[Federal Register Volume 62, Number 88 (Wednesday, May 7, 1997)]
[Proposed Rules]
[Pages 24874-24886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11808]
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DEPARTMENT OF VETERANS AFFAIRS
38 CFR Part 36
RIN 2900-AI16
Loan Guaranty: Credit Standards
AGENCY: Department of Veterans Affairs.
ACTION: Proposed rule.
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SUMMARY: This document proposes to amend VA's loan guaranty regulations
regarding credit standards used by lenders to evaluate the
creditworthiness of veteran-borrowers for home loans. VA is committed
to regular review and revision of the standards used to determine the
creditworthiness of veteran-applicants as issues arise and as the
mortgage industry changes. These proposed changes are designed to keep
VA in step with the rest of the home mortgage industry, at least to an
extent appropriate for a Government benefit-related mortgage program.
This document also requests Paperwork Reduction Act comments concerning
the collection of information contained in this document.
DATES: Comments must be received on or before July 7, 1997.
ADDRESSES: Mail or hand deliver written comments to: Director, Office
of Regulations Management (02D), Department of Veterans Affairs, 810
Vermont Avenue, NW, Room 1154, Washington, DC 20420. Comments should
indicate that they are submitted in response to ``RIN 2900-AI16.'' All
written comments received will be available for public inspection at
the above address in the Office of Regulations Management, Room 1158,
between the hours of 8:00 a.m. and 4:30 p.m., Monday through Friday
(except holidays).
FOR FURTHER INFORMATION CONTACT: Ms. Judith Caden, Assistant Director
for Loan Policy (264), Loan Guaranty Service, Veterans Benefits
Administration, Department of Veterans Affairs, 810 Vermont Avenue, NW,
Washington, DC 20420, (202) 273-7368.
SUPPLEMENTARY INFORMATION: VA is proposing to amend its loan guaranty
regulations regarding credit standards used by lenders to evaluate the
creditworthiness of veteran-borrowers for home loans. The regulations
proposed to be amended are set forth at 38 CFR 36.4337.
Statutory credit criteria applicable to the VA Loan Guaranty
Program are set forth at 38 U.S.C. 3710. Under the VA Loan Guaranty
Program, a loan may not be guaranteed unless the veteran is a
satisfactory credit risk, and the
[[Page 24875]]
contemplated terms of payment required in a mortgage to be given in
part payment of the purchase price or the construction cost bear a
proper relation to the veteran's present and anticipated income and
expenses. When making a credit determination for a VA-guaranteed loan,
the lender must consider that a veteran's benefit is involved. The law
intends that the veteran have this benefit provided the requirements of
the law are met. However, it serves no purpose to approve or make a
loan to a veteran who will be unable to meet the repayment terms or is
not a satisfactory credit risk. Such an approval would be, in fact, a
disservice since it could well result in the veteran losing the home, a
debt being owed by the veteran to the U.S. Government, and an adverse
effect on the veteran's credit standing.
VA is committed to regular review and revision of the standards
used to determine the creditworthiness of veteran-applicants as issues
arise and as the mortgage industry changes. VA recognizes that it is
important to keep in step with the rest of the home mortgage industry,
at least to an extent appropriate for a Government benefit-related
mortgage program.
Accordingly, we are proposing to amend Sec. 36.4337 for the reasons
discussed below.
Tax-Exempt Income (Paragraphs (d) and (f))
It is proposed to amend paragraph (d) and to add a new paragraph
(f)(4) concerning tax-free income when underwriting a loan. Previously,
VA regulations recognized the impact of tax-free income on the debt-to-
income ratio (generally higher) through noting it as a compensating
factor. However, the mortgage industry has come to require direct
recognition through what is generally called ``grossing up.'' This is
the adjusting of the tax-exempt income upward to a pre-tax or gross
income amount which, after deducting State and Federal income taxes,
would equal the tax-exempt income. This enables the calculation of the
debt-to-income ratio as if the borrower's income were all taxable and
results in the same ratio as a borrower with after-tax income equal to
the borrower's tax-exempt income. In recognition of the industry
practice, and for consistency, this proposed change to VA regulations
would allow ``grossing up'' for the purpose of calculating the debt-to-
income ratio. The actual tax-exempt income would be required to be used
in calculating the residual income.
Compensating Factors for Underwriting a Loan (Paragraph (c))
It is proposed to add two additional factors to the list of
compensating factors lenders are to consider in the course of
underwriting a loan. Upon review, it appears to be appropriate to
expand this list to include tax credits for child care and tax benefits
of home ownership as additional compensating factors.
Increase in Residual Income Required for Family Support (Paragraph
(e))
It is proposed to provide for an increase in the amount of residual
income required for family support. The computation of the Residual
Income tables set forth in this paragraph is based upon cost-of-living
and expenditure data compiled by the U.S. Bureau of Labor Statistics.
Based upon VA's review of that data, a 4-percent increase in those
guideline amounts appears to be an appropriate reflection of that data.
Inclusion of Household Members in Residual Income Determinations
(Paragraph (e))
It is proposed to clarify that the use of residual income
guidelines is to be based on consideration of all members of the
veteran's household. This reflects that all members of a household
(without regard to the nature of the relationship) are relevant to
determinations regarding residual income.
Residual Income Tiers (Paragraph (e))
It is proposed to adjust the breakpoint in the two residual income
tiers from $70,000 to $80,000. When the tiers were originally
established in December 1987, the median VA loan was approximately
$70,000. The median loan amount has risen steadily to its current level
of approximately $87,000, and it appears that an adjustment would be in
order. However, since this revision would constitute a slight loosening
of the credit standards, limiting the increase in the breakpoint in the
two tiers to $80,000 would be consistent with prudent underwriting
policy.
Age of Credit Documentation (Paragraphs (f), (g), and (h))
VA is proposing to change the maximum allowable age of credit
documentation to 120 days (or 180, in the case of new construction)
from the date the note is signed. This is proposed in order to
establish a standard consistent with industry standards and to clarify
the baseline for determining the maximum allowable age of credit
documents. Previously, the maximum age was 90 days, and, for automatic
loans, the baseline was the date of application. The use of the date of
application as the baseline sometimes resulted in cases in which the
documents were very old by the time they were used to underwrite the
borrowers' qualifications. This change would establish a standard more
closely tied to the time of the underwriting decision, which is usually
made at a time close to loan closing.
Reserves or National Guard (Paragraph (f))
VA is proposing a change to include members of the Reserves or
National Guard in the requirements that pertain to active duty
applicants within 12 months of release from active duty. Since income
received by a member of the Reserves or National Guard can be important
to a borrower's ability to qualify for a loan and since Reserves and
National Guard are subject to the same downsizing as the active
military, those applicants who are within 12 months of completion of
their current terms of service would be subject to the same
documentation requirements as members of the active military within 12
months of release from active duty.
Verification of Employment (Paragraph (f))
It is proposed to clarify that if an employer puts N/A or otherwise
declines to complete the block for ``probability of continued
employment'' on the Verification of Employment (VOE), no further action
would be required of the lender. Although written verification of
employment forms contain space for the employer to indicate the
borrower's probability of continued employment, many employers have
adopted the policy of not giving any indication as to such probability.
In order to assure that the lender will not be considered to have been
deficient in underwriting the loan without the probability of continued
employment having been given by the employer, if the space is shown as
``NA'' or has an indication that the company policy precludes giving
such information, no further development of probability of continued
employment would be required. The lender would be expected to have made
an assessment based on the borrower's overall work history and tenure
in his/her current position.
Income Such As Workers' Compensation and Foster Care (Paragraph
(f))
It is proposed to clarify when income such as workers' compensation
and
[[Page 24876]]
foster care income can be used as income. In the past VA has addressed
some types of unusual income, but workers' compensation and foster care
income have not been addressed. This proposed regulatory change would
set forth that such income can be considered when it can be determined
to be stable and reliable.
Automobile Allowance or Other Expense Account Type of Income
(Paragraph (f))
It is proposed to address income derived from an automobile
allowance or other expense account type of income. VA credit standards
have not previously addressed ``income'' derived from automobile or
similar allowances, which are often a part of the borrower's overall
income. Therefore, VA proposes to add information for determining when
an automobile allowance or other expense allowance constitutes income
for loan qualification purposes.
Profit and Loss Statements Prepared by Accountants (Paragraph (f))
It is proposed to delete the requirement that profit and loss
statements be prepared by an accountant. Inasmuch as full tax returns
are required in connection with every self-employed applicant and the
cost of an accountant-prepared financial statement can be an excessive
burden for very small businesses (e.g., hairdressers or independent
house painters), the requirement to submit an accountant-prepared
profit and loss statement in every instance would be deleted. Instead,
it is proposed that the financial statement must be sufficient for a
loan underwriter to determine the necessary information for loan
approval and that an independent audit by a Certified Public Accountant
would be required if necessary for such determination.
Temporary Income (Paragraph (f))
It is proposed to change the length of time temporary income such
as that from public assistance programs must be expected to continue
before it can be counted for loan qualification purposes, from ``a
substantial fraction of the term of the loan, i.e., one-third or more''
to 3 years or more. This proposed change is consistent with current
industry standards.
Rental Income From a Multi-Unit Residence (Paragraph (f))
It is also proposed to simplify the treatment of rental income in
the credit underwriting standards. Existing instructions for
consideration of rental income from a multi-unit residence require
analysis of the seller's records. Since such records are seldom
actually available for review, the regulations are proposed to be
changed to provide for use of 75 percent of expected gross rental
income, unless documentation supports use of a greater amount. This
percentage would be consistent with current industry standards.
Consumer Credit Counseling Plan (Paragraph (g))
It is proposed to state that veterans in a Consumer Credit
Counseling (CCC) plan would be treated in the same manner as
individuals in a plan under Chapter 13 of the Bankruptcy Code, since
CCC plans and Chapter 13 plans are similar programs for those having
credit difficulties. This change would incorporate that policy for
borrowers with bad credit who entered a counseling program. We also
note that the proposed policy would address participation in a CCC plan
by a veteran who entered such a program before reaching the point of
having bad credit and would not treat the participation as a negative
credit item, since we believe this would be unfair.
Chapter 13 Bankruptcy (Paragraph (g))
It is proposed that the provisions be changed regarding when a
borrower should be considered a satisfactory credit risk after having
filed for relief under Chapter 13 of the Bankruptcy Code. The prior
criteria of requiring a Chapter 13 plan be 75 percent completed before
a borrower can be found to be a satisfactory credit risk is more
stringent when the plan calls for payout over a 5-year period than the
requirement for someone who took straight bankruptcy under Chapter 7.
This proposed change to accept satisfactory payment over 12 months
would remove that inequity and make VA's guideline consistent with
other criteria in the industry. Court approval for new credit would
still be required.
Chapter 7 Bankruptcy (Paragraph (g))
It is proposed to provide that a Chapter 7 bankruptcy would not
cause a person to be considered a bad credit risk if 2 years have
elapsed from the date of discharge in bankruptcy and to clarify
treatment of more recent bankruptcies. This would eliminate imprecise
language concerning longer periods and would bring VA's provisions in
line with criteria used in the rest of the industry, including the
Department of Housing and Urban Development (HUD), the Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (Freddie Mac).
Re-establishment of Satisfactory Credit (Paragraph (g))
It is proposed to state when satisfactory credit is considered to
be reestablished. One of the frequently asked questions for which VA's
credit standards have not previously provided an answer is when to
consider that satisfactory credit has been reestablished after a period
of bad credit not involving bankruptcy. To be consistent with other
criteria involving Consumer Credit Counseling and Chapter 13 plans, 12
months since the date of the last derogatory credit item would be
sufficient to consider that satisfactory credit has been reestablished.
Minimum Payment of Monthly Debts (Paragraph (g))
It is proposed to delete the requirement to include in an analysis
of monthly debts a minimum payment even if a revolving account has a
zero balance. Previously, a requirement to include a minimum payment
for a revolving charge that has a zero balance at the time of loan
application was intended to offset those who temporarily pay off such
an account for the sole purpose of appearing to have a stronger
financial status than is usual. However, it is very difficult to
distinguish between those with an open account but no balance at the
moment, those who seldom use the account and pay it off every month,
and those who have not used the account in many months. Since assuming
that a borrower will be using the account is potentially unfair, the
requirement that a minimum payment amount must be included would be
deleted as part of this proposal.
Long-Term and Short-Term Debts (Paragraph (g))
The definition of relatively long-term obligation which must be
included in a loan analysis is proposed to be changed from one with
remaining payments of at least 6 months to one with remaining payments
of at least 10 months. This change would be consistent with current
industry standards and with HUD requirements. It is also proposed to
remove unnecessary language.
Allotments Shown on Pay Stubs (Paragraph (g))
It is proposed to add a requirement that lenders investigate the
reasons for allotments shown on pay stubs or leave and earning
statements in order to assure that all debts are properly considered.
As pay stubs and leave statements have become a common method of
verifying a borrower's
[[Page 24877]]
income, it has become common to see allotments on those documents which
are not adequately identified as to whether they exist to repay a debt
which is not otherwise disclosed by the borrower. This proposed
regulatory change would require lenders to investigate to determine if
an allotment is related to a debt.
Debts Assigned by Divorce Decree (Paragraph (g))
It is proposed to add a clarification regarding debts assigned to
an ex-spouse by a divorce decree. Often the responsibility for a debt
that had been jointly established by a veteran and former spouse has
been assigned to the former spouse by divorce decree. However, since
the debt remains a part of the veteran's credit history, it may appear
as an open account on the veteran's credit report. It appears that it
would be unfair to consider such debts as the veteran's obligation and,
therefore, VA proposes to establish that such debts would not be
considered the veteran's obligation.
Collection Accounts (Paragraph (g))
It is proposed to clarify that collection accounts do not
necessarily have to be paid off as a condition for loan approval. Only
account balances reduced to judgment by a court would be required to be
paid in full.
Merged Credit Reports (Paragraph (g))
It is proposed to permit the use of a 3-file merged credit report
(MCR) as an alternative to the Residential Mortgage Credit Report
(RMCR) currently in use. The use of merged in-file credit reports is
growing within the mortgage industry, in light of industry analysis
which shows no extra risk associated with using such reports in
underwriting mortgages. Therefore, VA proposes to change the credit
report requirement to allow the use of MCRs as an alternative to RCMRs.
VA already allows the use of the MCR as an alternative to RCMRs for
quality control purposes.
Nonsubstantive Changes
In addition to the proposed changes discussed under the specific
headings above, nonsubstantive changes would be made for purposes of
clarity and to correct typographical errors.
Paperwork Reduction Act of 1995
Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), a
collection of information is set forth in the provisions of the
proposed Sec. 36.4337. This section prescribes the information to be
submitted for approval of a VA loan guaranty and contains material
which further explains the quality of the information needed for
approval. To facilitate access to the collection of information
provisions, all of Sec. 36.4337 is included in the text portion of this
document. Also, as required under section 3507(d) of the Act, VA has
submitted a copy of this proposed rulemaking action to the Office of
Management and Budget (OMB) for its review of the collection of
information.
OMB assigns control numbers to collections of information it
approves. VA may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number.
Comments on the collections of information should be submitted to
the Office of Management and Budget, Attention: Desk Officer for the
Department of Veterans Affairs, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Director, Office of
Regulations Management (02D), Department of Veterans Affairs, 810
Vermont Avenue, NW, Washington, DC 20420. Comments should indicate that
they are submitted in response to ``RIN 2900-AI16.''
Title: Credit Standards.
Summary of collection of information: Pursuant to 38 U.S.C. 3710, a
loan may not be guaranteed unless the veteran is a satisfactory credit
risk. The statute also requires that VA set forth in regulatory form
standards to be used by lenders in underwriting VA-guaranteed loans and
obtaining credit information. Lenders must collect certain specific
information concerning the veteran and the veteran's credit history
(and spouse or other co-borrower, as applicable), in order to properly
underwrite the veteran's loan. Collection of this information is normal
business practice for mortgage lenders. The proposed Sec. 36.4337 would
require that the lender provide VA with a certification and other
limited information in addition to that which would be required for a
non-Government-guaranteed mortgage loan.
Description of need for information and proposed use of
information: VA requires the lender to provide the Department with the
credit information to assure itself that applications for VA-guaranteed
loans are underwritten in a reasonable and prudent manner.
Description of likely respondents: Mortgage lenders who make VA-
guaranteed home loans.
Estimated number of respondents: 300,000 in FY 1997; 280,000 in FY
1998.
Estimated frequency of responses: This is a ``one-time'' request
for each application for a VA-guaranteed loan.
Estimated average burden per collection: 10 minutes. VA estimates
that an average of 80 minutes would be needed for the portion of the
information that would already be collected as normal business practice
for mortgage lenders. VA estimates that 10 minutes constitutes the
average additional time needed due to the provisions of this
information collection.
Estimated total annual reporting and recordkeeping burden: 5000
hours in FY 1997 and 4667 hours in FY 1998 for the information that
would not otherwise be collected and retained in the ordinary course of
business.
The Department considers comments by the public on proposed
collections of information in--
Evaluating whether the proposed collections of information
are necessary for the proper performance of the functions of the
Department, including whether the information will have practical
utility;
Evaluating the accuracy of the Department's estimate of
the burden of the proposed collections of information, including the
validity of the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of the collections of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
OMB is required to make a decision concerning the proposed
collection of information contained in this proposed rule between 30
and 60 days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment on the proposed regulations.
Regulatory Flexibility Act
The Secretary hereby certifies that these proposed regulatory
amendments will not, if promulgated, have a significant economic impact
on a substantial number of small entities as they are defined in the
Regulatory Flexibility Act, 5 U.S.C. 601-612. Industry norms for other
lending programs already require lenders to comply with most of the
proposed
[[Page 24878]]
standards set forth in this regulatory package. Further, activities
concerning loans subject to the VA Loan Guaranty Program do not
constitute a significant portion of activities of small businesses.
(The Catalog of Federal Domestic Assistance Program numbers are
64.106, 64.114, 64.118 and 64.119.)
List of Subjects in 38 CFR Part 36
Condominiums, Handicapped, Housing Loan programs--housing and
community development, Reporting and recordkeeping requirements,
Veterans.
Approved: February 21, 1997.
Jesse Brown,
Secretary of Veterans Affairs.
For the reasons set out in the preamble, 38 CFR part 36 is proposed
to be amended as set forth below.
PART 36--LOAN GUARANTY
1. The authority citation for part 36 Secs. 36.4300 through 36.4375
continues to read as follows:
Authority: Sections 36.4300 through 36.4375 issued under 38
U.S.C. 101, 501, 3701-3704, 3710, 3712-3714, 3720, 3729, 3732,
unless otherwise noted.
2. Section 36.4337 is revised to read as follows:
Sec. 36.4337 Underwriting standards, processing procedures, lender
responsibility, and lender certification.
(a) Use of standards. Except for refinancing loans guaranteed
pursuant to 38 U.S.C. 3710(a)(8), the standards contained in paragraphs
(c) through (j) of this section will be used to determine that the
veteran's present and anticipated income and expenses, and credit
history, are satisfactory.
(b) Waiver of standards. Use of the standards in paragraphs (c)
through (j) of this section for underwriting home loans will be waived
only in extraordinary circumstances when the Secretary determines,
considering the totality of circumstances, that the veteran is a
satisfactory credit risk.
(c) Methods. The two primary underwriting tools that will be used
in determining the adequacy of the veteran's present and anticipated
income are debt-to-income ratio and residual income analysis. They are
described in paragraphs (d) through (f) of this section. Ordinarily, to
qualify for a loan, the veteran must meet both standards. Failure to
meet one standard, however, will not automatically disqualify a
veteran. The following shall apply to cases where a veteran does not
meet both standards:
(1) If the debt-to-income ratio is 41 percent or less, and the
veteran does not meet the residual income standard, the loan may be
approved with justification, by the underwriter's supervisor, as set
out in paragraph (c)(4) of this section.
(2) If the debt-to-income ratio is greater than 41 percent (unless
it is larger due solely to the existence of tax-free income which
should be noted in the loan file), the loan may be approved with
justification, by the underwriter's supervisor, as set out in paragraph
(c)(4) of this section.
(3) If the ratio is greater than 41 percent and the residual income
exceeds the guidelines by at least 20 percent, the second level review
and statement of justification are not required.
(4) In any case described by paragraphs (c)(1) and (c)(2) of this
section, the lender must fully justify the decision to approve the loan
or submit the loan to the Secretary for prior approval in writing. The
lender's statement must not be perfunctory, but should address the
specific compensating factors, as set forth in paragraph (c)(5) of this
section, justifying the approval of the loan. The statement must be
signed by the underwriter's supervisor. It must be stressed that the
statute requires not only consideration of a veteran's present and
anticipated income and expenses, but also that the veteran be a
satisfactory credit risk. Therefore, meeting both the debt-to-income
ratio and residual income standards does not mean that the loan is
automatically approved. It is the lender's responsibility to base the
loan approval or disapproval on all the factors present for any
individual veteran. The veteran's credit must be evaluated based on the
criteria set forth in paragraph (g) of this section as well as a
variety of compensating factors that should be evaluated.
(5) The following are examples of acceptable compensating factors
to be considered in the course of underwriting a loan:
(i) Excellent long-term credit;
(ii) Conservative use of consumer credit;
(iii) Minimal consumer debt;
(iv) Long-term employment;
(v) Significant liquid assets;
(vi) Downpayment or the existence of equity in refinancing loans;
(vii) Little or no increase in shelter expense;
(viii) Military benefits;
(ix) Satisfactory homeownership experience;
(x) High residual income;
(xi) Low debt-to-income ratio;
(xii) Tax credits for child care; and
(xiii) Tax benefits of home ownership.
(6) The list in paragraph (c)(5) of this section is not exhaustive
and the items are not in any priority order. Valid compensating factors
should represent unusual strengths rather than mere satisfaction of
basic program requirements. Compensating factors must be relevant to
the marginality or weakness.
(d) Debt-to-income ratio. A debt-to-income ratio that compares the
veteran's anticipated monthly housing expense and total monthly
obligations to his or her stable monthly income will be computed to
assist in the assessment of the potential risk of the loan. The ratio
will be determined by taking the sum of the monthly Principal,
Interest, Taxes and Insurance (PITI) of the loan being applied for,
homeowners and other assessments such as special assessments,
condominium fees, homeowners association fees, etc., and any long-term
obligations divided by the total of gross salary or earnings and other
compensation or income. The ratio should be rounded to the nearest two
digits; e.g., 35.6 percent would be rounded to 36 percent. The standard
is 41 percent or less. If the ratio is greater than 41 percent, the
steps cited in paragraphs (c)(1) through (c)(6) of this section apply.
(e) Residual income guidelines. The guidelines provided in this
paragraph for residual income will be used to determine whether the
veteran's monthly residual income will be adequate to meet living
expenses after estimated monthly shelter expenses have been paid and
other monthly obligations have been met. All members of the household
must be included in determining if the residual income is sufficient.
They must be counted even if the veteran's spouse is not joining in
title or on the note, or if there are any other individuals depending
on the veteran for support, such as children from a spouse's prior
marriage who are not the veteran's legal dependents. It is appropriate,
however, to reduce the number of members of a household to be counted
for residual income purposes if there is sufficient verified income not
otherwise included in the loan analysis, such as child support being
regularly received as discussed in paragraph (e)(4) of this section. In
the case of a spouse not to be obligated on the note, verification that
he/she has stable and reliable employment as discussed in paragraph
(f)(3) of this section would allow not counting the spouse in
determining the sufficiency of the residual income. The guidelines for
residual income are based on data supplied in the Consumer Expenditure
Survey (CES) published by the Department of Labor's Bureau of Labor
Statistics. Regional minimum incomes
[[Page 24879]]
have been developed for loan amounts up to $79,999 and for loan amounts
of $80,000 and above. It is recognized that the purchase price of the
property may affect family expenditure levels in individual cases. This
factor may be given consideration in the final determination in
individual loan analyses. For example, a family purchasing in a higher-
priced neighborhood may feel a need to incur higher-than-average
expenses to support a lifestyle comparable to that in their
environment, whereas a substantially lower-priced home purchase may not
compel such expenditures. It should also be clearly understood from
this information that no single factor is a final determinant in any
applicant's qualification for a VA-guaranteed loan. Once the residual
income has been established, other important factors must be examined.
One such consideration is the amount being paid currently for rental or
housing expenses. If the proposed shelter expense is materially in
excess of what is currently being paid, the case may require closer
scrutiny. In such cases, consideration should be given to the ability
of the borrower and spouse to accumulate liquid assets, such as cash
and bonds, and to the amount of debts incurred while paying a lesser
amount for shelter. For example, if an application indicates little or
no capital reserves and excessive obligations, it may not be reasonable
to conclude that a substantial increase in shelter expenses can be
absorbed. Another factor of prime importance is the applicant's manner
of meeting obligations. A poor credit history alone is a basis for
disapproving a loan, as is an obviously inadequate income. When one or
the other is marginal, however, the remaining aspect must be closely
examined to assure that the loan applied for will not exceed the
applicant's ability or capacity to repay. Therefore, it is important to
remember that the figures provided below for residual income are to be
used as a guide and should be used in conjunction with the steps
outlined in paragraphs (c) through (j) of this section. The residual
income guidelines are as follows:
(1) Table of residual incomes by region (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 income guidelines: Northeast--
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island and Vermont; Midwest--Illinois, Indiana,
Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota,
Ohio, South Dakota and Wisconsin; South--Alabama, Arkansas, Delaware,
District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland,
Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina,
Tennessee, Texas, Virginia, West Virginia; West--Alaska, Arizona,
California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico,
Oregon, Utah, Washington and Wyoming.
(4) Military adjustments. For loan applications involving an
active-duty serviceperson or military retiree, the residual income
figures will be reduced by a minimum of 5 percent if there is a clear
indication that the borrower or spouse will continue to receive the
benefits resulting from the use of facilities on a nearby military
base. (This reduction applies to tables in paragraph (e) of this
section.)
(f) Stability and reliability of income. Only stable and reliable
income of the veteran and spouse can be considered in determining
ability to meet mortgage payments. Income can be considered stable and
reliable if it can be concluded that it will continue during the
foreseeable future.
(1) Verification. Income of the borrower and spouse which is
derived from employment and which is considered in determining the
family's ability to meet the mortgage payments, payments on debts and
other obligations, and other expenses must be verified. If the spouse
is employed and will be contractually obligated on the loan, the
combined income of both the veteran and spouse is considered when the
income of the veteran alone is not sufficient to qualify for the amount
of the loan sought. In other than community property states, if the
[[Page 24880]]
spouse will not be contractually obligated on the loan, Regulation B,
promulgated by the Federal Reserve Board pursuant to the Equal Credit
Opportunity Act, prohibits any request for, or consideration of,
information concerning the spouse (including income, employment,
assets, or liabilities), except that if the applicant is relying on
alimony, child support, or maintenance payments from a spouse or former
spouse as a basis for repayment of the loan, information concerning
such spouse or former spouse may be requested and considered (see
paragraph (f)(4) of this section). In community property states,
information concerning a spouse may be requested and considered in the
same manner as that for the applicant. The standards applied to income
of the veteran are also applicable to that of the spouse. There can be
no discounting of income on account of sex, marital status, or any
other basis prohibited by the Equal Credit Opportunity Act. Income
claimed by an applicant that is not or cannot be verified cannot be
considered when analyzing the loan. If the veteran or spouse has been
employed by a present employer for less than 2 years, a 2-year history
covering prior employment, schooling, or other training must be
secured. Any periods of unemployment must be explained. Employment
verifications and pay stubs must be no more than 120 days (180 days for
new construction) old to be considered valid. For loans closed
automatically, this requirement will be considered satisfied if the
date of the employment verification is within 120 days (180 days for
new construction) of the date the note is signed. For prior approval
loans, this requirement will be considered satisfied if the
verification of employment is dated within 120 days of the date the
application is received by VA.
(2) Active-duty applicants. (i) In the case of an active-duty
applicant, a military Leave & Earnings Statement is required and will
be used instead of an employment verification. The statement must be no
more than 120 days old (180 days for new construction) and must be the
original or a lender-certified copy of the original. For loans closed
automatically, this requirement is satisfied if the date of the Leave &
Earnings Statement is within 120 days (180 days for new construction)
of the date the note is signed. For prior approval loans, this
requirement will be considered satisfied if the verification of
employment is dated within 120 days of the date the application is
received by VA.
(ii) For servicemembers within 12 months of release from active
duty, including members of the Reserves or National Guard, one of the
following is also required:
(A) Documentation that the servicemember has in fact already
reenlisted or extended his/her period of active duty to a date beyond
the 12-month period following the projected closing of the loan.
(B) Verification of a valid offer of local civilian employment
following release from active duty. All data pertinent to sound
underwriting procedures (date employment will begin, earnings, etc.)
must be included.
(C) A statement from the servicemember that he/she intends to
reenlist or extend his/her period of active duty to a date beyond the
12 month period following the projected loan closing date, and a
statement from the service member's commanding officer confirming that
the service member is eligible to reenlist or extend his/her active
duty as indicated and that the commanding officer has no reason to
believe that such reenlistment or extension of active duty will not be
granted.
(D) Other unusually strong positive underwriting factors, such as a
downpayment of at least 10 percent, significant cash reserves, or clear
evidence of strong ties to the community coupled with a nonmilitary
spouse's income so high that only minimal income from the active duty
servicemember is needed to qualify.
(iii) Each active-duty member who applies for a loan must be
counseled through the use of VA Form 26-0592, Counseling Checklist for
Military Homebuyers. Lenders must submit a signed and dated VA Form 26-
0592 with each prior approval loan application or automatic loan report
involving a borrower on active duty.
(3) Income reliability. Income received by the borrower and spouse
is to be used only if it can be concluded that the income will continue
during the foreseeable future and, thus, should be properly considered
in determining ability to meet the mortgage payments. If an employer
puts N/A or otherwise declines to complete a verification of employment
statement regarding the probability of continued employment, no further
action is required of the lender. Reliability will be determined based
on the duration of the borrower's current employment together with his
or her overall documented employment history. There can be no
discounting of income solely because it is derived from an annuity,
pension or other retirement benefit, or from part-time employment.
However, unless income from overtime work and part-time or second jobs
can be accorded a reasonable likelihood that it is continuous and will
continue in the foreseeable future, such income should not be used.
Generally, the reliability of such income cannot be demonstrated unless
the income has continued for 2 years. The hours of duty and other work
conditions of the applicant's primary job, and the period of time in
which the applicant was employed under such arrangement, must be such
as to permit a clear conclusion as to a good probability that overtime
or part-time or secondary employment can and will continue. Income from
overtime work and part-time jobs not eligible for inclusion as primary
income may, if properly verified for at least 12 months, be used to
offset the payments due on debts and obligations of an intermediate
term, i.e., 6 to 24 months. Such income must be described in the loan
file. The amount of any pension or compensation and other income, such
as dividends from stocks, interest from bonds, savings accounts, or
other deposits, rents, royalties, etc., will be used as primary income
if it is reasonable to conclude that such income will continue in the
foreseeable future. Otherwise, it may be used only to offset
intermediate-term debts, as above. Also, the likely duration of certain
military allowances cannot be determined and, therefore, will be used
only to offset intermediate-term debts, as above. Such allowances are:
Pro-pay, flight or hazard pay, and overseas or combat pay, all of which
are subject to periodic review and/or testing of the recipient to
ascertain whether eligibility for such pay will continue. Only if it
can be shown that such pay has continued for a prolonged period and can
be expected to continue because of the nature of the recipient's
assigned duties, will such income be considered as primary income. For
instance, flight pay verified for a pilot can be regarded as probably
continuous and, thus, should be added to the base pay. Income derived
from service in the Reserves or National Guard may be used if the
applicant has served in such capacity for a period of time sufficient
to evidence good probability that such income will continue beyond 12
months. The total period of active and reserve service may be helpful
in this regard. Otherwise, such income may be used to offset
intermediate-term debts. There are a number of additional income
sources whose contingent nature precludes their being considered as
available for repayment of a long-term mortgage obligation. Temporary
income items
[[Page 24881]]
such as VA educational allowances and unemployment compensation do not
represent stable and reliable income and will not be taken into
consideration in determining the ability of the veteran to meet the
income requirement of the governing law. As required by the Equal
Opportunity Act Amendments of 1976, Public Law 94-239, income from
public assistance programs is used to qualify for a loan if it can be
determined that the income will probably continue for 3 years or more.
(4) Tax-exempt income. Special consideration can be given to
verified nontaxable income once it has been established that such
income is likely to continue (and remain untaxed) into the foreseeable
future. Such income includes certain military allowances, child support
payments, workers' compensation benefits, disability retirement
payments and certain types of public assistance payments. In such
cases, current income tax withholding tables may be used to determine
an amount which can be prudently employed to adjust the borrower's
actual income. This adjusted or ``grossed up'' income may be used to
calculate the monthly debt-to-income ratio, provided the analysis is
documented. Only the borrower's actual income may be used to calculate
the residual income. Care should be exercised to ensure that the income
is in fact tax-exempt.
(5) Alimony, child support, maintenance, workers' compensation,
foster care payments. (i) If an applicant chooses to reveal income from
alimony, child support or maintenance payments (after first having been
informed that any such disclosure is voluntary pursuant to the Federal
Reserve Board's Regulation B), such payments are considered as income
to the extent that the payments are likely to be consistently made.
Factors to be considered in determining the likelihood of consistent
payments include, but are not limited to: Whether the payments are
received pursuant to a written agreement or court decree; the length of
time the payments have been received; the regularity of receipt; the
availability of procedures to compel payment; and the creditworthiness
of the payor, including the credit history of the payor when available
under the Fair Credit Reporting Act or other applicable laws. However,
the Fair Credit Reporting Act (15 U.S.C. 1681(b)) limits the
permissible purposes for which credit reports may be ordered, in the
absence of written instructions of the consumer to whom the report
relates, to business transactions involving the subject of the credit
report or extensions of credit to the subject of the credit report.
(ii) If the applicant chooses to reveal income related to workers'
compensation, it will be considered as income to the extent it can be
determined such income will continue.
(iii) Income received specifically for the care of any foster
child(ren) may be counted as income if documented. Generally, however,
such foster care income is to be used only to balance the expenses of
caring for the foster child(ren) against any increased residual income
requirements.
(6) Military quarters allowance. With respect to off-base housing
(quarters) allowances for service personnel on active duty, it is the
policy of the Department of Defense to utilize available on-base
housing when possible. In order for a quarters allowance to be
considered as continuing income, it is necessary that the applicant
furnish written authorization from his or her commanding officer for
off-base housing. This authorization should verify that quarters will
not be made available and that the individual should make permanent
arrangements for nonmilitary housing. A Department of Defense form, DD
Form 1747, Status of Housing Availability, is used by the Family
Housing Office to advise personnel regarding family housing. The
applicant's quarters allowance cannot be considered unless item b
(Permanent) or d is completed on DD Form 1747, dated October 1990. Of
course, if the applicant's income less quarters allowance is
sufficient, there is no need for assurance that the applicant has
permission to occupy nonmilitary housing provided that a determination
can be made that the occupancy requirements of the law will be met.
Also, authorization to obtain off-base housing will not be required
when certain duty assignments would clearly qualify service personnel
with families for quarters allowance. For instance, off-base housing
authorizations need not be obtained for service personnel stationed
overseas who are not accompanied by their families, recruiters on
detached duty, or military personnel stationed in areas where no on-
base housing exists. In any case in which no off-base housing
authorization is obtained, an explanation of the circumstances
justifying its omission must be included with the loan application
except when it has been established by the VA facility of jurisdiction
that the waiting lists for on-base housing are so long that it is
improbable that individuals desiring to purchase off-base housing would
be precluded from doing so in the foreseeable future. If stations make
such a determination, a release shall be issued to inform lenders.
(7) Automobile (or similar) allowance. Generally, automobile
allowances are paid to cover specific expenses related to an
applicant's employment, and it is appropriate to use such income to
offset a corresponding car payment. However, in some instances, such an
allowance may exceed the car payment. With proper documentation, income
from a car allowance which exceeds the car payment can be counted as
effective income. Likewise, any other similar type of allowance which
exceeds the specific expense involved may be added to gross income to
the extent it is documented to exceed the actual expense.
(8) Commissions. When all or a major portion of the veteran's
income is derived from commissions, it will be necessary to establish
the stability of such income if it is to be considered in the loan
analysis for the repayment of the mortgage debt and/or short-term
obligations. In order to assess the value of such income, lenders
should obtain written verification of the actual amount of commissions
paid to date, the basis for the payment of such commissions and when
commissions are paid; i.e., monthly, quarterly, semiannually, or
annually. Lenders should also obtain signed and dated individual income
tax returns, plus applicable schedules, for the previous 2 years, or
for whatever additional period is deemed necessary to properly
demonstrate a satisfactory earnings record. The length of the veteran's
employment in the type of occupation for which commissions are paid is
also an important factor in the assessment of the stability of the
income. If the veteran has been employed for a relatively short time,
the income should not normally be considered stable unless the product
or service was the same or closely related to the product or service
sold in an immediate prior position. Generally, income from commissions
is considered stable when the applicant has been receiving such income
for at least 2 years. Less than 2 years of income from commissions
cannot usually be considered stable. When an applicant has received
income from commissions for less than 1 year, it will rarely be
possible to demonstrate that the income is stable for qualifying
purposes; such cases would require in-depth development.
(9) Self-employment. Generally, income from self-employment is
considered stable when the applicant has been in business for at least
2 years. Less than 2 years of income from self-
[[Page 24882]]
employment cannot usually be considered stable unless the applicant
has had previous related employment and/or extensive specialized
training. When an applicant has been self-employed less than 1 year, it
will rarely be possible to demonstrate that the income is stable for
qualifying purposes; such cases would require in-depth development. The
following documentation is required for all self-employed borrowers:
(i) A profit-and-loss statement for the prior fiscal year (12-month
accounting cycle), plus the period year to date since the end of the
last fiscal year (or for whatever shorter period records may be
available), and balance sheet based on the financial records. The
financial statement must be sufficient for a loan underwriter to
determine the necessary information for loan approval and an
independent audit (on the veteran and/or the business) by a Certified
Public Accountant will be required if necessary for such determination;
and
(ii) Copies of signed individual income tax returns, plus all
applicable schedules for the previous 2 years, or for whatever
additional period is deemed necessary to properly demonstrate a
satisfactory earnings record, must be obtained. If the business is a
corporation or partnership, copies of signed Federal business income
tax returns for the previous two years plus all applicable schedules
for the corporation or partnership must be obtained; and
(iii) If the business is a corporation or partnership, a list of
all stockholders or partners showing the interest each holds in the
business will be required. Some cases may justify a written credit
report on the business as well as the applicant. When the business is
of an unusual type and it is difficult to determine the probability of
its continued operation, explanation as to the function and purpose of
the business may be needed from the applicant and/or any other
qualified party with the acknowledged expertise to express a valid
opinion.
(10) Recently discharged veterans. Loan applications received from
recently discharged veterans who have little or no employment
experience other than their military occupation and from veterans
seeking VA-guaranteed loans who have retired after 20 years of active
military duty require special attention. The retirement income of the
latter veterans in many cases may not be sufficient to meet the
statutory income requirements for the loan amount sought. Many have
obtained full-time employment and have been employed in their new jobs
for a very short time.
(i) It is essential in determining whether veterans in these
categories qualify from the income standpoint for the amount of the
loan sought, that the facts in respect to their present employment and
retirement income be fully developed, and that each case be considered
on its individual merits.
(ii) In most cases the veteran's current income or current income
plus his or her retirement income is sufficient. The problem lies in
determining whether it can be properly concluded that such income level
will continue for the foreseeable future. If the veteran's employment
status is that of a trainee or an apprentice, this will, of course, be
a factor. In cases of the self-employed, the question to be resolved is
whether there are reasonable prospects that the business enterprise
will be successful and produce the required income. Unless a favorable
conclusion can be made, the income from such source should not be
considered in the loan analysis.
(iii) If a recently discharged veteran has no prior employment
history and the veteran's verification of employment shows he or she
has not been on the job a sufficient time in which to become
established, consideration should be given to the duties the veteran
performed in the military service. When it can be determined that the
duties a veteran performed in the service are similar or are in direct
relation to the duties of the applicant's present position, such duties
may be construed as adding weight to his or her present employment
experience and the income from the veteran's present employment thus
may be considered available for qualifying the loan, notwithstanding
the fact that the applicant has been on the present job only a short
time. This same principle may be applied to veterans recently retired
from the service. In addition, when the veteran's income from
retirement, in relation to the total of the estimated shelter expense,
long-term debts and amount available for family support, is such that
only minimal income from employment is necessary to qualify from the
income standpoint, it would be proper to resolve the doubt in favor of
the veteran. It would be erroneous, however, to give consideration to a
veteran's income from employment for a short duration in a job
requiring skills for which the applicant has had no training or
experience.
(iv) To illustrate the provisions of this paragraph (f), it would
be proper to use short-term employment income in qualifying a veteran
who had experience as an airplane mechanic in the military service and
the individual's employment after discharge or retirement from the
service is in the same or allied fields; e.g., auto mechanic or
machinist. This presumes, however, that the verification of employment
included a statement that the veteran was performing the duties of the
job satisfactorily, the possibility of continued employment was
favorable and that the loan application is eligible in all other
respects. An example of nonqualifying experience is that of a veteran
who was an Air Force pilot and has been employed in insurance sales on
commission for a short time. Most cases, of course, fall somewhere
between those extremes. It is for this reason that the facts of each
case must be fully developed prior to closing the loan automatically or
submitting the case to VA for prior approval.
(11) Employment of short duration. The provisions of paragraph
(f)(7) of this section are similarly applicable to applicants whose
employment is of short duration. Such cases will entail careful
consideration of the employer's confirmation of employment, probability
of permanency, past employment record, the applicant's qualifications
for the position, and previous training, including that received in the
military service. In the event that such considerations do not enable a
determination that the income from the veteran's current position has a
reasonable likelihood of continuance, such income should not be
considered in the analysis. Applications received from persons employed
in the building trades, or in other occupations affected by climatic
conditions, should be supported by documentation evidencing the
applicant's total earnings to date and covering a period of not less
than 1 year as well as signed and dated copies of complete income tax
returns, including all schedules for the past 2 years or for whatever
additional period is deemed necessary to properly demonstrate a
satisfactory earnings record. If the applicant works out of a union,
evidence of the previous year's earnings should be obtained together
with a verification of employment from the current employer.
(12) Rental income.--(i) Multi-unit subject property. When the loan
pertains to a structure with more than a one-family dwelling unit, the
prospective rental income will not be considered unless the veteran can
demonstrate a reasonable likelihood of success as a landlord, and
sufficient cash reserves are verified to enable the veteran to carry
the mortgage loan payments (principal, interest, taxes, and insurance)
without assistance from the rental income for a period of at least 6
months. The determination of the veteran's likelihood of success as a
[[Page 24883]]
landlord will be based on documentation of any prior experience in
managing rental units or other collection activities. The amount of
rental income to be used in the loan analysis will be based on 75
percent of the amount indicated on the lease or rental agreement,
unless a greater percentage can be documented.
(ii) Rental of existing home. Proposed rental of a veteran's
existing property may be used to offset the mortgage payment on that
property, provided there is no indication that the property will be
difficult to rent. If available, a copy of the rental agreement should
be obtained. It is the responsibility of the loan underwriter to be
aware of the condition of the local rental market. For instance, in
areas where the rental market is very strong the absence of a lease
should not automatically prohibit the offset of the mortgage by the
proposed rental income.
(iii) Other rental property. If income from rental property will be
used to qualify for the new loan, the documentation required of a self-
employed applicant should be obtained together with evidence of cash
reserves equaling 3 months PITI on the rental property. As for any
self-employed earnings (see paragraph (f)(7) of this section),
depreciation claimed may be added back in as income. In the case of a
veteran who has no experience as a landlord, it is unlikely that the
income from a rental property may be used to qualify for the new loan.
(13) Taxes and other deductions. Deductions to be applied for
Federal income taxes and Social Security may be obtained from the
Employer's Tax Guide (Circular E) issued by the Internal Revenue
Service (IRS). (For veterans receiving a mortgage credit certificate
(MCC), see paragraph (f)(14) of this section.) Any State or local taxes
should be estimated or obtained from charts similar to those provided
by IRS which may be available in those states with withholding taxes. A
determination of the amount paid or withheld for retirement purposes
should be made and used when calculating deductions from gross income.
In determining whether a veteran-applicant meets the income criteria
for a loan, some consideration may be given to the potential tax
benefits the veteran will realize if the loan is approved. This can be
done by using the instructions and worksheet portion of IRS Form W-4,
Employee's Withholding Allowance Certificate, to compute the total
number of permissible withholding allowances. That number can then be
used when referring to IRS Circular E and any appropriate similar State
withholding charts to arrive at the amount of Federal and State income
tax to be deducted from gross income.
(14) Mortgage credit certificates. (i) The Internal Revenue Code,
as amended by the Tax Reform Act of 1984, allows states and other
political subdivisions to trade in all or part of their authority to
issue mortgage revenue bonds for authority to issue MCCs. Veterans who
are recipients of MCCs may realize a significant reduction in their
income tax liability by receiving a Federal tax credit for a percentage
of their mortgage interest payment on debt incurred on or after January
1, 1985.
(ii) Lenders must provide a copy of the MCC to VA with the home
loan application. The MCC will specify the rate of credit allowed and
the amount of certified indebtedness; i.e., the indebtedness incurred
by the veteran to acquire a principal residence or as a qualified home
improvement or rehabilitation loan.
(iii) For credit underwriting purposes, the amount of tax credit
allowed to a veteran under an MCC will be treated as a reduction in the
monthly Federal income tax. For example, a veteran having a $600
monthly interest payment and an MCC providing a 30-percent tax credit
would receive a $180 (30 percent x $600) tax credit each month.
However, because the annual tax credit, which amounts to $2,160 (12 x
$180), exceeds $2,000 and is based on a 30-percent credit rate, the
maximum tax credit the veteran can receive is limited to $2,000 per
year (Pub. L. 98-369) or $167 per month ($2,000/12). As a consequence
of the tax credit, the interest on which a deduction can be taken will
be reduced by the amount of the tax credit to $433 ($600--$167). This
reduction should also be reflected when calculating Federal income tax.
(iv) For underwriting purposes, the amount of the tax credit is
limited to the amount of the veteran's maximum tax liability. If, in
the example in paragraph (f)(14)(iii) of this section, the veteran's
tax liability for the year were only $1,500, the monthly tax credit
would be limited to $125 ($1,500/12).
(g) Credit. The conclusion reached as to whether or not the veteran
and spouse are satisfactory credit risks must also be based on a
careful analysis of the available credit data. Regulation B (12 CFR
part 202), promulgated by the Federal Reserve Board pursuant to the
Equal Credit Opportunity Act, requires that lenders, in evaluating
creditworthiness, shall consider, on the applicant's request, the
credit history, when available, of any account reported in the name of
the applicant's spouse or former spouse which the applicant can
demonstrate accurately reflects the applicant's creditworthiness. In
other than community property states, if the spouse will not be
contractually obligated on the loan, Regulation B prohibits any request
for or consideration of information about the spouse concerning income,
employment, assets or liabilities. In community property states,
information concerning a spouse may be requested and considered in the
same manner as that for the applicant.
(1) Adverse data. If the analysis develops any derogatory credit
information and, despite such facts, it is determined that the veteran
and spouse are satisfactory credit risks, the basis for the decision
must be explained. If a veteran and spouse have debts outstanding which
have not been paid timely, or which they have refused to pay, the fact
that the outstanding debts are paid after the acceptability of the
credit is questioned or in anticipation of applying for new credit does
not, of course, alter the fact that the record for paying debts has
been unsatisfactory. With respect to unpaid debts, lenders may take
into consideration a veteran's claim of bona fide or legal defenses.
Such defenses are not applicable when the debt has been reduced to
judgment. Where a collection account has been established, if it is
determined that the borrower is a satisfactory credit risk, it is not
mandatory that such an account be paid off in order for a loan to be
approved. Court-ordered judgments, however, must be paid off before a
new loan is approved.
(2) Bankruptcy. When the credit information shows that the borrower
or spouse has been discharged in bankruptcy under the ``straight''
liquidation and discharge provisions of the bankruptcy law, this would
not in itself disqualify the loan. However, in such cases it is
necessary to develop complete information as to the facts and
circumstances concerning the bankruptcy. Generally speaking, when the
borrower or spouse, as the case may be, has been regularly employed
(not self-employed) and has been discharged in bankruptcy within the
last one to two years, it probably would not be possible to determine
that the borrower or spouse is a satisfactory credit risk unless both
of the following requirements are satisfied:
(i) The borrower or spouse has obtained credit subsequent to the
bankruptcy and has met the credit payments in a satisfactory manner
over a continued period; and
(ii) The bankruptcy was caused by circumstances beyond the control
of the borrower or spouse, e.g.,
[[Page 24884]]
unemployment, prolonged strikes, medical bills not covered by
insurance. Divorce is not generally viewed as beyond the control of the
borrower and/or spouse. The circumstances alleged must be verified. If
a borrower or spouse is self-employed, has been adjudicated bankrupt,
and subsequently obtains a permanent position, a finding as to
satisfactory credit risk may be made provided there is no derogatory
credit information prior to self-employment, there is no derogatory
credit information subsequent to the bankruptcy, and the failure of the
business was not due to misconduct. If a borrower or spouse has been
discharged in bankruptcy within the past 12 months, it will not
generally be possible to determine that the borrower or spouse is a
satisfactory credit risk.
(3) Petition under Chapter 13 of Bankruptcy Code. A petition under
chapter 13 of the Bankruptcy Code filed by the borrower or spouse is
indicative of an effort to pay their creditors. Some plans may provide
for full payment of debts while others arrange for payment of scaled-
down debts. Regular payments are made to a court-appointed trustee over
a 2-to 3-year period (or up to 5 years in some cases). When the
borrowers have made all payments in a satisfactory manner, they may be
considered as having reestablished satisfactory credit. When they apply
for a home loan before completion of the payout period, favorable
consideration may nevertheless be given if at least 12 months' worth of
payments have been made satisfactorily and the Trustee or Bankruptcy
Judge approves of the new credit.
(4) Foreclosures. (i) When the credit information shows that the
veteran or spouse has had a foreclosure on a prior mortgage; e.g., a
VA-guaranteed, or HUD-insured mortgage, this will not in itself
disqualify the borrower from obtaining the loan. Lenders and field
station personnel should refer to the preceding guidelines on
bankruptcies for cases involving foreclosures. As with a borrower who
has been adjudicated bankrupt, it is necessary to develop complete
information as to the facts and circumstances of the foreclosure.
(ii) When VA pays a claim on a VA-guaranteed loan as a result of a
foreclosure, the original veteran may be required to repay any loss to
the Government. In some instances VA may waive the veteran's debt, in
part or totally, based on the facts and circumstances of the case.
However, guaranty entitlement cannot be restored unless the
Government's loss has been repaid in full, regardless of whether or not
the debt has been waived, compromised, or discharged in bankruptcy.
Therefore, a veteran who is seeking a new VA loan after having
experienced a foreclosure on a prior VA loan will in most cases have
only remaining entitlement to apply to the new loan. The lender should
assure that the veteran has sufficient entitlement for its secondary
marketing purposes.
(5) Federal debts. An applicant for a Federally assisted loan will
not be considered a satisfactory credit risk for such loan if the
applicant is presently delinquent or in default on any debt to the
Federal Government, e.g., a Small Business Administration loan, a U.S.
Guaranteed Student loan, a debt to the Public Health Service, or where
there is a judgment lien against the applicant's property for a debt
owed to the Government. The applicant may not be approved for the loan
until the delinquent account has been brought current or satisfactory
arrangements have been made between the borrower and the Federal agency
owed, or the judgment is paid or otherwise satisfied. Of course, the
applicant must also be able to otherwise qualify for the loan from an
income and remaining credit standpoint. Refinancing under VA's interest
rate reduction refinancing provisions, however, is allowed even if the
borrower is delinquent on the VA guaranteed mortgage being refinanced.
Prior approval processing is required in such cases.
(6) Absence of credit history. The fact that recently discharged
veterans may have had no opportunity to develop a credit history will
not preclude a determination of satisfactory credit. Similarly, other
loan applicants may not have established credit histories as a result
of a preference for purchasing consumer items with cash rather than
credit. There are also cases in which individuals may be genuinely wary
of acquiring new obligations following bankruptcy, consumer credit
counseling (debt proration), or other disruptive credit occurrence. The
absence of the credit history in these cases will not generally be
viewed as an adverse factor in credit underwriting. However, before a
favorable decision is made for cases involving bankruptcies or other
derogatory credit factors, efforts should be made to develop evidence
of timely payment of non-installment debts such as rent and utilities.
It is anticipated that this special consideration in the absence of a
credit history following bankruptcy would be the rare case and
generally confined to bankruptcies that occurred over 3 years ago.
(7) Consumer credit counseling plan. If a veteran, or veteran and
spouse, have prior adverse credit and are participating in a Consumer
Credit Counseling plan, they may be determined to be a satisfactory
credit risk if they demonstrate 12 months' satisfactory payments and
the counseling agency approves the new credit. If a veteran, or veteran
and spouse, have good prior credit and are participating in a Consumer
Credit Counseling plan, such participation is to be considered a
neutral factor, or even a positive factor, in determining
creditworthiness.
(8) Re-establishment of satisfactory credit. In circumstances not
involving bankruptcy, satisfactory credit is generally considered to be
reestablished after the veteran, or veteran and spouse, have made
satisfactory payments for 12 months after the date of the last
derogatory credit item.
(9) Long-term v. short-term debts. All known debts and obligations
including any alimony and/or child support payments of the borrower and
spouse must be documented. Significant liabilities, to be deducted from
the total income in determining ability to meet the mortgage payments
are accounts that, generally, are of a relatively long term, i.e., 10
months or over. Other accounts for terms of less than 10 months must,
of course, be considered in determining ability to meet family
expenses. Certainly, any severe impact on the family's resources for
any period of time must be considered in the loan analysis. For
example, monthly payments of $300 on an auto loan with a remaining
balance of $1,500 would be included in those obligations to be deducted
from the total income regardless of the fact that the account can be
expected to pay out in 5 months. It is clear that the applicant will,
in this case, continue to carry the burden of those $300 payments for
the first, most critical months of the home loan.
(10) Requirements for verification. If the credit investigation
reveals debts or obligations of a material nature which were not
divulged by the applicant, lenders must be certain to obtain
clarification as to the status of such debts from the borrower. A
proper analysis is obviously not possible unless there is total
correlation between the obligations claimed by the borrower and those
revealed by a credit report or deposit verification. Conversely,
significant debts and obligations reported by the borrower must be
dated. If the credit report fails to provide necessary information on
such accounts, lenders will be expected to obtain their own
verifications of those debts directly from the creditors. Credit
reports and verifications must be no more than 120 days old (180 days
for new
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construction) to be considered valid. For loans closed automatically,
this requirement will be considered satisfied if the date of the credit
report or verification is within 120 days (180 days for new
construction) of the date the note is signed. For prior approval loans,
this requirement will be considered satisfied if the date of the credit
report or verification is within 120 days of the date of the
application is received by VA. Of major significance are the
applicant's rental history and outstanding or recently retired
mortgages, if any, particularly prior VA loans. Lenders should be sure
ratings on such accounts are obtained; a written explanation is
required when ratings are not available. A determination is necessary
as to whether alimony and/or child support payments are required.
Verification of the amount of such obligations should be obtained,
although documentation concerning an applicant's divorce should not be
obtained automatically unless it is necessary to verify the amount of
any alimony or child support liability indicated by the applicant. If
in the routine course of processing the loan application, however,
direct evidence is received (e.g., from the credit report) that an
obligation to pay alimony or child support exists (as opposed to mere
evidence that the veteran was previously divorced), the discrepancy
between the loan application and credit report can and should be fully
resolved in the same manner as any other such discrepancy would be
handled. When a pay stub or leave-and-earnings statement indicates an
allotment, the lender must investigate the nature of the allotment(s)
to determine whether the allotment is related to a debt. Debts assigned
to an ex-spouse by a divorce decree will not generally be charged
against a veteran-borrower.
(11) Job-related expenses. Known job-related expenses should be
documented. This will include costs for any dependent care, significant
commuting costs, etc. When a family's circumstances are such that
dependent care arrangements would probably be necessary, it is
important to determine the cost of such services in order to arrive at
an accurate total of deductions.
(12) Credit reports. Credit reports obtained by lenders on VA-
guaranteed loan applications must be either a three-file Merged Credit
Report (MCR) or a Residential Mortgage Credit Report (RMCR). If used,
the RMCR must meet the standards formulated jointly by the Department
of Veterans Affairs, Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, Federal Housing Administration, Farmers
Home Administration, credit repositories, repository affiliated
consumer reporting agencies and independent consumer reporting
agencies. All credit reports obtained by the lender must be submitted
to VA.
(h) Borrower's personal and financial status. The number and ages
of dependents have an important bearing on whether income after
deduction of fixed charges is sufficient to support the family. Type
and duration of employment of both the borrower and spouse are
important as an indication of stability of their employment. The amount
of liquid assets owned by the borrower or spouse, or both, is an
important factor in determining that they have sufficient funds to
close the loan, as well as being significant in analyzing the overall
qualifications for the loan. (It is imperative that adequate cash
assets from the veteran's own resources are verified to allow the
payment (see Sec. 36.4336(a)(3)) of any difference between the sales
price of the property and the loan amount, in addition to that
necessary to cover closing costs, if the sales price exceeds the
reasonable value established by VA.) Verifications must be no more than
120 days old (180 days for new construction) to be considered valid.
For loans closed on the automatic basis, this requirement will be
considered satisfied if the date of the deposit verification is within
120 days (180 days for new construction) of the date of the veteran's
application to the lender. For prior approval loans, this requirement
will be considered satisfied if the verification of employment is dated
within 120 days of the date the application is received by VA. Current
monthly rental or other housing expense is an important consideration
when compared to that to be undertaken in connection with the
contemplated housing purchase.
(i) Estimated monthly shelter expenses. It is important that
monthly expenses such as taxes, insurance, assessments and maintenance
and utilities be estimated accurately based on property location and
type of house; e.g., old or new, large or small, rather than using or
applying a ``rule of thumb'' to all properties alike. Maintenance and
utility amounts for various types of property should be realistically
estimated. Local utility companies should be consulted for current
rates. The age and type of construction of a house may well affect
these expenses. In the case of condominiums or houses in a planned unit
development (PUD), the monthly amount of the maintenance assessment
payable to a homeowners association should be added. If the amount
currently assessed is less than the maximum provided in the covenants
or master deed, and it appears likely that the amount will be
insufficient for operation of the condominium or PUD, the amount used
will be the maximum the veteran could be charged. If it is expected
that real estate taxes will be raised, or if any special assessments
are expected, the increased or additional amounts should be used. In
special flood hazard areas, include the premium for any required flood
insurance.
(j) Lender responsibility. (1) Lenders are fully responsible for
developing all credit information; i.e., for obtaining verifications of
employment and deposit, credit reports, and for the accuracy of the
information contained in the loan application.
(2) Verifications of employment and deposits, and requests for
credit reports and/or credit information must be initiated and received
by the lender.
(3) In cases where the real estate broker/agent or any other party
requests any of this information, the report(s) must be returned
directly to the lender. This fact must be disclosed by appropriately
completing the required certification on the loan application or report
and the parties must be identified as agents of the lender.
(4) Where the lender relies on other parties to secure any of the
credit or employment information or otherwise accepts such information
obtained by any other party, such parties shall be construed for
purposes of the submission of the loan documents to VA to be authorized
agents of the lender, regardless of the actual relationship between
such parties and the lender, even if disclosure is not provided to VA
under paragraph (j)(3) of this section. Any negligent or willful
misrepresentation by such parties shall be imputed to the lender as if
the lender had processed those documents and the lender shall remain
responsible for the quality and accuracy of the information provided to
VA.
(5) All credit reports secured by the lender or other parties as
identified in paragraphs (j)(3) and (j)(4) of this section shall be
provided to VA. If updated credit reports reflect materially different
information than that in other reports, such discrepancies must be
explained by the lender and the ultimate decision as to the effects of
the discrepancy upon the loan application fully addressed by the
underwriter.
(k) Lender certification. Lenders originating loans are responsible
for determining and certifying to VA on the appropriate application or
closing form that the loan meets all statutory and regulatory
requirements. Lenders will
[[Page 24886]]
affirmatively certify that loans were made in full compliance with the
law and loan guaranty regulations as prescribed in this section.
(1) Definitions. The definitions contained in part 42 of this title
and the following definitions are applicable in this section.
(i) Another appropriate amount. In determining the appropriate
amount of a lender's civil penalty in cases where the Secretary has not
sustained a loss or where two times the amount of the Secretary's loss
on the loan involved does not exceed $10,000, the Secretary shall
consider:
(A) The materiality and importance of the false certification to
the determination to issue the guaranty or to approve the assumption;
(B) The frequency and past pattern of such false certifications by
the lender; and
(C) Any exculpatory or mitigating circumstances.
(ii) Complaint includes the assessment of liability served pursuant
to this section.
(iii) Defendant means a lender named in the complaint.
(iv) Lender includes the holder approving loan assumptions pursuant
to 38 U.S.C. 3714.
(2) Procedures for certification. (i) As a condition to VA issuance
of a loan guaranty on all loans closed on or after October 27, 1994,
and as a prerequisite to an effective loan assumption on all loans
assumed pursuant to 38 U.S.C. 3714 on or after the effective date of
these regulations, the following certification shall accompany each
loan closing or assumption package:
The undersigned lender certifies that the (loan) (assumption)
application, all verifications of employment, deposit, and other
income and credit verification documents have been processed in
compliance with 38 CFR part 36; that all credit reports obtained or
generated in connection with the processing of this borrower's
(loan) (assumption) application have been provided to VA; that, to
the best of the undersigned lender's knowledge and belief the (loan)
(assumption) meets the underwriting standards recited in chapter 37
of title 38 United States Code and 38 CFR part 36; and that all
information provided in support of this (loan) (assumption) is true,
complete and accurate to the best of the undersigned lender's
knowledge and belief.
(ii) The certification shall be executed by an officer of the
lender authorized to execute documents and act on behalf of the lender.
(3) Any lender who knowingly and willfully makes a false
certification required pursuant to Sec. 36.4337(k)(2) shall be liable
to the United States Government for a civil penalty equal to two times
the amount of the Secretary's loss on the loan involved or to another
appropriate amount, not to exceed $10,000, whichever is greater.
(l) Assessment of liability. (1) Upon an assessment confirmed by
the Under Secretary for Benefits, in consultation with the
Investigating Official, that a certification, as required in this
section, is false, a report of findings of the Under Secretary for
Benefits shall be submitted to the Reviewing Official setting forth:
(i) The evidence that supports the allegations of a false
certification and of liability;
(ii) A description of the claims or statements upon which the
allegations of liability are based;
(iii) The amount of the VA demand to be made; and
(iv) Any exculpatory or mitigating circumstances that may relate to
the certification.
(2) The Reviewing Official shall review all of the information
provided and will either inform the Under Secretary for Benefits and
the Investigating Official that there is not adequate evidence, that
the lender is liable, or serve a complaint on the lender stating:
(i) The allegations of a false certification and of liability;
(ii) The amount being assessed by the Secretary and the basis for
the amount assessed;
(iii) Instructions on how to satisfy the assessment and how to file
an answer to request a hearing, including a specific statement of the
lender's right to request a hearing by filing an answer and to be
represented by counsel; and
(iv) That failure to file an answer within 30 days of the complaint
will result in the imposition of the assessment without right to appeal
the assessment to the Secretary.
(m) Hearing procedures. A lender hearing on an assessment
established pursuant to this section shall be governed by the
procedures recited at 38 CFR 42.8 through 42.47.
(n) Additional remedies. Any assessment under this section may be
in addition to other remedies available to VA, such as debarment and
suspension pursuant to 38 U.S.C. 3704 and part 44 of this title or loss
of automatic processing authority pursuant to 38 U.S.C. 3702, or other
actions by the Government under any other law including but not limited
to title 18, U.S.C. and 31 U.S.C. 3732.
(Authority: 38 U.S.C. 3703, 3710.)
[FR Doc. 97-11808 Filed 5-6-97; 8:45 am]
BILLING CODE 8320-0-P