Loan Guaranty: Loan Servicing and Claims Procedures Modifications, 6294-6368 [08-337]

Agencies

• DEPARTMENT OF VETERANS AFFAIRS

[Federal Register Volume 73, Number 22 (Friday, February 1, 2008)]
[Rules and Regulations]
[Pages 6294-6368]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 08-337]



[[Page 6293]]

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Part II





Department of Veterans Affairs





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38 CFR Part 36



Loan Guaranty: Loan Servicing and Claims Procedures Modifications; 
Final Rule

Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules 
and Regulations

[[Page 6294]]


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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: Final rule.

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SUMMARY: This document establishes a new series for the Department of 
Veterans Affairs (VA) Loan Guaranty regulations, which will be phased 
in over an approximately eleven-month timeframe, as mortgage servicing 
industry segments ``go live'' on a new computer-based tracking system 
being established by VA. This new series replicates existing 
regulations for most aspects of the VA Loan Guaranty program, but also 
includes changes related to several aspects of the servicing and 
liquidating of guaranteed housing loans in default, and the submitting 
of guaranty claims by loan holders. Specific topics revised in the new 
4800 series include: increasing authority of servicers to implement 
loss-mitigation options, making incentive payments to servicers for 
successful loss-mitigation options, establishing a system of measuring 
and ranking servicer performance, establishing updated reporting 
requirements, permitting loan holders to review liquidation appraisals, 
requiring holders to calculate the net value of the security property 
prior to foreclosure, establishing a timeframe for when foreclosure of 
a defaulted loan should be completed, limiting the amount of interest 
and other fees and charges that may be included in a guaranty claim, 
establishing allowable attorneys fees to be included in the guaranty 
claim, establishing a deadline for the submission of guaranty claims, 
modifying the requirements for title evidence for properties conveyed 
to VA following foreclosure, modifying the requirements for how long a 
holder must maintain records relating to loans for which VA has paid a 
claim on the guaranty, and eliminating the requirement for the 
submission of legal procedural papers to VA. This document also 
includes specific revisions to three rules related to increased 
attorney fee allowances, establishment of a time limit for filing a 
claim under the guaranty, and granting authority for the Servicer 
Appraisal Processing Program that will be effective for all program 
participants upon publication of these rules.

DATES: This rule is effective February 1, 2008.

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 
202-461-9521. (This is not a toll-free telephone number.)

SUPPLEMENTARY INFORMATION:

Statutory Background

    Under 38 U.S.C. chapter 37, VA guarantees loans made by private 
lenders to veterans for the purchase, construction, and refinancing of 
homes owned and occupied by veterans.

Business Process Reengineering Review

    Beginning in 2001, VA conducted an internal, in-depth review of the 
entire Loan Administration process that was effectively a business 
process reengineering (BPR) effort. ``Loan Administration'' includes 
the servicing of existing loans, dealing with loans in default and 
loans being terminated, and the processing of claims by loan holders 
under the guaranty after defaulted loans have been foreclosed or 
otherwise terminated. Loan Administration also includes efforts by VA 
and private loan holders to assist homeowners whose loans are in 
default to cure the default, retain their home if possible, or find 
other means short of foreclosure. VA's BPR team recommended revising 
the Loan Administration process to reflect changes in the loan 
servicing industry in recent years, as well as advances in technology. 
VA's BPR team also recommended placing greater reliance on private 
sector servicing in accordance with VA guidelines, with VA using 
advanced technology to oversee servicing actions.

Regulatory Background

    On February 18, 2005 (70 FR 8472), VA proposed to amend its loan 
guaranty regulations in order to implement the following 
recommendations proposed by the BPR team: giving servicers increased 
authority to implement loss-mitigation alternatives to foreclosure and 
paying servicers an incentive bonus for each successful loss-mitigation 
alternative to foreclosure; establishing a performance-based tier-
ranking system for servicers; permitting qualified loan holders to 
review liquidation appraisals and establish the fair market value of 
the property; requiring loan holders to calculate the net value of 
properties securing loans prior to foreclosure; establishing timeframes 
for when VA would expect holders, exercising reasonable diligence, 
should be able to complete the foreclosure of defaulted loans; limiting 
the amount of interest and other fees and charges that may be included 
in a guaranty claim; establishing reasonable and customary attorney 
fees allowed to be claimed under the guaranty; establishing a deadline 
for holders to submit claims under the guaranty and to request 
reconsideration of denied claims; modifying the requirements for title 
evidence submitted to VA when the holder is conveying the property to 
VA following the liquidation sale; modifying the requirements for how 
long a holder must maintain records relating to loans for which VA has 
paid a claim on the guaranty; modifying the requirements for holders to 
report key events with regard to loans being serviced; and repealing 
the requirement for holders to provide VA with procedural papers in 
legal or equitable proceedings related to a loan on the security 
property. VA published a supplemental notice on November 27, 2006 (71 
FR 68498), to provide specific information regarding the computer-based 
system that VA proposed to implement as part of the loan servicing and 
claims procedure modifications. VA published another supplemental 
notice on June 1, 2007 (72 FR 30505), to provide information on a 
decision to phase-in implementation of most of the new rules, based on 
previous comments from the industry and the development of VA's 
computer-based tracking system.

Discussion of Public Comments

    The initial public comment period closed on April 19, 2005. VA 
received 51 comments from the public about various aspects of the 
proposed changes. The public comment period was reopened following 
publication of the first supplemental notice and closed December 11, 
2006. VA received an additional 8 comments from the public about the 
proposed reporting requirements for VA's new computer-based system. The 
public comment period was again reopened following publication of the 
second supplemental notice and closed June 15, 2007. VA received 2 
comments from the public about its proposed phased implementation and 
clarifications regarding modifications.
    The final rule has been revised to incorporate changes that VA 
agrees are necessary in light of, or as the logical outgrowth of, the 
comments provided. In order to accommodate the phased implementation of 
the new rules, VA is establishing a new subpart F (Sec. Sec.  36.4800 
through 36.4893, inclusive) of part 36 that contains substantive rules 
identical

[[Page 6295]]

to those in the current rules (Sec. Sec.  36.4300 through 36.4393). In 
addition, we redesignate those current rules as subpart B of title 38, 
CFR. Subpart F will be effective upon publication of this notice only 
for the first segment of the mortgage servicing industry, as described 
in the second supplemental notice published June 1, 2007 (72 FR 30505). 
The table below is similar to the one in that notice, and provides the 
effective date for the first segment that will be affected by these 
rules, as well as an indication of the time periods during which we 
expect to make these rules applicable to all other segments of the 
industry (although these time periods may change due to unforeseen 
circumstances). We will publish as notices in the Federal Register the 
actual applicability dates for industry segments two through nine.

------------------------------------------------------------------------
                                        Applicability date of phased-in
             Segment No.               rules (by calendar year quarter)
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1...................................  February 1, 2008.
2...................................  2nd Quarter, 2008.
3...................................  2nd Quarter, 2008.
4...................................  4th Quarter, 2008.
5...................................  2nd Quarter, 2008.
6...................................  3rd Quarter, 2008.
7...................................  3rd Quarter, 2008.
8...................................  3rd Quarter, 2008.
9...................................  4th Quarter, 2008.
------------------------------------------------------------------------

    Subpart B will continue to be the governing rules for industry 
segments until the dates they become subject to the new subpart F. VA 
is aware that certain portions of subpart B, specifically Sec. Sec.  
36.4302 and 36.4312, are in need of revision to match recent 
legislative amendments, as well as to update VA positions on certain 
requirements. However, in order to avoid confusion with those issues 
not directly impacting the servicing and liquidating of guaranteed 
housing loans in default, and the submitting of guaranty claims by loan 
holders, those changes have not been included in this rulemaking. 
Instead, VA is preparing proposed changes to Sec. Sec.  36.4302 and 
36.4312 in subpart B and in the corresponding Sec. Sec.  36.4802 and 
36.4813 in the new subpart F, and will request comments from the public 
on those changes after the effective date of these new rules.
    In our review of subpart B, we also identified a number of minor 
errors, such as erroneous cross-references, typographical errors, and 
hanging provisions (flush text) that needed reformatting, and have 
corrected these wherever necessary in the new subpart F. However such 
corrections have not affected the rights, responsibilities, or 
obligations of program participants.
    The following paragraphs discuss the comments VA received in 
response to the proposed rules and the supplemental notices. The 
paragraphs are in order by the new subpart F section number and provide 
VA responses. The preamble does not discuss sections about which we did 
not receive any public comment. The preamble also does not discuss any 
section that is substantively the same as its counterpart in Sec. Sec.  
36.4300 through 36.4393. However, such a section may contain conforming 
renumbering changes and/or technical revisions or reorganization. This 
final rule includes three changes to subpart B in Sec. Sec.  
36.4313(b)(5), 36.4321(d), and 36.4344a, and the comments and rationale 
for those changes are the same as those in the comments and responses 
on the new final rules in corresponding Sec. Sec.  36.4814(b)(5), 
36.4824(d), and 36.4848.

36.4800 Applicability of Sec. Sec.  36.4800 Through 36.4893, Inclusive

    Comment: VA should consider the time needed to adapt industry 
servicing systems and carefully test all aspects of the proposed 
electronic reporting requirements. This could also include special 
circumstances such as recent acquisitions, changes in servicing 
platforms, or other unforeseen situations.
    VA Response: VA has carefully considered the factors that are 
essential to the success of its new electronic reporting environment, 
and determined that a phased implementation by industry segment offers 
the best chance for success. Accordingly, VA has established nine 
industry segments for program participants, with each segment ``going 
live'' on VA's new computer-based tracking system over an approximately 
11-month timeframe. Each phase of implementation will include 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. Throughout this phase-in process, VA will 
remain flexible in adjusting its implementation schedule in order to 
accommodate participants' unique circumstances, such as changes in 
servicing platforms or unforeseen events. In addition, VA has the 
authority under Sec.  36.4838 to administratively offer relief to 
entities not meeting VA requirements, such as electronic reporting.

36.4801 Definitions

    Comments: VA should provide its definitions of ``repayment plans'' 
and ``special forbearances.''
    VA Response: When VA published the proposed rule to replace the 
existing Sec.  36.4317 with an arrangement to establish incentive 
payments for loss mitigation options, VA believed that the mortgage 
industry had a common understanding of the basic concepts of repayment 
plans and special forbearance agreements. However, while reviewing 
comments, and in researching definitions established by major industry 
participants (Fannie Mae, Freddie Mac, and the Department of Housing 
and Urban Development [HUD]), VA realized that each entity has its own 
slightly different definition for each of these terms. Accordingly, VA 
has added detailed definitions of ``repayment plan'' and ``special 
forbearance'' in this final rule in Sec.  36.4801 to avoid any 
confusion as to what is required for each of these types of loss 
mitigation actions. VA is also clarifying the role of the servicer by 
adding a definition to state that the servicer is the entity which will 
be assigned a tier ranking based on its performance and will receive 
any incentive payment on a loan it services for the loan holder. The 
definitions are only minor clarifications of basic concepts customary 
in the loan servicing industry and do not impose any new requirements 
or take away any substantive rights of program participants. VA has 
listed all of the loss mitigation options in Sec.  36.4819 in their 
preferred order of consideration (i.e., a hierarchy for review), but 
recognizes that individual circumstances may lead to ``out of the 
ordinary'' procedures. VA also plans to provide more detailed examples 
and advice on a number of issues, including repayment plans and special 
forbearances, as part of the training it will provide to servicers 
after publishing these rules.
    Comment: VA should clarify the payment of incentives for successful 
loss mitigation efforts.
    VA Response: VA concurs. The holder is the entity ultimately 
responsible for compliance with VA regulations and under Sec.  36.4801 
``Holder'' includes ``the authorized servicing agent of the lender or 
assignee or transferee.'' However, for purposes of tier ranking (Sec.  
36.4818) and loss mitigation options and incentives (Sec.  36.4819), 
VA's intent is to measure performance of the actual loan servicer and 
reward it accordingly. In order to make this distinction clearer, we 
provide a definition in Sec.  36.4801 of ``servicer.'' The authorized 
servicer is

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either 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, who will be 
responsible for forwarding funds to the holder in accordance with its 
servicing agreement. Incentives under Sec.  36.4819 will generally be 
paid directly to the servicer based on its performance under that 
section and in accordance with its tier ranking under Sec.  36.4818.
    Comment: VA should clarify the procedures and implications of debt 
reductions used to ensure a property is eligible for conveyance to VA.
    VA Response: In Sec.  36.4823, we clarify the procedures to be 
followed to reduce debts in order to gain the right to convey to VA 
properties acquired at liquidation sales. However, to avoid confusion 
with multiple definitions of similar terms, we do not use the terms 
``Indebtedness'', ``Specified amount'' and ``Unguaranteed portion of 
the indebtedness'' in this final rule in Sec.  36.4801; that section 
will instead use the term ``Total indebtedness.'' The terms are defined 
in Sec.  36.4301 because they are used primarily in Sec. Sec.  36.4320 
and 36.4321. However, the new final Sec. Sec.  36.4823 and 36.4824 do 
not contain them and refer only to the total indebtedness as defined in 
the statute and the new final Sec.  36.4801.
    The other definitions included in Sec.  36.4801 that are different 
from those in Sec.  36.4301 were previously proposed.

36.4809 Transfer of Title by Borrower or Maturity by Demand or 
Acceleration

    In Sec.  36.4308(g), we refer to a time period specified in Sec.  
36.4316, which in turn establishes a three-month waiting period prior 
to the filing of a notice of intention to foreclose. The reporting and 
processing of defaults is handled differently under the new rules in 
Sec. Sec.  36.4800 through 36.4893, and Sec.  36.4818 does not refer to 
a waiting period. Therefore, in Sec.  36.4809(g), we do not refer to 
another section but rather refer to the actual time frame of three 
months.

36.4814 Advances and Other Charges

    Comment: VA should review its proposed foreclosure attorney fee 
schedule, which is very similar to those published by HUD, Fannie Mae, 
and Freddie Mac in 2001, to account for reasonable increases in living 
costs over the past several years, as well as other cost increases 
since that time due to increased labor and operational expenses for 
attorneys.
    VA Response: VA concurs. VA has carefully reviewed the proposed 
foreclosure attorney fee schedule and has adjusted the amounts in 
accordance with the information provided in the comments, as well as 
updated information obtained from other sources. The table provided 
below, as referenced in final rules Sec.  36.4313(b)(5)(ii) and Sec.  
36.4814(b)(5)(ii), is reasonably consistent with the fees allowed by 
other agencies for comparable work, and the commitment in paragraph 
(b)(5)(ii) to review the schedule annually will ensure the opportunity 
to timely address any imbalance in the schedule. In addition, VA has 
slightly modified the proposed language in new final rules Sec.  
36.4313(b)(5)(iii) and Sec.  36.4814(b)(5)(iii) to allow additional 
trustee fees, above those allowed for legal services, when the trustee 
conducting the sale must be a Government official under local law, or 
if an individual other than the foreclosing attorney (or any employee 
of that attorney) is appointed as part of judicial proceedings, and 
local law also establishes the fees payable for the services of the 
public or judicially appointed trustee.
    VA intends to reimburse only for attorney fees for services related 
to foreclosure of loans. Most of the attorneys commenting on the 
proposed rule reported that over the past five years many servicers 
have been outsourcing the foreclosure oversight process (i.e., hiring 
third parties to perform functions previously handled as part of the 
servicer's routine duties), and firms providing such outsourcing 
services are charging attorney firms a fee for providing the file 
needed to initiate the foreclosure action. While VA understands that 
servicers may find efficiencies in outsourcing certain functions, the 
cost for such outsourcing must be considered as an operating expense of 
the firm contracting for the outsourcing; i.e., the servicer. VA cannot 
consider outsourcing fees to be part of the cost of an attorney fee for 
completing a foreclosure. Consistent with our proposed rule, VA is 
establishing maximum amounts for legal services in each State, and 
those amounts are intended to reimburse for reasonable attorney fees. 
This is consistent with the position taken by Freddie Mac, which 
prohibits payment for referral fees, packaging or other similar fees, 
and new case start-up fees in its Single Family Seller/Servicer Guide, 
Volume 2, Chapter 71, section 71.18. Fannie Mae also notes in its 2006 
Servicing Guide, Part VIII, Chapter 1, section 104.03, that it will not 
reimburse a servicer for legal fees and expenses related to actions 
that are essentially servicing functions.
    Comment: VA should allow a fee to cover the costs of restarting a 
foreclosure that has been postponed, for example, by the filing of a 
bankruptcy petition. This would be in addition to the reimbursement for 
obtaining relief from the bankruptcy stay.
    VA Response: VA concurs. VA recognizes that this is occurring more 
frequently, and is a true cost of doing business. Therefore, VA has 
allowed in the table provided herein in accordance with the final rules 
Sec.  36.4313(b)(5)(ii) and Sec.  36.4814(b)(5)(ii) an additional $350 
``foreclosure restart'' fee when a foreclosure sale is postponed or 
cancelled through no fault of the servicer or its foreclosure attorney. 
This includes but is not limited to bankruptcy, VA requested delay, 
property damage, hazardous conditions, condemnation, natural disaster, 
property seizure, or relief under the Servicemembers Civil Relief Act.
    Comment: VA should consider increasing its maximum allowable 
bankruptcy fees, for reasons similar to those suggested for foreclosure 
fees.
    VA Response: VA concurs. VA has reviewed the fees allowed by other 
entities, as well as the arguments made for increasing bankruptcy fees. 
VA believes that a modest adjustment is appropriate at this time and is 
revising the table referenced in the final rules in Sec.  
36.4313(b)(5)(ii) and Sec.  36.4814(b)(5)(ii) to allow attorney fees of 
$650 (Chapter 7) or $850 (initial Chapter 13) for obtaining bankruptcy 
releases directly related to loan termination. For additional relief 
filed under either chapter, VA will allow an additional $250. VA will 
continue to monitor these fees on an annual basis.
    The current legal services table is as follows:

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                                                                                                            Foreclosure
                      Jurisdiction                         Non-judicial      Judicial      Deed-in-lieu     restart fee     Chapter 13       Chapter 7
                                                            foreclosure     foreclosure   of foreclosure        \2\         release \3\     release \3\
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Alabama.................................................             550             N/A             350             350             850             650
Alaska..................................................            1200             N/A             350             350             850             650

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Arizona.................................................             625             N/A             350             350             850             650
Arkansas................................................             750             N/A             350             350             850             650
California..............................................             600             N/A             350             350             850             650
Colorado................................................             800             N/A             350             350             850             650
Connecticut.............................................             N/A            1250             350             350             850             650
Delaware................................................             N/A             950             350             350             850             650
District of Columbia....................................             600             N/A             350             350             850             650
Florida.................................................             N/A            1200             350             350             850             650
Georgia.................................................             600             N/A             350             350             850             650
Guam....................................................            1200             N/A             350             350             850             650
Hawaii..................................................             N/A            1850             350             350             850             650
Idaho...................................................             600             N/A             350             350             850             650
Illinois................................................             N/A            1100             350             350             850             650
Indiana.................................................             N/A            1000             350             350             850             650
Iowa....................................................             550             850             350             350             850             650
Kansas..................................................             N/A             850             350             350             850             650
Kentucky................................................             N/A            1100             350             350             850             650
Louisiana...............................................             N/A             900             350             350             850             650
Maine...................................................             N/A            1250             350             350             850             650
Maryland................................................             800             N/A             350             350             850             650
Massachusetts...........................................             N/A            1250             350             350             850             650
Michigan................................................             650             N/A             350             350             850             650
Minnesota...............................................             650             N/A             350             350             850             650
Mississippi.............................................             550             N/A             350             350             850             650
Missouri................................................             650             N/A             350             350             850             650
Montana.................................................             600             N/A             350             350             850             650
Nebraska................................................             600             850             350             350             850             650
Nevada..................................................             600             N/A             350             350             850             650
New Hampshire...........................................             900             N/A             350             350             850             650
New Jersey..............................................             N/A            1300             350             350             850             650
New Mexico..............................................             N/A             900             350             350             850             650
New York--Western Counties \1\..........................             N/A            1250             350             350             850             650
New York--Eastern Counties..............................             N/A            1800             350             350             850             650
North Carolina..........................................             550             N/A             350             350             850             650
North Dakota............................................             N/A             900             350             350             850             650
Ohio....................................................             N/A            1100             350             350             850             650
Oklahoma................................................             N/A             900             350             350             850             650
Oregon..................................................             675             N/A             350             350             850             650
Pennsylvania............................................             N/A            1250             350             350             850             650
Puerto Rico.............................................             N/A            1100             350             350             850             650
Rhode Island............................................             900             N/A             350             350             850             650
South Carolina..........................................             N/A             850             350             350             850             650
South Dakota............................................             650             850             350             350             850             650
Tennessee...............................................             550             N/A             350             350             850             650
Texas...................................................             550             N/A             350             350             850             650
Utah....................................................             600             N/A             350             350             850             650
Vermont.................................................             N/A             950             350             350             850             650
Virginia................................................             600             N/A             350             350             850             650
Virgin Islands..........................................             N/A            1100             350             350             850             650
Washington..............................................             675             N/A             350             350             850             650
West Virginia...........................................             550             N/A             350             350             850             650
Wisconsin...............................................             N/A            1100             350             350             850             650
Wyoming.................................................             600             N/A             350             350             850             650
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\1\ Western Counties of New York are: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Livingston, Monroe, Niagara, Ontario, Orleans, Steuben, Wayne,
  Wyoming, and Yates. The remaining counties are in Eastern New York.
\2\ When a foreclosure is stopped due to circumstances beyond control of the holder or its attorney (including, but not limited to bankruptcy, VA-
  requested delay, property damage, hazardous conditions, condemnation, natural disaster, property seizure, or relief under the Servicemembers Civil
  Relief Act) and then restarted, VA will allow the restart fee in addition to the base foreclosure attorney fee.
\3\ For each additional relief of stay under either chapter, VA will pay $250.

    Comment: VA should publish a single national reimbursable fee 
schedule so that servicers will be able to accurately calculate total 
indebtedness. VA should provide at least 30 days advance notice of 
changes in fees to allow for system updates and procedural 
modifications.
    VA Response: VA does not concur at this time because this 
information is maintained at the Regional Loan Center (RLC) level in 
order to be updated as quickly as possible when local changes occur, so 
that holders may be reimbursed for actual expenses as they occur, 
rather than experiencing a lag time. The current schedules provide the 
local fees and expenses and we believe that this data should continue 
to be provided at the local level. However, VA will initiate plans to 
post such a national schedule of fees when this can be accomplished in 
a timely manner.

36.4815 Loan Modifications

    Comment: VA should not require holders to reduce the interest rate 
on a loan modification where market interest rates have decreased since 
the date of loan origination.

[[Page 6298]]

    VA Response: VA does not concur, but is changing the new final rule 
in Sec.  36.4815 in an effort to make it easier for servicers to 
administer. The existing VA regulation dealing with loan modifications 
(Sec.  36.4314) allows no change to the interest rate on the loan. In 
fact, another regulation (Sec.  36.4311(c)) specifically states that 
interest in excess of the rate reported by the lender when requesting 
evidence of guaranty shall not be payable. The vast majority of VA-
guaranteed loans are securitized in GNMA (Government National Mortgage 
Association) insured pools, which require the holder to purchase the 
loan from the pool in order to modify the loan. The proposed change 
recognized the difficulty faced by loan servicers in attempting to 
resecuritize loans with interest rates well below the market average, 
and thus allowed for increasing interest rates on modifications when 
market conditions dictate. However, VA also believes it is only fair to 
veterans to similarly reduce interest rates when market rates have 
decreased since loan origination. The impact of reduced interest rates 
would be similar to the effect of other creditworthy borrowers 
refinancing at lower interest rates, and should not adversely affect VA 
lenders. Therefore, VA is not departing from requiring an interest rate 
reduction where market interest rates have decreased since loan 
origination. VA is, however, removing the one percent cap on interest 
rate increases that had been contained in the proposed rule so that 
modifications will become a more widely used tool to help veterans 
retain their homes. VA is also slightly modifying the language that had 
been in paragraph (c) of the proposed rule in Sec.  36.4314 to make 
adjustments easier, by allowing the maximum interest rate to be based 
on a month-end rate, rather than requiring a daily adjustment as the 
proposed rule had provided. Therefore, Sec.  36.4812(c) is changed to 
allow a higher interest rate on a modified loan. The final rule in 
Sec.  36.4815 is changed as described above to remove the one percent 
cap on increases and to clarify the date to be used in establishing the 
new maximum interest rate allowable on a modified loan.
    Comment: VA should increase the guaranty on a modified loan to 
match the percentage guaranteed at loan origination, rather than only 
allowing an increase in the amount of guaranty if it would otherwise 
provide less than 25% guaranty of the modified loan amount.
    VA Response: VA does not concur. The proposal in Sec.  36.4314(g) 
to increase the guaranty on a modified loan to 25% of the loan amount 
was another effort to help modified VA-guaranteed loans qualify for 
resecuritization. Under the existing Sec.  36.4314, the amount of the 
guaranty does not increase upon loan modification, which means that the 
percentage of guaranty, in effect, will decrease if the modified loan 
amount is greater than the original loan amount. This is important 
because all VA-guaranteed loans greater than $144,000 at origination 
have a maximum 25% guaranty, and the average new loan is often well 
above that amount. Under the existing Sec.  36.4314 any such loan being 
modified would retain the same amount of guaranty, and thus have an 
effective percentage of guaranty less than 25% whenever the modified 
loan amount is greater than the original loan amount. This final rule 
in Sec.  36.4815(h) (due to minor realignment of the section 
paragraphs) allows the guaranty amount on the modified loan to increase 
up to 25% of the modified loan amount, subject to the maximum amount of 
guaranty allowable under the law. This should be sufficient to allow 
repooling in a new GNMA-insured security, and provide adequate risk 
sharing for the modified loan among VA, the holder, and GNMA. 
Therefore, no further revision is necessary, other than conforming 
language in Sec. Sec.  36.4802(h) and 36.4824(a).
    Comment: VA should not require the same underwriting standards for 
loan modifications as those used at loan origination.
    VA Response: VA does not concur. VA's existing Sec.  36.4314(a) 
governing loan modifications requires that the holder determine that 
the borrower is a satisfactory credit risk, and the proposed rule did 
the same by referencing the criteria in Sec.  36.4337. In establishing 
that the veteran is a satisfactory credit risk, there must be an 
analysis of the veteran's income and obligations, as well as a review 
of the credit history. The proposed rule specifically addressed the 
issue of credit history with respect to the event(s) that led to the 
need for loan modification, and the criteria in Sec.  36.4337 provide 
for the acknowledgement of compensating factors to address issues that 
might otherwise preclude the extension of credit. VA therefore believes 
the proposed regulation was sufficiently flexible to accommodate the 
assessment of the creditworthiness of borrowers who seek to modify 
their loans, and no changes are necessary in the final Sec.  
36.4815(a). A specific comment requested that the use of ``in-file'' 
credit reports be allowed to reduce costs, and VA agrees this will be 
in accordance with the way its underwriting criteria have been 
interpreted in order to expedite processing.
    Comment: VA should make provision for other expenses of 
modification not being rolled into the new loan.
    VA Response: VA concurs. The existing Sec.  36.4314 makes no 
provision for inclusion of any expenses in the modified loan amount. 
The proposed rule provided that only certain items could be included in 
the modified indebtedness. VA carefully reviewed the comments on this 
subject and is clarifying Sec.  36.4815(e) so that it addresses all 
possible expenses of modification. In addition to allowing holders to 
include unpaid principal, accrued interest, and deficits in the taxes 
and insurance impound accounts in the modified indebtedness, holders 
will also be allowed to capitalize advances required to preserve their 
lien position, such as homeowner association fees, special assessments, 
water and sewer liens, etc. By limiting the items that may be included 
in the modified loan indebtedness, VA is attempting to protect both the 
interests of the Government and the veteran borrower by keeping the 
potential loan-to-value (LTV) ratio as low as possible, while 
recognizing that it may often exceed 100%. In a case where modification 
is determined to be the best alternative early in the course of a 
default, there will be little else in the way of other fees and 
expenses that need to be paid. In such a case the borrower should be 
able to handle those other costs as a demonstration of 
creditworthiness, and after including the expenses allowed by the new 
final rule in the modified loan amount, the resulting LTV ratio may not 
be significantly different than at loan origination. If a default has 
continued for quite some time before modification is deemed feasible, 
then it is likely that the additional fees and costs may have accrued 
to a sum equal to one or more monthly mortgage payments. VA never 
envisioned that such fees and costs would be forgiven by the loan 
holder. Because the modification process involves some period when 
regular payments are not made on the loan, the borrower should be able 
to accumulate funds to cover the fees and costs accrued during the 
default, rather than having them rolled into the modified loan 
indebtedness. This is similar to the HUD requirements for 
modifications. As for any costs associated with processing the 
modification, VA expects that the incentives paid for successful 
modifications will offset such expenses, and VA will not allow any 
processing costs to be charged to the borrower as stated in the final 
Sec.  36.4815(f).
    Comment: VA should not require that all current owners occupy the 
property

[[Page 6299]]

and should pay for a title insurance policy covering the modified loan.
    VA Response: VA agrees that occupancy should not be a requirement 
because the basic program requirements do not require continued 
occupancy in order for the guaranty to remain in effect (i.e., at some 
point a veteran borrower may move from the home securing the VA-
guaranteed loan, but that does not invalidate the guaranty). Hence, 
Sec.  36.4815(a) will not require that all current owners occupy the 
property.
    As for title insurance policies, existing VA regulation Sec.  
36.4828(b) does require that holders obtain and retain a lien of proper 
dignity against the security property, and title insurance is often 
used at loan origination to satisfy this requirement. If a holder 
decides to require title insurance in connection with a loan 
modification to ensure its lien status, then VA would not object to a 
reasonable expense to the buyer for this service. Since in most cases a 
title insurance policy was obtained at loan origination, any insurance 
obtained at modification would only need to cover the period from loan 
origination to the date of modification, and it is expected that the 
cost for a title endorsement, or other form of insurance ``update,'' 
would be considerably less than the amount paid at loan origination. 
The final rule in Sec.  36.4815(f) slightly revises the proposed rule 
to provide this clarification.
    Comment: VA should not require that all current owners agree to the 
modification.
    VA Response: VA does not concur. VA is retaining the provision in 
the new final rule in Sec.  36.4815(a)(5) that all current owners must 
be obligated on the loan and participate in any modification, because 
it would not be fair to allow a change in the terms of a loan secured 
by a property without first notifying all parties with an ownership 
interest in that property and obtaining their agreement to the change. 
If a holder encounters unusual circumstances that lead it to believe a 
modification not meeting the requirements in Sec.  36.4815(a)(1)-(6) 
would be beneficial to a veteran, then the case may be submitted to VA 
for prior approval.
    Comment: VA should not restrict the number of times that a loan may 
be modified because other agencies/investors have no such limits.
    VA Response: Under Sec.  36.4314, we permit three modifications to 
any one loan without prior VA approval, but also may allow unlimited 
modifications with prior VA approval. To that extent, we agree with the 
comment.
    However, to the extent that the comment requests unlimited 
modifications without VA review, VA does not concur because VA has a 
responsibility to ensure that loan modifications are fair to the 
borrower, and to protect the interests of the Government. The final 
rule in Sec.  36.4815 provides sufficient flexibility to address almost 
all situations that may arise. Although the rule cannot address every 
possible circumstance, it does adequately provide for loss mitigation 
by authorizing holders in advance to modify the vast majority of loans, 
while allowing holders to seek direct approval from VA for unusual 
cases that do not fit the general criteria described in the regulation.
    In order to avoid any misunderstandings about the authorizations 
granted, the final rule is modified by adding paragraph (j), which 
advises that the authority contained in Sec.  36.4815 does not create a 
right of a borrower to have a loan modified but simply authorizes the 
loan holder to modify a loan in certain situations without the prior 
approval of the Secretary. This is in keeping with past VA policy and 
court decisions over the years that have found that VA's refunding 
program (Sec.  36.4820) is not a veteran's benefit, but rather an 
administrative option established by the regulation to enable VA to 
assist a veteran when VA makes the determination that the option is 
appropriate.
    Comment: VA should include the words ``or default is imminent'' in 
Sec.  36. 4815(a)(1).
    VA Response: VA does not concur. The proposed rule in Sec.  
36.4314(a) included those words and the second supplemental notice 
proposed deleting them. As stated in the second supplemental notice, 
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. However, if an unusual 
circumstance arises, a holder may seek direct approval from VA for 
approval of a case that does not fit the general criteria. Therefore, 
the final rule in Sec.  36.4815(a)(1) will remain as proposed in the 
second supplemental notice.

36.4817 Servicer Reporting Requirements

    Comment: VA should review its need for the requested data, should 
reduce the number of reportable items, and should eliminate the 
expedited, event-specific reporting.
    VA Response: VA concurs for the most part. VA has carefully 
reviewed the report timing and the required items in the proposed rule 
in Sec.  36.4315a in light of industry comments, consultation with 
information technology specialists, and review of the goals and 
operating procedures in VA's new loan servicing environment, as well as 
the reporting requirements of HUD, Fannie Mae, and Freddie Mac. In 
conducting this review, VA identified and retained only those items for 
reporting that VA determined absolutely necessary to conduct proper 
oversight of servicer actions. That oversight must include review of 
servicer actions that are being newly delegated by VA, servicer actions 
that were previously reviewed by VA utilizing extensive paper reports 
provided by servicers, and servicer actions that in the past were 
reviewed only upon submission of various documentation from servicers. 
Providing this information electronically should greatly reduce the 
time required for interaction between VA and servicers via telephone 
and written communications that occurs under the present operating 
procedures. VA has determined that a number of items (including escrow 
disbursements and legal actions other than terminations) will not be 
included in the list of what must be reported to VA. We discuss these 
items later in this document, responding to specific comments. In 
addition, remaining items for loans not in default may all be reported 
on a monthly basis (i.e., no later than the seventh calendar day of the 
month following the month in which the event occurred), while most of 
the items related to loan defaults will also be required on a monthly 
basis, rather than within five business days of an event. VA is 
changing these events and most of the remaining events that must be 
reported expeditiously to require reporting within 7 calendar days, 
rather than 5 business days because most tracking systems are not 
equipped to calculate business days, but can easily handle computation 
of calendar days.
    As suggested by the comments, one item previously proposed to be 
reported on all loans, bankruptcy filing information, will only be 
required on loans reported in default. Only events denoting significant 
action on loans

[[Page 6300]]

reported in default (such as referral to an attorney to initiate 
foreclosure, establishment of a liquidation sale date, advice that a 
sale has been held, etc.) will still need to be reported within seven 
calendar days of the event. As in the past, holders will need to notify 
VA within 15 calendar days of a liquidation sale when they desire to 
convey a property to VA.
    An example of one item that was in the proposed rule Sec.  
36.4315a(c)(2) with a five business day reporting requirement was 
information on assumption of a VA-guaranteed loan. Existing rule Sec.  
36.4303 presently requires reporting of information on approved 
assumptions and unauthorized transfers of ownership. The first 
supplemental notice, which provided more detail on the specific events 
to be reported, required electronic reporting of transfer of ownership 
(i.e., an authorized assumption) and unauthorized transfer of 
ownership. In light of the comments, VA is not, under Sec.  36.4817(c), 
requiring electronic reporting of unauthorized transfer of ownership, 
but is requiring electronic reporting of authorized transfer of 
ownership, which will be renamed accordingly. The final rule in Sec.  
36.4803(l)(2) continues to require the holder to notify VA within 60 
days of learning of an unauthorized transfer, as in the existing Sec.  
36.4303(l)(2).
    Comment: Information on the Servicemembers Civil Relief Act should 
only be required if that is a reason for delay of a foreclosure sale.
    VA Response: VA concurs with deleting the requirement to report 
this event. If the event causes delay in loan termination, then 
information about it may be reported as part of the claim event 
reporting.
    Comment: VA should allow reporting of multiple events occurring on 
a single loan during a monthly reporting period.
    VA Response: VA agrees with this comment and the file reporting 
format will allow for multiple events to be reported on each loan.
    Comment: The requirement to report substantial equity (25% or more) 
will necessitate a special title search and should be deleted, as it 
could require servicers to upgrade their systems to load junior lien 
information and to calculate the equity.
    VA Response: VA concurs with deleting this requirement. VA proposed 
this requirement in Sec.  36.4315a(f) in order to ensure review of 
cases where substantial equity could exist. However, after reviewing 
the other data requested and the computing capabilities offered by its 
new computer system, VA decided it can instead use the other reported 
data to calculate its own estimate of equity and take appropriate 
action to ensure that veterans receive every reasonable opportunity to 
salvage that equity prior to loss through foreclosure. Therefore, there 
is no requirement in the final rule to calculate or report substantial 
equity.
    Comment: VA should consider using the HUD Single Family Default 
Monitoring System (SFDMS) file layout for reporting information, rather 
than requesting data that may not presently be available in many loan 
servicing systems.
    VA Response: VA considered this possibility, but decided it was not 
feasible. As VA began developing the computer system that it will use 
to receive data from servicers, VA obtained considerable information 
about HUD's file layout and other systems from a leading provider of 
loan accounting and default tracking services, which is subcontracted 
to the contractor developing VA's system. As that development 
continued, it was clear that the information VA needs to monitor 
servicer activities that have been delegated will require more details 
than those obtained by HUD's SFDMS. This is due to different processes 
used by the agencies in conducting oversight, as well as making 
payments for incentives, acquisitions, and claims. VA has found that 
almost all of the data fields it is still seeking presently exist in 
most servicing systems. VA worked collaboratively with the providers of 
the most widely utilized loan servicing systems, and continued to 
reduce its data requirements as much as possible, in order to develop 
the easiest file layout and method of transmission for reporting. That 
layout has been posted on VA's public Web site. Therefore, VA expects 
that the industry will be able to easily comply with its remaining 
reporting requirements in Sec.  36.4817.
    Comment: VA should consider the potential cost to servicers of the 
additional reporting requirements, the time needed to implement those 
changes, and the security risks of transmitting additional information.
    VA Response: VA has carefully considered all of those issues in 
developing its final reporting rule in Sec.  36.4817.
    VA recognizes that few changes can be made without some costs. 
However, by using a fixed width flat file layout, VA is utilizing the 
simplest format currently available for reporting data. Moreover, VA 
has developed a methodology to reduce the amount of computations 
required by most loan servicing platforms when extracting data from 
their systems to report events to VA. This should also significantly 
reduce the cost of changes. There will be a few additional data fields 
that most servicing systems will need to add over time, and VA realizes 
that there will be some expenses to accomplish this, but the result 
will be data that is available electronically rather than manually.
    While there may be some programming costs incurred by servicers due 
to the additional reporting requirements in Sec.  36.4817, VA expects 
that servicers will benefit in a number of ways. First, with the change 
to electronic reporting, servicers will greatly reduce their monthly 
expenses of reporting defaults and loan status updates via paper forms 
to VA, as well as reducing the time required by their employees to 
respond to written and telephone inquiries from VA. Second, the 
additional data required is for purposes of VA oversight, but that data 
should be of considerable value to servicers in tracking their internal 
servicing performance (for example, providing greater control over 
insoluble defaults and ensuring faster referral for termination, 
allowing closer review of payment plans to monitor performance, etc.). 
Third, having the data available electronically should eliminate many 
manual processes that are much more costly. VA expects there will be 
many more areas in which servicers will benefit from the availability 
of this new data.
    VA is well aware that considerable lead time is needed in order to 
change loan servicing systems to capture additional data. VA has worked 
with its contractor and subcontractor to develop a phased approach to 
implementation of its new, computer-based tracking system, the VA Loan 
Electronic Reporting Interface (VALERI). VA will implement VALERI 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. VA is also developing 
a Web portal to allow manual input of information that is not yet 
contained in major loan servicing systems, and for smaller servicers 
who may not utilize servicing system providers, although the ultimate 
goal is automated file transfers of all information.
    Data security is of the utmost importance to VA. Servicer 
suggestions to delete requests for sensitive information, such as 
Social Security

[[Page 6301]]

Numbers (SSNs), have been honored as much as possible. VA will not 
request SSNs as part of the basic monthly reporting as originally 
proposed. Instead, the only request for SSNs will be when servicers 
report them for new loan assumers. Those SSNs and all other data will 
be encrypted during transmission, appropriate protocols will be 
established with each servicer and its loan servicing system (or 
provider) to ensure secure transmissions, and access to the data at VA 
and its contractors will be limited to authorized users.

36.4818 Servicer Tier Rankings--Temporary Procedures

    Comment: In developing its tier rankings, VA should consider a 
methodology that is publicly disseminated and can easily be determined 
by servicers based on information available to them. VA should also 
incorporate some allowance for the purchase of delinquent loans from 
other servicers.
    VA Response: VA concurs to an extent. In our development of a 
proposed rule to implement the tier ranking system, we will consider 
the negative impact of the purchase of delinquent loans from other 
servicers. In the preamble to this proposed rule, VA indicated an 
intent to model its tier ranking system after that used by the Federal 
Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac. 
After VA has collected data under its new reporting requirements for 
six months, VA intends to review the data and develop the criteria for 
ranking servicers. Those criteria will then be published in the Federal 
Register for notice and comment. Whether the final rule that implements 
the tier ranking system is similar to the Freddie Mac model will depend 
upon the data we collect and the comments we receive. VA expects that 
the computer system for collecting data will be operational in 2008, 
and proposed rules for tier ranking will be published in calendar year 
2009. Accordingly, the final rule in Sec.  36.4818 remains as proposed.
    Comment: VA should consider paying incentives at higher than the 
Tier II ranking during the first year, either due to some assessment of 
higher performance, or else based on a servicer's participation in VA's 
current Server Loss Mitigation Program (SLMP).
    VA Response: VA does not concur. The proposed rule Sec.  36.4316(a) 
provided for four levels of tier rankings of servicers, with all 
servicers in Tier II for the initial ranking period as of the effective 
date of this rule. Because VA will have no published methodology for 
rating servicer performance during the first year of the new program, 
it would not be fair to attempt to determine which servicers should be 
paid at the Tier I or any other level, other than the initial Tier II 
rating for all servicers. While VA has had the SLMP in operation for 
many years, that program has not attempted to measure specific 
performance in a manner similar to the proposed Servicer Tier Ranking 
system, and the SLMP has only allowed two loss mitigation alternatives, 
and not the three home retention alternatives in the new program. 
Accordingly, it would not be fair to grant SLMP participants a higher 
tier ranking until the criteria for performance have been established. 
In any event, the proposed incentive payments for Tier II compare 
favorably to what VA allowed under SLMP, and have been adjusted 
slightly to account for the time elapsed since the initial publication 
of the proposed amounts, as well as changes by other agencies during 
that time. Therefore, the final rule in Sec.  36.4818 remains as 
proposed.

36.4819 Servicer Loss Mitigation Options and Incentives

    Comment: VA should simply adopt HUD (Department of Housing and 
Urban Development) loss mitigation procedures, fees, and reimbursement 
schedules, including incentive payment upon execution of a repayment 
plan, rather than waiting for final or partial completion of the plan 
to pay for the additional work required in analyzing data and 
establishing a plan.
    VA Response: VA does not concur. VA carefully considered loss 
mitigation programs developed by HUD, Fannie Mae, Freddie Mac, and 
private mortgage insurers as part of its BPR project. Although most had 
attractive features, no one program by itself addressed all the issues 
of loss mitigation in the manner VA felt was necessary to ensure proper 
assistance to veterans, while also rewarding loan servicers in an 
appropriate fashion for success in mitigating potential losses.
    As for the comment suggesting that incentives be paid upon 
execution of a repayment plan or special forbearance agreement because 
of the work involved in developing the plan, VA believes this is part 
of the normal activity of servicing a delinquent loan in order to 
determine whether it may be reinstated or whether the default is 
insoluble. While one comment was that loss mitigation efforts have 
historically been considered extraordinary servicing activity, VA 
believes that any servicer interested in properly managing its 
portfolio (and ensuring future servicing income) will exert reasonable 
efforts to obtain borrower financial information to determine the 
likelihood of loan reinstatement. Therefore, the incentives authorized 
under this section are in recognition of basic concepts customary in 
the loan servicing industry, and do not impose any new requirements or 
take away any substantive rights of program participants. However, 
paying an incentive simply for executing a repayment or forbearance 
agreement would not serve as a true incentive for developing a plan 
that is likely to succeed, but could instead encourage plans where 
success is improbable. Therefore, VA will not revise its program to 
make an incentive payable upon execution of a loss-mitigation 
alternative and the new final rules in Sec. Sec.  36.4819 and 
36.4822(e) and (f) (adjusted from (f) and (g)) remain generally as 
proposed. In order to clarify VA's intended use of the options and 
alternatives, they are listed in Sec.  36.4819(b) from top to bottom in 
their preferred order of consideration (i.e., a hierarchy for review), 
but VA recognizes that individual circumstances may occasionally lead 
to ``out of the ordinary'' considerations.
    Comment: VA should provide a partial claim loss mitigation benefit 
similar to that offered by HUD.
    VA Response: VA does not concur. Under the HUD Partial Claim 
option, a mortgagee will advance funds on behalf of a mortgagor in an 
amount necessary to reinstate a delinquent loan (not to exceed the 
equivalent of 12 months PITI). The mortgagor will execute a promissory 
note and subordinate mortgage payable to HUD. Currently, these 
promissory or ``Partial Claim'' notes assess no interest and are not 
due and payable until the mortgagor either pays off the first mortgage 
or no longer owns the property.
    The issue of a similar VA partial claim program has been discussed 
for many years within Congress and at VA. However, Congress has not 
specifically authorized VA to develop such a program. As explained 
above, partial claim payments are actually payments on behalf of 
homeowners to their loan holders, but VA has no authorization to make 
direct loans to borrowers to cover their delinquent payments, so a 
partial claim program is not feasible. Instead, VA believes that by 
encouraging holders to consider extended repayment plans or even loan 
modifications, borrowers should receive the assistance necessary to 
retain ownership of their homes. Therefore, VA does not concur that a 
partial claim program should be instituted in the new final rule in 
Sec.  36.4819.

[[Page 6302]]

36.4820 Refunding of Loans in Default

    Comment: VA should establish a process to extend the deadline to 
allow for recording of documents.
    VA Response: VA does not concur. VA proposed in Sec.  36.4318(c) to 
establish a deadline for submission of title documents on refunded 
loans, and to allow VA to impose a penalty for continued failure to 
comply with that deadline. VA must retain the option to take 
appropriate action when a holder has demonstrated a continued pattern 
of non-compliance with VA requests for timely delivery of documents 
that should be readily available, given the routine nature of loan 
transfers within the industry. VA has slightly modified the language to 
cl