Loan Guaranty: Ability-To-Repay Standards and Qualified Mortgage Definition Under the Truth in Lending Act, 26620-26628 [2014-10600]

Agencies

• DEPARTMENT OF VETERANS AFFAIRS

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


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AO65


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

AGENCY: Department of Veterans Affairs.

ACTION: Interim final rule.

-----------------------------------------------------------------------

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

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

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

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

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

Note on Comments and Publication of Final Rule

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

[[Page 26621]]

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

General Definitions of Qualified Mortgage

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

Subsequent Regulatory Changes to Qualified Mortgage Definition

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

[[Page 26622]]

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

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

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

VA's Interim Final Rule

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

[[Page 26623]]

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

VA's Underwriting Standards for Qualified Mortgages

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

Qualified Mortgage Status for VA Direct Loans

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

[[Page 26624]]

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

Safe Harbor Versus Rebuttable Presumption Qualified Mortgages--IRRRLs

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

IRRRL Income Verification Requirements

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

[[Page 26625]]

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

Indemnification Agreements and Qualified Mortgage Status

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

[[Page 26626]]

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

Consultation With CFPB

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

Administrative Procedure Act

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

Executive Orders 12866 and 13563

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

Unfunded Mandates

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

Paperwork Reduction Act

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

[[Page 26627]]

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

Regulatory Flexibility Act

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

Catalog of Federal Domestic Assistance

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

Signing Authority

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

List of Subjects in 38 CFR Part 36

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

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

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

PART 36--LOAN GUARANTY

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

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


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


Sec.  36.4300  Applicability and qualified mortgage status.

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

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


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

[[Page 26628]]

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

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


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

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


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

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

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

* * * * *

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


Sec.  36.4500  Applicability and qualified mortgage status.

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

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


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

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


Sec.  36.4501  Definitions.

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

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

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