Loan Guaranty: Loan Servicing and Claims Procedures Modifications, 30505-30509 [E7-10630]

Agencies

• DEPARTMENT OF VETERANS AFFAIRS

[Federal Register Volume 72, Number 105 (Friday, June 1, 2007)]
[Proposed Rules]
[Pages 30505-30509]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-10630]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AL65


Loan Guaranty: Loan Servicing and Claims Procedures Modifications

AGENCY: Department of Veterans Affairs.

ACTION: Second supplemental notice of proposed rulemaking; reopening of 
comment period.

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SUMMARY: This document provides a second supplemental notice regarding 
a proposal to amend the Department of Veterans Affairs (VA) Loan 
Guaranty regulations related to several aspects of the servicing and 
liquidating of guaranteed housing loans in default, and submission of 
guaranty claims by loan holders. This notice provides specific 
information regarding VA's proposal to phase-in implementation of the 
new electronic reporting requirement and other provisions in the 
proposed rule published February 18, 2005 (70 FR 8472). In addition, VA 
is taking this opportunity to address certain comments raised by some 
members of industry in response to VA's publication of the first 
supplemental notice to this rulemaking (November 27, 2006 (71 FR 
68948)), and to provide further explanation of the ongoing development 
of VA's computer-based tracking system. VA is reopening the comment 
period for the limited purpose of accepting public comments concerning 
the supplemental information provided in this notice.

DATES: Comments must be received on or before June 15, 2007. All 
comments previously received following publication of the proposed rule 
and the supplemental notice referenced above are being considered and 
do not need to be resubmitted.

ADDRESSES: Written comments may be submitted through 
www.regulations.gov; by mail or hand-delivery to the Director, 
Regulations Management (00REG), 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-AL65.'' Copies of comments received will be available for 
public inspection in the Office of Regulation Policy and Management, 
Room 1063B, between the hours of 8 a.m. and 4:30 p.m., Monday through 
Friday (except holidays). Please call (202) 273-9515 for an 
appointment. In addition, during the comment period, comments may be 
viewed online through the Federal Document Management System (FDMS). 
Comments previously received regarding the notice of proposed 
rulemaking for RIN 2900-AL65, published February 18, 2005 (70 FR 8472), 
and the supplemental notice published November 27, 2006 (71 FR 68948), 
will still be considered in the rulemaking process and do not need to 
be resubmitted.

FOR FURTHER INFORMATION CONTACT: Mike Frueh, Assistant Director for 
Loan Management (261), Veterans Benefits Administration, Department of 
Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420, at 
202-273-7325. (This is not a toll-free telephone number.)

SUPPLEMENTARY INFORMATION: VA published a notice of proposed rulemaking 
in the Federal Register on February 18, 2005 (70 FR 8472), to amend 
regulations concerning the servicing and claims submission requirements 
on VA-guaranteed home loans. The extensive changes in the proposed rule 
package were the result of an in-depth business process reengineering 
project that consulted mortgage-industry and government experts to help 
develop a plan to ensure that the VA home loan program continued to 
provide the best possible service to veterans of our armed forces in 
recognition of their service to our country.
    Included in the proposed rule were requirements for reporting 
information to VA under a new 38 CFR 36.4315a. Under the Revised 
Reporting Requirements preamble heading, 70 FR 8474-8475, VA stated 
that proposed Sec.  36.4315a would require all loan holders to 
electronically report information to the Department by use of a 
computer system, and that VA would be providing more specific 
information on this system prior to implementation. As VA progressed in 
developing its tracking system necessary to receive reports from loan 
servicers, it more clearly defined the system events and data elements 
that would be reported under Sec.  36.4315a. VA published more detailed 
information on those data elements and events in a supplemental notice 
dated November 27, 2006 (71 FR 68948). Public comments in response to 
that notice and the original proposed rules expressed concern that 
providing the amount of data requested by VA (and the corresponding 
need to adapt industry servicing systems to provide this data) would be 
extensive and time-consuming. The comments also expressed a desire for 
careful testing of all aspects of the new electronic reporting 
requirements. In response to these comments, VA proposes a phased 
implementation by industry segment and submits the following for public 
comment.
    The purpose of this notice is to solicit views, suggestions and 
comments from program participants, as well as the general public, as 
to what extent VA's proposed phased implementation should be adopted or 
modified, or other action taken, and to ensure that participants, 
beneficiaries, and the general public have the information they need to 
provide informed comments. To facilitate consideration of the issues 
covered by this supplemental notice, VA has set forth below a few 
matters with respect to which views, suggestions, comments and 
information are requested. Interested persons, however, are encouraged 
to address any other matters they believe to be germane

[[Page 30506]]

to VA's consideration of implementation methods.

Proposed Phased System Implementation

    VA proposes to implement its new, computer-based tracking system 
over an approximately 11-month timeframe, with program participants 
grouped into nine segments that will ``go live'' on VA's new system 
during designated phases of implementation. Each phase of 
implementation will incorporate time for data clean-up, system 
modifications, defect corrections, testing of interfaces and data 
transmission, and review of lessons learned before initiating the next 
phase. With respect to this proposal to designate phases of 
implementation, VA asks program participants and the general public to 
respond to or otherwise comment on the following questions:
    1. Does this phased implementation approach, in which program 
participants would be grouped into nine industry segments, appear 
reasonable in light of VA's need to balance industry participation with 
the potential for risks to the Government and program beneficiaries?
    2. Are there other ways that VA can segment the industry to 
effectively limit the risks to the Government and beneficiaries?
    3. Is the industry segmentation information provided in this 
supplemental notice clear enough for program participants to understand 
their role in the implementation process?
    4. What additional information would program participants need to 
prepare for implementation of their industry segment?
    5. Do program participants have any concerns about being unprepared 
for their scheduled, phased implementation? If so, what alternatives 
for implementation are available to VA?

Industry Segmentation Decisions

    VA proposes to phase-in the implementation based on criteria unique 
to each industry segment defined below. By implementing the new 
tracking system in this way, VA's goal is to bring on board the largest 
number of loans as early as its system can handle them, while also 
taking into account the number of servicers, the extent of servicers' 
interfaces, the types of loan portfolios, and other unique testing 
factors that VA can anticipate at this stage. The nine industry 
segments identified in this supplemental notice account for all current 
program participants. Each segment would have a corresponding effective 
date for the phased-in implementation.
    Industry Segment One: With the first industry segment, VA will need 
to bring into the new tracking system a large number of loans that are 
in different stages of delinquency. This is important because VA must 
have a representative cross-sampling by which it can test its new 
system's capabilities at various milestones. However, VA cannot manage 
the risk associated with simultaneously bringing multiple servicers 
into the system and adding such a large number of loans. As such, VA 
will select the first industry segment based on the largest number of 
delinquent loans with a representative portfolio and a loan servicing 
system that is already common to the industry.
    Industry Segment Two: The second segment would bring on-line a 
proprietary servicing system. Proprietary servicing systems are less 
common and, as a result, have characteristics that may present unique 
challenges to implementation. It is necessary for VA to determine early 
that its tracking system will be able to communicate seamlessly with 
such a servicing system, so that when VA is ready to begin taking on 
multiple servicers with proprietary systems, VA will be certain that 
its tracking system can handle the demands. Consequently, in Segment 
Two, VA will bring on-line a large program participant that is capable 
of participating at such an early stage and that uses a proprietary 
system to manage a high volume of delinquent loans.
    Industry Segment Three: For Segment Three, VA would begin 
introducing to its system multiple program participants with medium-
sized delinquent loan portfolios. Since this would be the first time 
that VA's system would have to handle an influx of multiple 
participants, however, VA would also limit Industry Segment Three to 
those who use the same servicing system as Industry Segment One, a 
common loan servicing platform with which VA's system would already be 
familiar.
    Industry Segment Four: With the fourth industry segment, VA would 
introduce another servicing system common to the industry. VA would 
identify the program participant with the largest, most representative 
portfolio of delinquent loans. As with Industry Segments One and Two, 
this would allow VA to bring on-line a large number of loans without 
the risk of shutting down multiple program participants in the case of 
testing defects.
    Industry Segment Five: Segment Five would focus on program 
participants with smaller portfolios where the program participants 
would use a variety of servicing systems. In the aggregate, this group 
would have a moderate number of delinquent loans. The increased 
complexity of interacting with multiple servicing systems would be 
offset by the ease of working with smaller portfolios. This segment 
would allow VA to verify its ability to implement with multiple 
servicers and multiple servicing systems for the first time.
    Industry Segment Six: At this stage, VA would be ready to bring 
large numbers of program participants into the system. VA would list 
the remaining servicers in descending order by size of delinquent loan 
portfolio. From this list, VA would create three groups of 
approximately equal size. From these three groups, VA would randomly 
select a group for Industry Segment Six. By selecting Industry Segment 
Six in this way, VA would focus for the first time on large numbers of 
servicers while keeping implementation risks low by selecting servicers 
with relatively small delinquent loan portfolios.
    Industry Segment Seven: For Industry Segment Seven, VA would 
randomly select the second group of servicers with relatively small 
delinquent loan portfolios for implementation.
    Industry Segment Eight: Industry Segment Eight would include the 
remaining group of servicers with relatively small delinquent loan 
portfolios.
    Industry Segment Nine: VA would reserve Industry Segment Nine for 
any servicers that have not been brought into the new tracking system 
in a previous industry segment.

Proposed Effective Dates of New Rules

    For most of the regulatory changes proposed on February 18, 2005 
(70 FR 8472), the effective date of the new rules for each industry 
segment would correspond to the date that segment ``goes live'' on the 
new system. Final implementation of the new rules would occur 
approximately 11 months after publication of the final rule. The table 
below provides the approximate effective date that we anticipate for 
each industry segment. These approximate effective dates are based on 
an anticipated publication of the final rules in September of 2007. The 
schedule would maintain the general timeframes described below, but 
could change due to unforeseen circumstances. There may be other 
factors at time of implementation that would influence the ordering of 
the industry segments (for example, industry consolidation and/or 
unacceptable testing results

[[Page 30507]]

discovered during preparations for an industry segment implementation). 
Because we cannot predict with certainty the precise date on which we 
will be ready to begin phase one, or the precise dates on which we will 
be ready to move from segment to segment, we intend to publish as 
notices in the Federal Register the actual effective dates for the 
industry segments.

------------------------------------------------------------------------
                                      Effective date of phased-in rules
            Segment No.                  (by calendar year quarter)
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1.................................  4th Quarter, 2007.
2.................................  4th Quarter, 2007.
3.................................  1st Quarter, 2008.
4.................................  1st Quarter, 2008.
5.................................  1st Quarter, 2008.
6.................................  1st Quarter, 2008.
7.................................  2nd Quarter, 2008.
8.................................  2nd Quarter, 2008.
9.................................  3rd Quarter, 2008.
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Proposed Exceptions to the Effective Dates of the New Rules

    There would be three exceptions to the phased implementation for 
the new rules, meaning that all program participants would be subject 
to these proposed exceptions upon the date of the final rules' 
publication. These exceptions can be implemented immediately because 
they are not dependent on the new tracking system. The first exception 
is the proposed revision to Sec.  36.4313(b)(5) on allowable legal 
fees, which would be effective upon publication of the final rule. The 
second exception is the provision in new Sec.  36.4321(d) that allows 1 
year after termination for filing a claim under the guaranty, which 
would be effective upon publication of the final rule. The third 
exception is the new authority proposed in Sec.  36.4344a for the 
Servicer Appraisal Processing Program, which would be effective upon 
publication of the final rule.

Proposed New 38 CFR 36.4800, et seq.

    All program participants not yet brought online would be governed 
by the existing regulations in 38 CFR 36.4300 through 36.4393, as 
amended through this rulemaking. Program participants would also be 
immediately subject to the three exceptions described earlier. As 
industry segments are brought on-line, however, they would then be 
subject to the phased-in rules, which would be found at a new 4800 
series in 38 CFR part 36.
    To make implementation less confusing, the 4800 series would 
reprint the existing rules not affected by this rulemaking. To 
illustrate: If a servicer were brought on-line and wanted to know the 
definition of a key term, it would look to 38 CFR 36.4801 to determine 
the meaning. The servicer would find the new Sec.  36.4801 different 
from the existing Sec.  36.4301 in the way that VA has proposed. On the 
other hand, if the same servicer wanted information about how 
guaranties are computed, it would look to Sec.  36.4802 in the new 
environment, and would find it identical to the existing rule in 38 CFR 
36.4302 because VA has not proposed a change to that section as a part 
of this rulemaking.
    When all industry segments have been brought on-line, VA will 
remove current Sec. Sec.  36.4300 through 36.4393, and redesignate the 
new 4800 series to replace current Sec. Sec.  36.4300 through 36.4393. 
At that time, all program participants would be subject to the new 
rules.

Anticipated Effect of the Phase-in on Veterans and the Lending Industry

    The impact on veterans by this phasing of effective dates of the 
new rules would be minimal. Under the existing rules, veterans 
experiencing payment problems receive financial counseling and other 
assistance from VA to help them avoid foreclosure whenever possible. 
Under the new rules, loan servicers would be responsible for providing 
similar assistance to veterans and VA would be assuming an oversight 
role, monitoring the servicers' direct intervention, while retaining 
the ability to intervene on the veteran's behalf when necessary. VA 
would do everything possible to mitigate potential disparities and to 
minimize the time to move to full implementation of the new rules. VA 
would, to the maximum extent permitted by law, help veterans who may be 
affected by any differences. Nevertheless, VA believes the phase-in 
approach offers the least risk with the most opportunity for success, 
as other alternatives contemplated might severely impact VA's ability 
to serve any veteran. VA recognizes that mortgage servicers would incur 
some expenses for conversion to the new reporting requirements through 
the use of VA's new tracking system. However, as servicers shift over 
to VA's new system, they would become eligible for certain incentives 
authorized under the new rules. VA believes that the overall impact on 
servicers would be minimized by phasing in implementation of the new 
rules in accordance with the schedule for bringing servicers on-line 
with VA's new system, and this approach also offers the least risk to 
VA in the event the new system requires modifications.
    With respect to the effect of the proposed phased implementation, 
VA asks program participants and the general public to respond to or 
otherwise comment on the following questions:
    1. Does VA's proposal balance the competing interests of the 
Government, beneficiaries, and program participants?
    2. Are there program participants who would want to be brought in 
to the system at an earlier or later date than proposed in this 
supplemental notice?
    3. How could VA modify the proposal for implementing the new system 
to accommodate program participants who seek an alternative phase-in 
date?
    4. Are there other issues, such as the impact of incentives 
authorized under the new rules or the cost of preparing to be brought 
in to the system, which VA should consider in deciding whether there is 
any other feasible alternative to the phased implementation?

Proposed Clarification on Servicer or Holder

    The holder is the entity ultimately responsible for compliance with 
VA regulations and under Sec.  36.4301 ``holder'' means ``the 
authorized servicing agent of the lender or assignee or transferee.'' 
However, for purposes of tier ranking (Sec.  36.4316) and loss 
mitigation options and incentives (Sec.  36.4317), VA's intent is to 
measure performance of the actual loan servicer and reward it 
accordingly. In order to make this distinction clearer, VA proposes to 
add a new definition in Sec.  36.4301 to describe the duties, 
responsibilities and rights of servicers.

Proposed Clarifications on Loan Modifications

    VA proposed extensive changes to the existing rule in Sec.  36.4314 
to clarify the conditions under which a loan holder could modify an 
existing loan without the prior approval of VA. In reviewing the 
proposed rule VA realized that two aspects of it remained confusing and 
in need of clarification.
    First, proposed paragraph (a)(1) includes the phrase ``or default 
is imminent.'' Because VA is proposing a hierarchy of loss mitigation 
options for consideration within the new regulatory package, it would 
not be appropriate for a holder to consider modification of a loan 
until after first considering a repayment plan or a period of 
forbearance in order to allow loan reinstatement. Therefore, it would 
not normally be feasible for a holder to consider modification of a 
loan where default is only imminent, because that would not allow for 
prior consideration of a repayment plan or a period of forbearance. 
Accordingly, in addition to the amendments noted in the notice of

[[Page 30508]]

proposed rulemaking published on February 18, 2005 (70 FR 8472), VA 
proposes to eliminate the words ``or default is imminent'' from the 
proposed rule.
    Second, proposed paragraph (a)(4) includes the phrase, ``At least 
12 months must have elapsed since the closing of the loan.'' As we 
reviewed this proposal, we realized that the intent of the redesign 
group had been misconstrued with this language. VA actually intended 
for a holder to be empowered to consider a loan modification without 
VA's prior approval if the borrower had made at least 12 payments on 
the loan. The actual language in the proposed rule did not accurately 
convey this condition, and could allow loan modification even if a 
borrower had made no payments on the loan, but 12 months had elapsed 
since origination. VA would definitely want to review such a unique 
case prior to loan modification. However, if a borrower has made 12 
payments after origination, then a holder should be allowed to modify 
the loan without prior VA approval, provided the other conditions are 
satisfied. Therefore, in addition to the amendments noted in the notice 
of proposed rulemaking published on February 18, 2005 (70 FR 8472), VA 
proposes to replace ``months must have elapsed'' with ``payments must 
have been paid'' in proposed Sec.  36.4314(a)(4).

Paperwork Reduction Act

    While the proposed rule sets forth collections of information 
pertaining to proposed Sec.  36.4315a, this supplemental notice of 
proposed rulemaking contains no new or proposed revised collections of 
information outside those referenced in the proposed rule.

Executive Order 12866

    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, when regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety, 
and other advantages; distributive impacts; and equity). The Executive 
Order classifies a ``significant regulatory action,'' requiring review 
by the Office of Management and Budget (OMB) unless OMB waives such 
review, as any regulatory action that is likely to result in a rule 
that may: 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; Create a serious inconsistency or otherwise interfere with 
an action taken or planned by another agency; Materially alter the 
budgetary impact of entitlements, grants, user fees, or loan programs 
or the rights and obligations of recipients thereof; or Raise novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order.
    The economic, interagency, budgetary, legal, and policy 
implications of this supplemental notice of proposed rulemaking have 
been examined, and it has been determined to be a significant 
regulatory action under Executive Order 12866.

Unfunded Mandates

    The Unfunded Mandates Reform Act requires, at 2 U.S.C. 1532, that 
agencies prepare an assessment of anticipated costs and benefits before 
developing any rule that may result in expenditure by State, local, or 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any given year. This supplemental notice of proposed 
rulemaking would have no such effect on State, local, or tribal 
governments, or the private sector.

Regulatory Flexibility Act

    The Secretary hereby certifies that this supplemental notice of 
proposed rulemaking would not have a significant economic impact on a 
substantial number of small entities as they are defined in the 
Regulatory Flexibility Act, 5 U.S.C. 601-612. The vast majority of VA 
loans are serviced by very large financial companies. Only a handful of 
small entities service VA loans and they service only a very small 
number of loans. This supplemental notice of proposed rulemaking, which 
only impacts veterans, other individual obligors with guaranteed loans, 
and companies that service VA loans, will have a very minor impact on a 
very small number of small entities servicing such loans. Therefore, 
pursuant to 5 U.S.C. 605(b), the supplemental notice of proposed 
rulemaking is exempt from the initial and final regulatory flexibility 
analysis requirements of sections 603 and 604.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Program number is 
64.114, Veterans Housing Guaranteed and Insured Loans.

List of Subjects in 38 CFR Part 36

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

    Approved: April 24, 2007.
Gordon H. Mansfield,
Deputy Secretary of Veterans Affairs.
    For the reasons set out in the preamble, the Department of Veterans 
Affairs proposes to amend 38 CFR part 36 as follows:

PART 36--LOAN GUARANTY

    1. The authority citation for part 38 continues to read as follows:

    Authority: 38 U.S.C. 501, 3701-3704, 3707, 3710-3714, 3719, 
3720, 3729, 3762, unless otherwise noted.

    2. Amend Sec.  36.4301 as proposed to be amended on February 18, 
2005 (70 FR 8483) by revising the following terms in alphabetical order 
to read as follows:


Sec.  36.4301  Definitions.

* * * * *
    Compromise sale. A sale to a third party for an amount less than is 
sufficient to repay the unpaid balance on the loan where the holder has 
agreed in advance to release the lien in exchange for the proceeds of 
such sale.
* * * * *
    Holder. The lender or any subsequent assignee or transferee of the 
guaranteed obligation or the authorized servicing agent (also referred 
to as ``the servicer'') of the lender or of the assignee or transferee.
* * * * *
    Liquidation sale. * * * This term also includes a compromise sale.
* * * * *
    Servicer. The authorized servicer may be the servicing agent of a 
holder or the holder itself if the holder is performing all servicing 
functions on a loan. The servicer is typically the entity reporting all 
loan activity to VA and filing claims under the guaranty on behalf of 
the holder. VA will generally issue guaranty claims and other payments 
to the servicer, which will be responsible for forwarding funds to the 
holder in accordance with its servicing agreement. Incentives under 
Sec.  36.4317 will generally be paid directly to the servicer based on 
its performance under that section and in accordance with its tier 
ranking under Sec.  36.4316.
* * * * *
    Total indebtedness. For purposes of 38 U.S.C. 3732(c), the 
veteran's ``total indebtedness'' shall be the sum of: The unpaid 
principal on the loan as of the date of the liquidation sale, accrued

[[Page 30509]]

unpaid interest permitted by Sec.  36.4321(a), and fees and charges 
permitted to be included in the guaranty claim by Sec.  36.4313.
* * * * *
    3. Revise Sec.  36.4314 to read as follows:


Sec.  36.4314  Loan modifications.

    (a) Subject to the provisions of this section, the terms of any 
guaranteed loan may be modified by written agreement between the holder 
and the borrower, without prior approval of the Secretary, if all of 
the following conditions are met:
    (1) The loan is in default;
    (2) The event or circumstances that caused the default have been or 
will be resolved and it is not expected to re-occur.
    (3) The obligor is considered to be a reasonable credit risk, based 
on a review by the holder of the obligor's creditworthiness under the 
criteria specified in Sec.  36.4337, including a current credit report. 
The fact of the recent default will not preclude the holder from 
determining the obligor is now a satisfactory credit risk provided the 
holder determines that the obligor is able to resume regular mortgage 
installments when the modification becomes effective based upon a 
review of the obligor's current and anticipated income, expenses, and 
other obligations as provided in Sec.  36.4337.
    (4) At least 12 monthly payments have been paid since the closing 
date of the loan;
    (5) The current owner occupies the property securing the loan and 
is obligated to repay the loan.
    (6) All current owners of the property are parties to, and have 
agreed to the terms of, the loan modification.
    (7) The loan will be reinstated to performing status by virtue of 
the loan modification.
    (b) A loan can be modified no more than once in a 3-year period and 
no more than three times during the life of the loan.
    (c) All modified loans must bear a fixed-rate of interest, which 
may not exceed the lesser of--
    (1) A rate which is 100 basis points above the interest rate in 
effect on this loan just prior to the execution of the modification 
agreement, or
    (2) The Government National Mortgage Association (GNMA) current 
month coupon rate that is closest to par (100) in effect at the close 
of business on the business day immediately preceding the date the 
modification agreement is executed by the obligor plus 50 basis points.
    (d) The unpaid balance of the modified loan may be re-amortized 
over the remaining life of the loan. The loan term may extend the 
maturity date to the shorter of--
    (1) 360 months from the due date of the first installment required 
under the modification, or
    (2) 120 months after the original maturity date of the loan.
    (e) Only unpaid principal, accrued interest, and deficits in the 
taxes and insurance impound accounts may be included in the modified 
indebtedness. Late fees and other charges may not be capitalized.
    (f) Holders will ensure the first lien status of the modified loan. 
No current owner of the property will be released from liability as a 
result of executing the modification agreement without prior approval 
from VA. Releasing a current owner obligor from liability without prior 
approval will release the Secretary from liability under the guaranty.
    (g) The dollar amount of the guaranty may not exceed the greater of 
the original guaranty amount of the loan being modified or 25 percent 
of the loan being modified subject to the statutory maximum specified 
at 38 U.S.C. 3703(a)(1)(B).
    (h) The obligor may not receive any cash back from the 
modification.

[FR Doc. E7-10630 Filed 5-31-07; 8:45 am]
BILLING CODE 8320-01-P