percent
for purposes of the CFPB's general qualified mortgage provision. See 78
FR 6589; 78 FR 44718; see also 12 CFR 1026.43(e)(2)(vi). As revised in
the July

[[Page 26622]]

amendment, Appendix Q states that ``a creditor may not rely on Agency
or GSE guidance to reach a resolution contrary to that provided by the
following standards, even if such Agency or GSE guidance specifically
addresses the particular type of debt or income . . .'' Id.

Questions About the July Revision, Appendix Q, and Debt-to-Income
Ratios

After the publication of the amendments in June and July 2013, some
VA stakeholders raised questions about what requirements might apply to
VA. These stakeholders had originally believed CFPB's rule would not
substantially affect VA's program requirements, but raised concerns to
VA regarding the effect of the June and July 2013 publications. Two
important areas of concern were income verification requirements for
IRRRLs and debt-to-income calculations for originations and refinances
other than IRRRLs.
VA has fielded numerous questions related to the July Revision and
whether it means all IRRRLs will be subject to income verification
requirements. As noted above, the preamble to the CFPB's rule published
in June stated that ``[u]nder the temporary qualified mortgage
provisions in Sec. 1026.43(e)(4), for instance, creditors need only
comply with the documentation and underwriting requirements established
by the respective Federal agencies, and need not apply the 43 percent
debt-to-income ratio or follow the documentation and underwriting
procedures applicable to the general category of qualified mortgages
under Sec. 1026.43(e)(3) and appendix Q.'' 78 FR 35473. Also in the
preamble to the July rule, CFPB stated that the July Revision was
intended ``to make clear that matters wholly unrelated to ability to
repay will not be relevant to determination of [qualified mortgage]
status.'' 78 FR 44686, July 24, 2013. Lenders have nonetheless informed
VA that as long as they have any doubts, they will proceed as if the
income verification requirements apply to IRRRLs, even though the Dodd-
Frank Act provides for a specific exemption, as do VA regulations. See
Public Law 111-203, Sec. 1411; 38 CFR 36.4307. VA guaranteed over
300,000 IRRRLs in fiscal year (FY) 2013. VA estimates that, had lenders
been required to verify income for IRRRLs in the same manner that they
verify income for purchase-money guaranteed loans, the average closing
time for an IRRRL would have taken two to four weeks longer.
In addition, many VA stakeholders have raised concerns about the
debt-to-income ratio. According to these stakeholders, one
interpretation of the CFPB rule seems to exempt VA loans from the CFPB
debt-to-income requirements of 12 CFR 1026.43(e)(2)(vi). Under 12 CFR
1026.43(e)(4), VA guaranteed loans are qualified mortgages with safe
harbor protections if they also (i) provide for regular periodic
payments, (ii) do not exceed a term of 30 years, and (iii) include
points and fees that do not exceed specified amounts. Note: The three
requirements summarized here are more fully described at 12 CFR
1026.43(e)(2)(i)-(iii). As debt-to-income ratio requirement is not one
of those, the argument is that it does not apply to VA-guaranteed
loans. The preamble and official commentary discussed above support
this position. Also supporting this position is the small entity
compliance guide published by the CFPB. The guide states: ``To meet the
Temporary QM definition, loans must be underwritten using the required
guidelines of the [GSE/Agency] entities above, including any relevant
DTI guidelines. They do not have to meet the 43 percent debt-to-income
ratio threshold that applies to General QM loans. The creditor does not
have to satisfy GSE or agency standards which are wholly unrelated to
the credit risk or underwriting of the loan or any standards which
apply after the consummation of the loan.'' Ability-to-Repay and
Qualified Mortgage Rule Small Entity Compliance Guide at 33, http://files.consumerfinance.gov/f/201401_cfpb_atr-qm_small-entity-compliance-guide.pdf (emphasis in original).
Some VA stakeholders have suggested that there might be another
interpretation of the CFPB's rules. Since Appendix Q states that a
creditor may not rely on Agency guidance to reach a resolution of the
appropriate treatment of a specific kind of debt or income contrary to
the resolution provided by Appendix Q, some stakeholders have suggested
to VA that the 43 percent debt-to-income ratio will apply after all. In
FY 2013, there were 95,198 VA-guaranteed loans that exceeded the 43
percent debt-to-income ratio. VA understands that lenders may not make
similar loans going forward if the loans are not qualified mortgages
with safe harbor protections. Alternatively, the perceived risk of non-
qualified mortgage loans may cause investors in the marketplace to
artificially deflate the prices they would pay for VA loans, which
would lead to lenders increasing their loan prices to veterans to meet
that shortfall. This is due in part to VA's maximum 25 percent
guaranty, as opposed to the 100 percent guaranty provided by other
Federal agencies.
CFPB published another amendment in October 2013. See 78 FR 60382,
Oct. 1, 2013. This time the rule removed the July Revision, at least
with regard to VA. 78 FR 60442, Oct. 1, 2013. Another amendment was
published three weeks later reinstating the July Revision. See 78 FR
62993, Oct. 23, 2013. The amendment explained that the omission of the
July Revision was inadvertent and no substantive change was intended.
78 FR 63002, Oct. 23, 2013.
VA has attempted to eliminate the uncertainty by explaining to
stakeholders that, in VA's view, neither the July Revision nor Appendix
Q changes the way debt-to-income ratio affects the underwriting of VA-
guaranteed loans. Some stakeholders continue to advise, however, that
the issue goes beyond education or training. They seek legal certainty,
and advise that in the absence of the legal certainty they seek, they
are concerned whether investors will continue to view VA-guaranteed
loans as high-quality investments that warrant premium pricing.
VA does not have authority to state with legal effect the proper
interpretation of CFPB's rules. CFPB has the authority to interpret,
enforce, and amend the rules CFPB promulgates. Courts and Congress
could also have a role in resolving any issues surrounding the merits
of the legal interpretations explained above.
As a result, VA's approach in this rule is to define which VA loans
satisfy the qualified mortgage requirements, notwithstanding other
limitations. In other words, VA may not be able to provide a definitive
interpretation of CFPB's rule, but VA can make sure that VA's rule
removes stakeholder uncertainties concerning VA loans. Since VA's goal
is to ensure that veterans' benefits are delivered without
interruption, additional burden, or cost to veterans, VA intends
through this interim final rule to quell such concerns by specifying
exactly what is required for a VA loan to be considered a qualified
mortgage with safe harbor protections.

VA's Interim Final Rule

In this interim final rule, VA is amending 38 CFR 36.4300(b) to
establish that almost all VA loans that meet current VA underwriting
standards will be safe harbor qualified mortgages with regard to the
revised TILA Ability to Repay provisions. In paragraph (b)(1), VA
defines safe harbor qualified mortgage as one that meets the Ability-
to-Repay requirements of sections 129B

[[Page 26623]]

and 129C of TILA regardless of whether the loan might be considered a
high cost mortgage transaction as defined by section 103bb of TILA (15
U.S.C. 1602bb). Paragraph (b)(2) states that subject to certain
exceptions pertaining to IRRRLs, any guaranteed or insured loan made in
compliance with this subpart is a safe harbor qualified mortgage. There
are some VA IRRRLs which will be considered rebuttable presumption
qualified mortgages instead. Those are described later in this
preamble.
Paragraph (b)(3) incorporates without change CFPB's category of
exempted transactions, except that VA is omitting reverse mortgages
because they are not mortgages that VA guarantees, insures, or makes.
Under CFPB's rule, 12 CFR 1026.43(a), exempted transactions are not
subject to challenge under the ability-to-pay requirements of TILA (15
U.S.C. 1639C).
With regard to the loans that are subject to the ability-to-repay
provisions (i.e., loans other than the type described in Sec.
36.4300(b)(3)), VA and CFPB's definitions of qualified mortgage may
differ. To the extent there are differences between CFPB's definition
and VA's, VA intends for its definition of qualified mortgage to loans
guaranteed, insured, or made by VA to preempt rules that may seem
contrary to VA's. This would include those loans which would fit under
VA's definition, but not necessarily under the CFPB definition (i.e.,
negative amortization, documentation requirements for IRRRLs, minimum
FICO score documentation, and in one possible legal interpretation,
debt-to-income ratios). Congress has authorized VA to deliver veterans'
benefits in a way that helps as many veterans as possible. In so doing,
VA's statutory framework expressly includes authority for negative
amortizing loans under certain circumstances, streamlined refinances
that are simply improving a borrower's ability to repay a loan that the
Secretary has already guaranteed under more stringent underwriting
guidelines, and Secretarial discretion to guarantee loans after taking
into consideration the unique circumstances that affect veterans.
Despite some of the differences between VA's definition and CFPB's,
VA has made a finding that, for the following reasons, VA's definition
is consistent with TILA. Pursuant to 38 U.S.C. 3710, VA already has in
place an extensive regulatory framework for determining whether a
borrower is a satisfactory credit risk to obtain a loan guaranteed or
insured by VA. Specifically, the regulations found at 38 CFR 36.4340
and 36.4313 include credit underwriting standards such as debt-to-
income ratios, criteria for evaluating the reliability and stability of
the income of a veteran, procedures for ascertaining and verifying the
monthly income required by the veteran to meet the anticipated loan
payment terms, residual income standards, allowable fees and charges to
be paid at closing, and document retention requirements for lenders.

VA's Underwriting Standards for Qualified Mortgages

VA's current underwriting standards for guaranteed loans are
consistent with, if not prototypical for, the generally applicable
definition of qualified mortgage in TILA. VA's rules already require
full underwriting of all origination loans such as purchase money loans
and refinances other than IRRRLs. By statute, the maturity of a VA-
guaranteed loan at the time of origination shall not be more than
thirty years and thirty-two days. See 38 U.S.C. 3703(d)(1). VA requires
that loans generally be amortized in equal periodic payments that are
substantially equal. See 38 CFR 36.4310. VA requires that discount
points be reasonable as determined by the Secretary of Veterans
Affairs. See 38 CFR 36.4313(d)(7)(ii)(C). These requirements would seem
to correspond to those in CFPB's rule at 12 CFR 1026.43(e)(2)(i)-(iii).
Also, as with CFPB's rule, VA's rule already requires lenders to
verify assets, employment, credit reports, and the accuracy of all
other information provided in support of a purchase money origination
loan or a refinance that is not an IRRRL. See 38 CFR 36.4340(j). VA
regulates allowable fees and charges that may be charged to or paid by
a veteran borrower. See 38 CFR 36.4313. VA has a structure in place for
determining acceptable debt-to-income ratio. See 38 CFR 36.4340(c). It
should be noted, too, that in addition to all of these requirements, VA
has had a longstanding requirement for residual income to ensure that
the borrower has sufficient income to cover family living expenses
after meeting monthly mortgage and debt obligations. See 38 CFR
36.4340(e).
Where VA's rule differs somewhat from CFPB's is that VA must also
balance credit underwriting with its mission of serving veterans. For
instance, VA makes room for limited underwriting exceptions when a
debt-to-income ratio might not provide a complete picture of a
borrower's ability to repay a loan. See 38 CFR 36.4340(c). VA also
permits underwriters to make judgment calls based on a veteran's unique
circumstances, such as when recently discharged veterans have a limited
credit history. See 38 CFR 36.4340(g). A key tenet of the VA Home Loan
program is the allowance it provides to underwriters to review a
veteran's entire loan profile and consider all compensating factors in
order to determine the credit worthiness of the veteran. It is not one
characteristic alone that reveals whether a veteran maintains the
ability to repay a loan, but the culmination of all characteristics in
a veteran's profile. Veterans show a high degree of borrowing
responsibility as a population, which is borne out by the fact that
VA's loans performed better than even conventional loans during the
peak of the financial crisis. According to the Mortgage Bankers
Association National Delinquency Survey, as of the second quarter 2013
VA has held the lowest foreclosure rate for the past 22 quarters and
the lowest seriously delinquent rate for 15 of the past 18 quarters
when compared to prime, subprime, and Federal Housing Administration
(FHA) loans.
Accordingly, this rule amends 38 CFR 36.4300 by designating as safe
harbor qualified mortgages all purchase money origination loans and
refinances other than certain IRRRLs guaranteed or insured by VA. Such
a designation helps to assure veterans that they can continue using
their benefits to obtain loans on favorable terms, while also easing
any liability concerns expressed by lenders making VA-guaranteed loans
and any marketplace concerns about the stability of investing in VA-
guaranteed loans.

Qualified Mortgage Status for VA Direct Loans

In addition to designating qualified mortgage status for VA-
guaranteed and VA-insured loans, this rulemaking is designating as a
qualified mortgage any loan that VA makes directly to a borrower. One
such type of loan, authorized in 38 U.S.C. 3711, is typically made to
recipients of a Specially Adapted Housing grant. Another type,
authorized in 38 U.S.C. 3761, is made to Native American veterans who
live on trust lands. A third, which VA calls a vendee loan, is
authorized in 38 U.S.C. 3720 and 3733, and is made to purchasers of
properties VA acquires as a result of foreclosures in the guaranteed
loan program. Given that each of these types of loans is required to
meet either the same or substantially similar standards as those
prescribed for the guaranteed program, there is no reason to categorize
them

[[Page 26624]]

differently for the purposes of a borrower's ability to repay them.
Accordingly, VA is amending 38 CFR 36.4500 by stating that all VA
direct loans, Native American direct loans, and vendee loans are safe
harbor qualified mortgages for the purposes of sections 129B and 129C
of TILA. VA is using the same definition of safe harbor qualified
mortgage as in Sec. 36.4300(b)(1). We also amend the section heading
and include the authority citation to 15 U.S.C. 1639C(b)(3)(B)(ii) and
38 U.S.C. 3710 for new Sec. 36.4500(c). As a conforming amendment, VA
is revising Sec. 36.4501 to define ``Vendee loan'' as a loan made by
the Secretary for the purpose of financing the purchase of a property
acquired pursuant to chapter 37 of title 38, United States Code. We
also include the authority citation to 38 U.S.C. 3720 and 3733.
We are redesignating current paragraph (c) of Sec. 36.4500 as
paragraph (d) and also make a few conforming changes to include
headings for 38 CFR 36.4500(a), (b), and newly redesignated paragraph
(d) so that they are consistent with the format of newly added
paragraph (c). Each paragraph will now have its own heading as follows:
``Applicability to direct loans'' for paragraph (a); ``Applicability to
direct loans to Native Americans'' for paragraph (b); ``Safe harbor
qualified mortgage'' for paragraph (c); and ``Restatement'' for
paragraph (d).

Safe Harbor Versus Rebuttable Presumption Qualified Mortgages--IRRRLs

While all VA IRRRLs will be considered qualified mortgages, not all
will be safe harbor qualified mortgages. The ones that are not safe
harbor qualified mortgages, meaning that they cannot conclusively meet
the Ability-to-Repay requirements, are qualified mortgages entitled to
a presumption that they meet the Ability-to-Repay requirements of the
Dodd-Frank Act. Unlike a safe harbor qualified mortgage, a rebuttable
presumption qualified mortgage provides the borrower with the
opportunity to argue that the lender did not make a good faith
determination that the borrower would have a reasonable ability to
repay the loan. (Provided a loan meets VA underwriting standards and
complies with the requirements of 38 CFR 36.4300-36.4393, inclusive, it
will be a VA guaranteed loan regardless of whether it is considered a
safe harbor qualified mortgage or a rebuttable presumption qualified
mortgage or neither under TILA.)
In order for an IRRRL to be considered a safe harbor qualified
mortgage, the loan must meet all of the requirements of 36.4300(c)(1):
(i) The loan being refinanced was originated at least 6 months before
the new loan's closing date, and the veteran has not been more than 30
days past due during the 6 months preceding the new loan's closing
date; (ii) the recoupment period for all allowable fees and charges
(see 38 CFR 36.4313) financed as part of the loan or paid at closing
does not exceed thirty-six (36) months; and (iv) all other VA
requirements for guaranteeing an IRRRL are met.
The purpose of an IRRRL is to place veterans into a better
financial position by (i) reducing their interest rate in effect
lowering their payment, (ii) reducing the term of the loan which would
reduce the total of payments on the loan, or (iii) reducing their
concern for market fluctuations by converting a loan from an ARM to a
fixed rate. In establishing a ``cooling off'' period and recoupment
requirement, VA intends to keep the tenets of the IRRRL program strong
by ensuring that veterans who obtain an IRRRL are placed in a better
financial position. VA believes that a veteran who has recently
undergone the rigorous underwriting process associated with loan
origination, and who is still within six months of obtaining the loan,
should give him or herself time to understand the benefits of the
original loan. If a veteran is experiencing financial hardships or
other concerns during the first six months of the loan, VA has
alternative means to help the veteran navigate through those issues
outside of an IRRRL. The recoupment period helps disclose to the
veteran the true costs associated with refinancing a loan. In FY 2013,
308,332 IRRRLs were originated and 12,900 (4%) loans would have failed
to meet the seasoning requirement in this rule. Currently, data is not
available to address the number of files in FY 2013 that would be
affected by the 36 month recoupment requirement.
A proposed IRRRL that does not meet the seasoning and recoupment
requirements of section 36.4300(c)(1) is still considered a qualified
mortgage, but it will not have the safe harbor protection. Instead, it
will only be considered a qualified mortgage with the presumption that
a borrower has the ability to repay the loan. VA believes that a
veteran should be able to take advantage of any opportunity that puts
the veteran in a better financial situation. To make it effectively
impossible for a veteran to refinance a loan solely because a veteran
has not been in the home for the prescribed period or because the
recoupment might fall just short of the requirement seems overly
restrictive. At the same time, VA believes that lenders and borrowers
should proceed with caution in such circumstances and understand that
there is some risk associated with these sorts of loans. As such, VA
has determined that the various interests are best balanced by
designating such loans as qualified mortgages, but only to the extent
that they provide a presumption of the borrower's ability to repay.
A proposed IRRRL that does not meet the requirements for exemption
of income verification, as explained below, must receive prior approval
from VA to be guaranteed. If VA grants approval, the IRRRL will satisfy
the requirements of a qualified mortgage with the presumption that the
borrower is able to repay the loan. Safe harbor protections will only
apply to such an IRRRL if it also meets the seasoning and recoupment
requirements.
In the rule text we also include the authority citation to 15
U.S.C. 1639C(b)(3)(B)(ii) and 38 U.S.C. 3710 for new Sec.
36.4300(c)(1) and make a few conforming changes. The conforming changes
redesignate current paragraph (b) of 38 CFR 36.4300 as paragraph (e),
and add headings for 38 CFR 36.4300(a) and newly redesignated paragraph
(e) so that they are consistent with the format of newly added
paragraphs (b) thru (d). Each paragraph will now have its own heading
as follows: ``Applicability to guaranteed loans'' for paragraph (a);
``Safe harbor qualified mortgage'' for paragraph (b); ``Interest rate
reduction refinancing loans (IRRRLs)'' for paragraph (c); ``Effect of
indemnification on qualified mortgage status'' for paragraph (d); and
``Restatement'' for paragraph (e).

IRRRL Income Verification Requirements

VA is exercising its authority under section 1411 of the Dodd-Frank
Act to exempt IRRRLs from many of the income verification requirements
of TILA. In 2009, when Congress began deliberating the requirements
associated with income verification, the bills introduced to address
the issues did not include an exemption for VA IRRRLs. See H.R. 1728
EH, 111th Congress (2009-2010); H.R. 4173 RFS, 111th Congress (2009-
2010). By 2010 when the Dodd-Frank Act was passed, the law expressly
allowed VA to exclude its IRRRLs from income verification requirements.
Congress worked closely with VA in drafting the final section 1411 to
ensure that the majority of veterans who wanted to take advantage of
the IRRRL program would be able to continue to do so.

[[Page 26625]]

An IRRRL can only be made if it is to refinance a loan that VA has
already guaranteed. 38 U.S.C. 3710(a)(8). As explained above, all VA-
guaranteed loans must meet VA's strict underwriting standards at
origination. Loan proceeds from an IRRRL can only be used to pay off
the original principal balance and to finance closing costs; the
veteran cannot receive cash back. See 38 U.S.C. 3710(e)(1)(C).
Pursuant to 38 U.S.C. 3710(e)(2), an IRRRL is guaranteed without
regard to the amount of outstanding entitlement available for use by
the veteran, and the amount of such entitlement is not charged as a
result of a guaranty provided for an IRRRL. The IRRRL is deemed to have
been obtained with the guaranty entitlement used to obtain the loan
being refinanced. In other words, for the purposes of the benefit, the
IRRRL is essentially the same loan as the original, the key difference
being that the veteran should be in a better financial position than
before. The veteran is either paying a lower interest rate, meaning a
reduced monthly payment, or the veteran is in a fixed-rate loan and no
longer subject to market fluctuations associated with adjustable rate
mortgages. If the veteran could afford the original loan, then the idea
is that the IRRRL should be even more affordable.
As explained above, CFPB originally proposed that VA streamlined
refinancing would be exempt from CFPB's income verification
requirements. In response to the rule, most commenters supported the
proposed exemption. 78 FR 35472. One consumer advocate group feared,
however, that the exemption would lead to serial refinancing and
equity-stripping, usually affecting those consumers who are the most
vulnerable. Id.
The consumer advocate's comment highlighted a possible
vulnerability in the IRRRL program. Some borrowers are easily enticed
into refinancing their loans simply by understanding that the refinance
can lead to two months without making a mortgage payment; the current
month of the refinance and a second month due to the interest financed
into the new loan. Other borrowers become fixated on a lower interest
rate provided by an IRRRL without understanding that they might not
ever recoup their investment of closing costs. That is why VA has
defined safe harbor qualified mortgage to exclude IRRRLs that put a
veteran at risk of equity-stripping. By classifying such an IRRRL as a
rebuttable presumption qualified mortgage rather than a safe harbor
qualified mortgage, VA is providing a disincentive for lenders to make
these sorts of loans. Nevertheless, as shown above, VA estimates that
only four percent of its IRRRLs guaranteed in FY 2013 would have failed
to meet the proposed seasoning requirement.
VA believes it is unfair to negate the income verification
exemption when it seems only to help the overwhelming majority of
veterans who obtain an IRRRL. VA estimates that if the exemption were
not protected, the closing time for an IRRRL would be delayed on
average for two to four weeks. Lenders have expressed concern that time
and costs associated with internal income verification procedures
(e.g., hiring processors and underwriters to request the verification
and review its contents) would affect the borrower negatively in price
and closing time delays. VA does not have the means to track the exact
costs or delays, but lenders have indicated those additional timeframes
and enhanced process procedures if income verification was required.
Accordingly, in new Sec. 36.4340(b)(2), VA is exempting
streamlined refinances from income verification requirements as long as
the following Dodd-Frank Act conditions are met:
(i) The veteran is not 30 days or more past due on the loan being
refinanced;
(ii) The proposed streamlined refinance does not increase the
principal balance outstanding on the prior existing residential
mortgage loan, except to the extent of fees and charges allowed by VA;
(iii) Total points and fees payable in connection with the proposed
streamlined refinance loan are in accordance with 12 CFR 1026.32, will
not exceed 3 percent of the total new loan amount, and are in
compliance with VA's allowable fees and charges found at 38 CFR
36.4313;
(iv) The interest rate on the proposed streamlined refinance is
lower than the interest rate on the loan being refinanced, unless the
borrower is refinancing from an adjustable rate to a fixed-rate loan,
under guidelines that VA has established;
(v) The proposed streamlined refinance is subject to a payment
schedule that will fully amortize the IRRRL in accordance with VA
regulations;
(vi) The terms of the proposed streamlined refinance do not result
in a balloon payment, as defined in TILA; and
(vii) Both the residential mortgage loan being refinanced and the
proposed streamlined refinance satisfy all other VA requirements.
If a streamlined refinancing does not satisfy all seven of the
criteria, above, the lender must verify the income in accordance with
standards set forth in VA's regulation at 38 CFR 36.4340 and with those
that are generally applicable under CFPB's regulations on TILA.
VA's goal through this rulemaking is to protect the integrity of
the Home Loan program and provide veterans an assurance that they are
truly improving their financial position when proceeding with an IRRRL.
The seasoning and recoupment requirements discussed above, as well as
the income verification exemption provided when certain criteria are
met, all serve to further this goal.
In addition, VA is redesignating current paragraph (b) of Sec.
36.4340 as paragraph (b)(1) and adding a new paragraph (b)(2). We are
also including an authority citation to 15 U.S.C. 1639C(a)(5) and 38
U.S.C. 3710 for new Sec. 36.4340(b)(2). In current Sec. 36.4340(a),
the reference to Sec. 36.4807 is revised to refer to Sec. 36.4307.
The reference to Sec. 36.4807 was a typographical error.

Indemnification Agreements and Qualified Mortgage Status

Pursuant to 38 U.S.C. 3710(g)(4), VA is authorized to seek civil
penalties if VA determines a lender has knowingly and willfully made a
false certification with regard to compliance with VA's credit
information and loan processing standards. It is important to note that
this sort of violation does not necessarily mean fraud. If criminal
fraud is suspected, VA will notify the Office of Inspector General. 38
CFR 1.201. Sometimes during an audit of a lender VA does not find fraud
but does find a loan that was so egregiously underwritten that VA
believes the penalties might be applicable. As an alternative to the
penalties, VA may agree, pursuant to 38 U.S.C. 3720, to a compromise
and accept the lender's indemnification agreement.
With this rule, VA is adopting a standard similar to the Department
of Housing and Urban Development (HUD) with regard to indemnification
agreements. HUD, in its final rule published December 11, 2013,
clarified that ``an indemnification demand or resolution of a demand
that relates to whether the loan satisfied relevant eligibility and
underwriting requirements at time of consummation may result from facts
that could allow a change in qualified mortgage status, but the
existence of an indemnification does not per se remove qualified
mortgage status.'' 78 FR 75220-75221, Dec. 11, 2013. VA is adopting,
Sec. 36.4300(d), the same language as HUD

[[Page 26626]]

for VA-guaranteed loans that are subject to indemnification agreements.

Consultation With CFPB

Section 1412 of the Dodd-Frank Act directs VA to consult with CFPB
regarding this rulemaking. Accordingly, on May 6, 2013, VA submitted a
draft of this interim final rulemaking to the CFPB Office of
Regulation. CFPB attorneys raised a number of suggestions for revising
the preamble language to this document, but indicated that they did not
object to the content or intent of this interim final rule. CFPB's
suggestions have been incorporated into the text of the preamble. In
January of 2014, CFPB reviewed the rule and made additional
suggestions. We have incorporated those suggestions into this interim
final rule, and rely on this consultation as a further finding that
this rule is consistent with the requirements of the Dodd-Frank Wall
Street Reform and Consumer Financial Protection Act.

Administrative Procedure Act

In accordance with 5 U.S.C. 553(b)(B) and (d)(3), the Secretary of
Veterans Affairs finds that there is good cause to dispense with the
opportunity for advance notice and opportunity for public comment and
good cause to publish this rule with an immediate effective date. VA is
issuing this rulemaking as an interim final rule. VA sees an urgent
need to clarify for veterans, lenders, and investors the applicability
and potential effect of the qualified mortgage requirements on VA's
programs. VA understands that while our interpretation is such that
under CFPB's Temporary Qualified Mortgage (TQM) rules, VA would have
been exempt from the debt-to-income ratio rule and the points and fees
rule, some lenders have expressed a different interpretation of this
rule. VA has been advised by the industry that many lenders may not
make loans that are not considered ``qualified mortgages.''
Additionally, stakeholders have voiced concerns that the uncertainty
surrounding the applicability of TQM for VA loans could cause upheaval
in the delivery of benefits to veterans. This type of uncertainty may
lead investors to decrease the prices they will pay, causing lenders to
increase the prices they charge veterans and affecting a veteran's
ability to obtain mortgages.
VA has identified 95,198 of its purchase and cash-out refinance
loans guaranteed in FY 2013 that would have exceeded the debt-to-income
ratio of 43 percent under CFPB's rule. Though VA cannot predict how
many loans would not have been made had CFPB's rule been in place and
lenders not interpreted TQM to exclude VA from the debt-to-income ratio
rule, up to 95,198 veterans would not have been able to obtain a VA
home loan or would have been subject to higher costs. VA has examined
its FY 2013 loan data and identified 4,734 loans whose interest rates
exceeded the national Average Prime Offer Rate (APOR) by the CFPB
standard of 150 basis points. Applying CFPB's high-interest rate loan
provisions to VA, without VA's rule in place, 4,734 veterans may not
have been able to obtain a VA home loan or would have been subject to
higher loan costs. Consequently, VA believes an interim final rule is
necessary to re-stabilize the market for VA loans and to assure program
participants, especially those who are veterans, that VA's programs are
not undergoing large-scale changes.
VA has also been advised that, without the explicit statements
issued under this rule, veterans could see the costs of VA loans
increase, particularly with regard to IRRRLs, as much out of
uncertainty as any concrete requirement imposed by TILA rules. VA has
identified a total of 308,332 IRRRLS guaranteed in FY 2013 that would
not have met CFPB's income verification requirements. Assuming that
some of these loans would not have been made had CFPB's verification
requirements been applicable, up to 308,332 veterans would not have
been able to refinance their home loan or would have been subject to
higher loan costs.
VA also is concerned that investors will demur from purchasing
mortgage backed securities of VA-guaranteed loans due to perceived
issues regarding what constitutes ``safe harbor'' without issuance of
formal guidance on the qualified mortgage rules from VA. Issuing this
rule will help to remove these perceptions and allow veterans to
continue to utilize the benefit they have earned without bearing the
brunt of increased pricing and limited availability of the VA product.
Veterans, lenders, and investors have expressed concern over the
applicability and potential effect of CFPB's qualified mortgage
definition on the VA Home Loan program. VA has engaged in an extensive
drafting process to assure that this rulemaking comprehensively
addresses and eases the concerns expressed by these stakeholders.

Executive Orders 12866 and 13563

Executive Orders 12866 and 13563 direct agencies to assess the
costs and benefits of available regulatory alternatives and, when
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, and other advantages; distributive impacts;
and equity). Executive Order 13563 (Improving Regulation and Regulatory
Review) emphasizes the importance of quantifying both costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
Executive Order 12866 (Regulatory Planning and Review) defines a
``significant regulatory action,'' which requires review by OMB, as
``any regulatory action that is likely to result in a rule that may:
(1) Have an annual effect on the economy of $100 million or more or
adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or tribal governments or
communities; (2) Create a serious inconsistency or otherwise interfere
with an action taken or planned by another agency; (3) Materially alter
the budgetary impact of entitlements, grants, user fees, or loan
programs or the rights and obligations of recipients thereof; or (4)
Raise novel legal or policy issues arising out of legal mandates, the
President's priorities, or the principles set forth in this Executive
Order.''
The economic, interagency, budgetary, legal, and policy
implications of this regulatory action have been examined, and the rule
may be an economically significant regulatory action under Executive
Order 12866. VA's impact analysis can be found as a supporting document
at http://www.regulations.gov, usually within 48 hours after the
rulemaking document is published. Additionally, a copy of the
rulemaking and its impact analysis are available on VA's Web site at
http://www1.va.gov/orpm/, by following the link for ``VA Regulations
Published.''

Unfunded Mandates

The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C.
1532, that agencies prepare an assessment of anticipated costs and
benefits before issuing any rule that may result in expenditure by
State, local, and tribal governments, in the aggregate, or by the
private sector, of $100 million or more (adjusted annually for
inflation) in any one year. This interim final rule will have no such
effect on State, local, and tribal governments, or on the private
sector.

Paperwork Reduction Act

This interim final rule contains no provisions constituting a
collection of information under the Paperwork

[[Page 26627]]

Reduction Act of 1995 (44 U.S.C. 3501-3521).

Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612, applies
only to rules for which an agency is required to publish a notice of
proposed rulemaking pursuant to 5 U.S.C. 553(b) or any other law. 5
U.S.C. 603(a). The RFA does not apply to this rulemaking because VA has
found good cause to publish this rule without notice and comment
pursuant to 5 U.S.C. 553(b).

Catalog of Federal Domestic Assistance

The Catalog of Federal Domestic Assistance number and title for the
program affected by this document is 64.114, Veterans Housing--
Guaranteed and Insured Loans.

Signing Authority

The Secretary of Veterans Affairs, or designee, approved this
document and authorized the undersigned to sign and submit the document
to the Office of the Federal Register for publication electronically as
an official document of the Department of Veterans Affairs. Jose D.
Riojas, Chief of Staff, Department of Veterans Affairs, approved this
document on October 28, 2013, for publication.

List of Subjects in 38 CFR Part 36

Condominiums, Housing, Individuals with disabilities, Loan
programs--housing and community development, Loan programs--veterans,
Manufactured homes, Mortgage insurance, Reporting and recordkeeping
requirements, Veterans.

Dated: May 5, 2014.
Robert C. McFetridge,
Director, Regulation Policy and Management, Office of the General
Counsel, Department of Veterans Affairs.

For the reasons set forth in the preamble, VA is amending 38 CFR
part 36 as follows:

PART 36--LOAN GUARANTY

0
1. The authority citation for part 36 continues to read as follows:

Authority: 38 U.S.C. 501 and as otherwise noted.

0
2. Amend Sec. 36.4300 by:
0
a. Revising the section heading.
0
b. Adding a heading to paragraph (a).
0
c. Redesignating paragraph (b) as paragraph (e).
0
d. Adding new paragraphs (b) through (d).
0
e. Adding a heading to newly redesignated paragraph (e).
The revision and additions read as follows:

Sec. 36.4300 Applicability and qualified mortgage status.

(a) Applicability to guaranteed loans. * * *
(b) Safe harbor qualified mortgage. (1) Defined. A safe harbor
qualified mortgage meets the Ability-to-Repay requirements of sections
129B and 129C of the Truth-in-Lending Act (TILA) regardless of whether
the loan might be considered a high cost mortgage transaction as
defined by section 103bb of TILA (15 U.S.C. 1602bb).
(2) General. Subject to paragraphs (c) and (d) of this section, any
guaranteed or insured loan made in compliance with this subpart is a
safe harbor qualified mortgage.
(3) Exempted transactions. The following loans are not subject to
challenge under the ability-to-repay requirements of the Truth-in-
Lending Act (15 U.S.C. 1639C).
(i) A temporary or ``bridge'' loan with a term of 12 months or
less, such as a loan to finance the purchase of a new dwelling where
the consumer plans to sell a current dwelling within 12 months or a
loan to finance the initial construction of a dwelling;
(ii) A construction phase of 12 months or less of a construction-
to-permanent loan;
(iii) An extension of credit made pursuant to a program
administered by a Housing Finance Agency, as defined under 24 CFR
266.5;
(iv) An extension of credit made by:

(A) A creditor designated as a Community Development Financial
Institution, as defined under 12 CFR 1805.104(h);

(B) A creditor designated as a Downpayment Assistance through
Secondary Financing Provider, pursuant to 24 CFR 200.194(a), operating
in accordance with regulations prescribed by the U.S. Department of
Housing and Urban Development applicable to such persons;
(C) A creditor designated as a Community Housing Development
Organization provided that the creditor has entered into a commitment
with a participating jurisdiction and is undertaking a project under
the HOME program, pursuant to the provisions of 24 CFR 92.300(a), and
as the terms community housing development organization, commitment,
participating jurisdiction, and project are defined under 24 CFR 92.2;
or
(D) A creditor with a tax exemption ruling or determination letter
from the Internal Revenue Service under section 501(c)(3) of the
Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-
(1), provided that:
(1) During the calendar year preceding receipt of the consumer's
application, the creditor extended credit secured by a dwelling no more
than 200 times;
(2) During the calendar year preceding receipt of the consumer's
application, the creditor extended credit secured by a dwelling only to
consumers with income that did not exceed the low- and moderate-income
household limit as established pursuant to section 102 of the Housing
and Community Development Act of 1974 (42 U.S.C. 5302(a)(20)) and
amended from time to time by the U.S. Department of Housing and Urban
Development, pursuant to 24 CFR 570.3;
(3) The extension of credit is to a consumer with income that does
not exceed the household limit specified in 12 CFR 1026.43(a)(3); and
(4) The creditor determines, in accordance with written procedures,
that the consumer has a reasonable ability to repay the extension of
credit.
(v) An extension of credit made pursuant to a program authorized by
sections 101 and 109 of the Emergency Economic Stabilization Act of
2008 (12 U.S.C. 5211; 5219);
(c) Interest rate reduction refinancing loans (IRRRLs). (1) Safe
harbor. A streamlined refinance loan made pursuant to 38 U.S.C.
3710(a)(8) and (e) is a safe harbor qualified mortgage, as defined in
paragraph (b) of this section, if all of the following conditions are
met:
(i) The loan being refinanced was originated at least 6 months
before the date of the new loan's closing date, and the veteran has not
been more than 30 days past due during such 6-month period;
(ii) The recoupment period for all fees and charges financed as
part of the loan or paid at closing does not exceed thirty-six (36)
months;
(iii) The streamlined refinance loan is either exempt from income
verification requirements pursuant to 38 CFR 36.4307 or the refinance
loan complies with other income verification requirements pursuant to
38 CFR 36.4340, as well as the Truth-in-Lending Act (15 U.S.C. 1639C)
and its implementing regulations; and
(iv) All other applicable requirements of this subpart are met.
(Authority: 15 U.S.C. 1639C(b)(3)(B)(ii), 38 U.S.C. 3710)
(2) Rebuttable presumption. A streamlined refinance that does not
meet all of the requirements of safe harbor in paragraph (c)(1), is a
qualified mortgage for which there is a presumption that the borrower
had the ability to repay the loan at the time of consummation, if such
streamlined refinance, at the time of consummation,

[[Page 26628]]

satisfies the requirements of (c)(1)(iii) and (iv) of this section.
(d) Effect of indemnification on qualified mortgage status. An
indemnification demand or resolution of a demand that relates to
whether the loan satisfied relevant eligibility and underwriting
requirements at the time of consummation may result from facts that
could allow a change to qualified mortgage status, but the existence of
an indemnification does not per se remove qualified mortgage status.

(Authority: 15 U.S.C. 1639C(b)(3)(B)(ii), 38 U.S.C. 3710, 3720)

(e) Restatement. * * *
* * * * *

0
3. Amend Sec. 36.4340 by:
0
a. Revising paragraph (a).
0
b. Redesignating paragraph (b) as paragraph (b)(1).
0
c. Adding a new paragraph (b)(2).
The revision and addition read as follows:

Sec. 36.4340 Underwriting standards, processing procedures, lender
responsibility, and lender certification.

(a) Use of standards. The standards contained in paragraphs (c)
through (j) of this section will be used to determine whether the
veteran's present and anticipated income and expenses, and credit
history, are satisfactory. These standards do not apply to loans
guaranteed pursuant to 38 U.S.C. 3710(a)(8) except for cases where the
Secretary is required to approve the loan in advance under Sec.
36.4307.
(b)(1) * * *
(2) Exemption from income verification for certain refinance loans.
Notwithstanding paragraphs (a) and (b)(1) of this section, a
streamlined refinance loan to be guaranteed pursuant to 38 U.S.C.
3710(a)(8) and (e) is exempt from income verification requirements of
the Truth-in-Lending Act (15 U.S.C. 1639C) and its implementing
regulations only if all of the following conditions are met:
(i) The veteran is not 30 days or more past due on the prior
existing residential mortgage loan;
(ii) The proposed streamlined refinance loan would not increase the
principal balance outstanding on the prior existing residential
mortgage loan, except to the extent of fees and charges allowed by VA;
(iii) Total points and fees payable in connection with the proposed
streamlined refinance loan are in accordance with 12 CFR 1026.32, will
not exceed 3 percent of the total new loan amount, and are in
compliance with VA's allowable fees and charges found at 38 CFR
36.4313;
(iv) The interest rate on the proposed streamlined refinance loan
will be lower than the interest rate on the original loan, unless the
borrower is refinancing from an adjustable rate to a fixed-rate loan,
under guidelines that VA has established;
(v) The proposed streamlined refinance loan will be subject to a
payment schedule that will fully amortize the IRRRL in accordance with
VA regulations;
(vi) The terms of the proposed streamlined refinance loan will not
result in a balloon payment, as defined in TILA; and
(vii) Both the residential mortgage loan being refinanced and the
proposed streamlined refinance loan satisfy all other VA requirements.

(Authority: 15 U.S.C. 1639C(a)(5), 38 U.S.C. 3710)

* * * * *

0
4. Amend Sec. 36.4500 by:
0
a. Revising the section heading.
0
b. Adding a heading to paragraph (a).
0
c. Adding a heading to paragraph (b).
0
d. Redesignating paragraph (c) as paragraph (d).
0
e. Adding a new paragraph (c).
0
f. Adding a heading to newly redesignated paragraph (d).
The revision and additions read as follows:

Sec. 36.4500 Applicability and qualified mortgage status.

(a) Applicability to direct loans. * * *
(b) Applicability to direct loans to Native Americans. * * *
(c) Safe harbor qualified mortgage. (1) Defined. A safe harbor
qualified mortgage meets the Ability-to-Repay requirements of sections
129B and 129C of the Truth-in-Lending Act (TILA) regardless of whether
the loan might be considered a high cost mortgage transaction as
defined by section 103bb of TILA (15 U.S.C. 1602bb).
(2) Applicability of safe harbor qualified mortgage. All VA direct
loans made pursuant to 38 U.S.C. 3711, Native American Direct Loans
made pursuant to 38 U.S.C. 3761, et seq., and vendee loans made
pursuant to 38 U.S.C. 3720 and 3733 are safe harbor qualified
mortgages.

(Authority: 15 U.S.C. 1639C(b)(3)(B)(ii), 38 U.S.C. 3710)

(d) Restatement. * * *
* * * * *

0
5. In Sec. 36.4501, add the term ``Vendee loan'' immediately after the
definition of ``Trust land'' to read as follows:

Sec. 36.4501 Definitions.

* * * * *
Vendee loan means a loan made by the Secretary for the purpose of
financing the purchase of a property acquired pursuant to chapter 37 of
title 38, United States Code.

(Authority: 38 U.S.C. 3720, 3733)

* * * * *
[FR Doc. 2014-10600 Filed 5-8-14; 8:45 am]
BILLING CODE 8320-01-P