Loan Guaranty Vendee Loan Fees, 74382-74388 [2016-25738]

Agencies

• DEPARTMENT OF VETERANS AFFAIRS

[Federal Register Volume 81, Number 207 (Wednesday, October 26, 2016)]
[Proposed Rules]
[Pages 74382-74388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25738]


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

DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AP32


Loan Guaranty Vendee Loan Fees

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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

SUMMARY: This document proposes to amend the Department of Veterans 
Affairs (VA) Loan Guaranty Service (LGY) regulations to establish 
reasonable fees that VA may charge in connection with the origination 
and servicing of vendee loans made by VA. Fees proposed in this 
rulemaking are consistent with those charged in the private mortgage 
industry, and such fees would help VA to ensure the sustainability of 
this vendee loan program. The loans that would be subject to the fees 
are not veterans' benefits. This rule would also ensure that all direct 
and vendee loans made by the Secretary are safe harbor qualified 
mortgages.

DATES: Comments must be received by VA on or before December 27, 2016.

ADDRESSES: Written comments may be submitted through 
www.Regulations.gov; by mail or hand-delivery to Director, Regulation 
Policy and Management (00REG), Department of Veterans Affairs, 810 
Vermont Avenue 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-AP32--Loan Guaranty Vendee Loan Fees.'' 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 for an appointment. (This is not a toll-free 
number.) 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: Andrew Trevayne, Assistant Director 
for Loan and Property Management (261), Veterans Benefits 
Administration, Department of Veterans Affairs, 810 Vermont Avenue NW., 
Washington, DC 20420, (202) 632-8795. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: This document proposes to amend VA 
regulations to establish reasonable fees in connection with loans made 
by VA, commonly referred to as vendee loans. The proposed fees 
associated with vendee loans are standard in the mortgage industry. The 
vendee loans that would be subject to the fees are not veterans' 
benefits and are available to any purchasers, including investors, who 
qualify for the loan.
    Specifically, this rulemaking would permit VA to establish a fee to 
help cover costs associated with loan origination. The proposed rule 
would also permit certain reasonable fees to be charged following loan 
origination, during loan servicing. Fees permitted would be those 
charged for ad hoc services performed at the borrower's request or for 
the borrower's benefit, as well as standard fees specified in loan 
instruments. Lastly, third-party fees, those not charged by VA, would 
be included in this proposed rule solely to clarify for borrowers the 
various costs that a borrower may incur when obtaining a vendee loan.

Vendee Loans

    When a holder forecloses a VA-guaranteed loan, the holder has the 
option, pursuant to 38 U.S.C. 3732 and 3720, of conveying the 
foreclosed property to the Secretary of Veterans Affairs (the 
Secretary). For properties VA acquires this way, VA sells them as a 
salvage operation and deposits the sales proceeds into the Veterans 
Housing Benefit Program Fund (VHBPF), as required by 38 U.S.C. 3722, to 
help offset the housing operation costs of the Home Loan Guaranty 
Program.
    In addition to selling properties as part of the salvage operation, 
the Secretary has authority under 38 U.S.C. 3720 and 3733 to finance 
the sales upon such terms as the Secretary determines reasonable. VA 
refers to loans made pursuant to these provisions as vendee loans. The 
loans are not classified as veterans' benefits and are available to any 
purchaser VA determines creditworthy and whose bid is awarded a sales 
contract. Purchasers can be individuals or corporations, and the 
properties can be purchased as owner-occupied residences or as 
investments. Additionally, the Secretary may make vendee loans to 
certain entities pursuant to 38 U.S.C. 2041 for the purpose of 
assisting homeless veterans and their families acquire shelter.
    Under 38 U.S.C. 3733(a)(4), vendee loans may generally be made for 
up to 95 percent of the purchase price of the property. A vendee loan 
may exceed 95 percent of the purchase price to the extent the Secretary 
determines necessary to competitively market the property. A vendee 
loan may also exceed 95 percent of the purchase price in instances 
where the Secretary includes, as part of the vendee loan, an amount to 
be used for the purpose of rehabilitating such property. Additionally, 
38 U.S.C. 3733(a)(6) provides that the Secretary shall make a vendee 
loan at an interest rate that is lower than the prevailing mortgage 
market interest rate in areas where, and to the extent the Secretary 
determines, in light of prevailing conditions in the real estate market 
involved, that such lower interest rate is necessary in order to market 
the property competitively and is in the interest of the long-term 
stability and solvency of the VHBPF. These provisions demonstrate that 
this program is to be competitively marketed to borrowers so long as it 
is financially sustainable. In fiscal years (FYs) 2011 and 2012, the 
most recent period when VA made direct loans, VA sold, on average, 175 
real-estate owned (REO) properties per month with vendee financing, 
with an average loan amount of $114,925.
    Vendee financing is not a veterans' benefit; rather, it is a 
competitive lending program with the primary goal of providing 
financing to help VA dispose of its REO properties. Vendee loans enable 
VA to sell more of its properties and to sell them quicker. 
Nevertheless, this program helps veterans by contributing to the long-
term viability of the VHBPF, as the principal and interest resulting 
from repayment of vendee loans are deposited into the VHBPF to help 
offset the housing operation costs of the Home Loan Guaranty Program.

[[Page 74383]]

Authority for Fees

    Section 3720 of title 38 U.S.C. states that the Secretary may 
purchase property upon such terms and for such prices as the Secretary 
determines to be reasonable, and similarly sell, at public or private 
sale, any such property. It also authorizes the Secretary to otherwise 
deal with any property acquired or held pursuant to chapter 37 of title 
38, U.S.C.
    Section 3720 authorizes the Secretary to sell REO properties upon 
such terms and for such prices as the Secretary determines reasonable. 
See 38 U.S.C. 3720(a). Section 3720 further authorizes the Secretary to 
exercise this discretion notwithstanding any other provision of law. 
Given the common industry practice of including fees when negotiating 
the terms and prices of real estate transactions, and for other reasons 
explained below, the Secretary has determined that it is reasonable to 
negotiate fees in the terms and prices of any sale of the Secretary's 
REO properties. The specific types of allowable fees will be explained 
in-depth later in this preamble.
    VA considered alternatives to charging fees. One option was to 
increase the sales prices of properties to account for the funds that 
fees would generate. VA decided, however, that increasing sales prices 
might extend the time that VA must hold properties before selling them. 
This would also increase costs for taxpayers, rather than the small 
population of borrowers enjoying the advantages of vendee loans. VA 
also considered adjusting interest rates, but as explained earlier, 
Congress has established a preference for lower-than-market interest 
rates in order to market properties competitively. See 38 U.S.C. 
3733(a)(6). Consequently, VA believes that having the flexibility to 
negotiate fees is the most fiscally sound way to protect the integrity 
of the VHBPF and ensure that taxpayers who do not participate in the 
vendee program do not unfairly bear the burden of its costs.
    All origination-related fees and post-origination fees proposed 
under this rule will be deposited into the VHBPF. Under 38 U.S.C. 3722, 
amounts paid into the VHBPF under section 3729 or any other provision 
of law or regulation established by the Secretary imposing fees on 
persons or other entities constitute assets of the VHBPF. See 38 U.S.C. 
3722(c)(2). These fees would be designated to the proper account as 
required under the Federal Credit Reform Act of 1990. See 2 U.S.C. 661, 
et seq.

The Proposed Rule

    To help ensure that VA's REO portfolio is administered in a cost-
effective manner, VA is proposing to authorize certain reasonable fees 
in connection with the origination and post-origination servicing of 
vendee loans. The proposed fees would prevent against windfalls to the 
small population of vendee borrowers by ensuring that they, rather than 
the taxpayers at-large, pay for the unique advantages of vendee 
financing. The types of fees proposed are standard in the lending 
industry, and as such, would not significantly affect the program's 
competitiveness.
    In addition to the reasonable fees proposed herein, borrowers 
obtaining vendee financing may be required to pay certain third-party 
fees. Third-party fees are collected on behalf of, or payable to, 
persons other than the Secretary. These include, for instance, 
recording fees, force-placed insurance premiums, and inspection fees. 
VA does not control these third-party fees, as they are not collected 
on behalf of the Secretary. VA is identifying them in this proposed 
rule to help participants more fully understand the types of expenses 
that typically could affect borrowers.

Section 36.4500 Applicability and Qualified Mortgage Status

    VA proposes to add Sec.  36.4500(e) to clarify the applicability of 
the sections proposed under this rulemaking. It would state that 
proposed Sec. Sec.  36.4528, 36.4529, and 36.4530 would be applicable 
to all vendee loans.
    VA also proposes to amend paragraph (c)(2), regarding which vendee 
loans are qualified mortgages. The purpose and effects of this proposed 
change are explained later in this preamble in the section on safe 
harbor qualified mortgages.

Section 36.4501 Definitions

    VA proposes to update the authority citation for the definition of 
vendee loan, as provided in Sec.  36.4501. The authority citation 
currently includes 38 U.S.C. 3720 and 3733. VA proposes to add 38 
U.S.C. 2041 to this citation. This change would have no substantive 
effect on vendee loans but would merely ensure that the authority 
citation for the definition of vendee loans fully reflects the 
authorities under which the Secretary may make these loans.
    VA also proposes to clarify existing policy with regard to vendee 
loan terms. The rule would state specifically that the terms of a 
vendee loan (e.g., amount of down payment; amortization term; whether 
to escrow taxes, insurance premiums, or homeowners' association dues; 
fees etc.) are negotiated between the Secretary and the borrower on a 
case-by-case basis, subject to the requirements of 38 U.S.C. 2041 or 
3733. The terms may vary depending on, among other factors, the 
creditworthiness of the buyer/borrower and the purpose of the realty 
purchase--investment versus residence. Except for the addition of the 
Secretary's discretion to negotiate fees, this is not a substantive 
change. VA would also state that the terms related to allowable fees 
are subject to proposed Sec. Sec.  36.4528 through 36.4530 of this 
part.
    In addition, the rule would add a new definition for safe harbor 
qualified mortgage. The definition is consistent with that in the 
guaranteed loan program. See 38 CFR 36.4300(b)(1). It is necessary to 
add the definition to clarify the applicability of safe harbor 
provisions to all of VA's direct loan programs, not just the guaranteed 
programs.

Section 36.4528 Vendee Loan Origination Fee

    VA is proposing a new regulatory provision to be found in 38 CFR 
36.4528. Proposed Sec.  36.4528 would authorize an allowable fee that 
may be charged in connection with the origination of vendee loans. This 
proposed rule would permit VA to charge an origination fee not to 
exceed one-and-a-half percent of the loan amount. The proposed 
origination fee is distinct, and in addition to, the loan fee required 
to be paid by 38 U.S.C. 3729 for vendee loans made pursuant to 38 
U.S.C. 3733. All or part of the proposed origination fee may be paid in 
cash at loan closing, or all or part of the fee may be included in the 
loan. In computing the fee, VA would disregard any amount included in 
the loan to enable the borrower to pay such fee. In other words, if a 
borrower opts to include the fee into the loan amount, VA would not 
increase the amount of origination fee due. Under no circumstance may 
the total fee agreed upon between the Secretary and the borrower result 
in an amount that would cause the loan to be designated as a high-cost 
mortgage, as defined by section 103(bb) of the Truth in Lending Act 
(TILA), codified in 15 U.S.C. 1602(bb), and implementing regulations in 
12 CFR part 1026.
    VA understands that it is common industry practice for lenders to 
charge an ``origination fee'' of approximately one percent of the loan 
value. Bankrate.com explains that for many loans a one percent 
origination fee is

[[Page 74384]]

common.\1\ This fee is customarily charged by lenders to cover certain 
expenses involved with evaluating borrowers' creditworthiness and 
preparing a mortgage loan. VA currently permits a one percent fee to be 
charged in connection with originating loans in its Home Loan Guaranty 
Benefit Program (38 CFR 36.4313(d)(2)). Vendee financing is distinct 
from VA's benefit program. Nonetheless, VA believes that if private 
lenders are permitted to charge a one percent origination fee to 
eligible servicemembers and veterans utilizing their home loan benefit, 
then it is reasonable to establish up to a one-and-a-half percent fee 
in connection with the origination of non-benefit vendee loans, which 
may be made to any borrowers, including investors, who qualify.
---------------------------------------------------------------------------

    \1\ Loan Comparison Calculator, Bankrate.com, https://www.bankrate.com/calculators/home-equity/compare-loans-calculator.aspx#ixzz34FMEFGk5 (last visited May 8, 2015).
---------------------------------------------------------------------------

    To the extent the maximum one-and-a-half percent fee proposed 
herein may on occasion exceed the total amount charged at origination 
by certain private lenders, the unique characteristics of vendee 
financing would make the extra one-half percent reasonable and help the 
vendee program remain competitive. As explained above in the section on 
vendee loans, 38 U.S.C. 3733(a)(6) requires the Secretary to make 
vendee loans at an interest rate lower than the prevailing mortgage 
market interest rate in situations where, based on the local conditions 
in an area's real estate market, such lower interest rate is necessary 
to market the property competitively. In such situations, VA does not 
have the flexibility to charge above market interest rates to offset 
costs associated with loan origination, as a private lender might. 
Further, VA offers these lower interest rates without charging discount 
points collected in exchange for this lower interest rate at the time 
of loan origination. In private sector transactions, borrowers can pay 
up to three or four discount points, depending on how much they want to 
lower their interest rates. One discount point is an upfront payment of 
one percent of the loan amount, in addition to the other fees. The 
mortgage's interest rate is usually reduced by a quarter of a 
percentage point for every discount point paid.
    In addition to offering below-market interest rates without 
discount points, VA offers vendee financing for up to 95 percent of the 
purchase price of the property and, in instances where the Secretary 
deems it necessary to market the property competitively, may offer 
vendee financing in an amount that exceeds 95 percent of the purchase 
price. The average loan amount to sale price ratio for vendee loans 
exceeded 85 percent in FY11 and 88 percent in FY12.
    Generally, if a borrower's down payment on a home is less than 20 
percent of the sale price, a private lender will require mortgage 
insurance to protect itself in case the borrower defaults on the 
payments. The borrower pays the premiums, and the lender is the 
beneficiary.\2\ Private mortgage insurance typically costs about 0.25 
to two percent of the loan balance per year, depending on the amount of 
the down payment, loan term, and borrower's credit score, and continues 
until the borrower reaches 20 percent equity.\3\ In contrast, VA does 
not require a borrower to purchase private mortgage insurance on any 
vendee loan, regardless of the loan-to-purchase price ratio.
---------------------------------------------------------------------------

    \2\ Private mortgage insurance--The Basics of PMI, Bankrate.com, 
https://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx (last visited May 8, 2015).
    \3\ Definition Of `Private Mortgage Insurance-PMI', 
Investopedia.com, https://www.investopedia.com/terms/p/privatemortgageinsurance.asp (last visited May 8, 2015).
---------------------------------------------------------------------------

    Furthermore, the rule would provide that under no circumstances may 
the total fees agreed upon between the Secretary and the borrower 
result in an amount that would cause the loan to be designated as a 
high-cost mortgage loan under TILA and its implementing regulations (15 
U.S.C. 1602(bb); 12 CFR part 1026). High-cost mortgages are those where 
the annual percentage rate (APR) or points and fees charged exceed 
certain threshold amounts. Loans that meet such high-cost coverage 
tests are subject to special disclosure requirements and restrictions 
on loan terms.
    Accordingly, this rulemaking would include authority for VA to 
charge an amount not to exceed a one-and-a-half percent origination fee 
in connection with the origination of vendee loans. Fees that may be 
charged by third parties at the time of loan origination (for example, 
courier fees or fees for termite inspection) are not included under 38 
CFR 36.4528 and are discussed later in this preamble. In establishing 
this reasonable fee to cover costs associated with loan origination, VA 
is managing the non-benefit, vendee loan program in a business-like 
manner more consistent with private industry standards, and in so 
doing, ensuring that purchasers who utilize this financing, rather than 
taxpayers at-large, help bear the expenses associated with originating 
vendee loans.

Section 36.4529 Vendee Loan Post-Origination Fees

    VA is also proposing a new regulatory provision, 38 CFR 36.4529, 
which would allow VA to charge reasonable service-related fees 
following loan origination. These fees would not constitute the general 
servicing fee paid by VA to its contractor to perform functions 
normally considered part of prudent loan servicing activities. Rather, 
these fees would be charged to the borrower to cover the costs of ad 
hoc, special services that are requested and performed on the 
borrower's behalf, and are beyond the regular services performed in 
connection with loan servicing.
    It is common industry practice to charge specific fees in accord 
with the rendering of additional services on an account. Accordingly, 
VA is establishing, under proposed Sec.  36.4529(a), maximum amounts to 
be charged per fee in exchange for the Secretary's performance of 
certain services that are above and beyond ordinary and customary loan 
servicing activities. VA surveyed some of the larger private entities 
that perform loan servicing. The frequency, applicability, and amount 
of these fees generally vary by state, loan status, and other loan 
characteristics. As such, VA notes that the amounts proposed in this 
rulemaking would represent maximums; the specific fees to be charged on 
each account may be negotiated between the Secretary and the borrower.
    Under the proposed rule, VA could charge a borrower an assumption 
processing fee when a purchaser assumes a VA direct loan. This fee 
would be assessed when VA approves a request for the transfer of legal 
liability of repaying the mortgage. VA intends for the assumption fee 
to help offset the costs associated with processing the application, 
determining the creditworthiness of the assumptor, and revising the 
ownership records when the approved transfer is complete. VA would be 
permitted to charge an amount not to exceed $300, plus the actual cost 
of any credit report required. If the assumption were denied, VA would 
only charge the actual cost of the credit report. The disclosed maximum 
assumption fees in the fee schedules surveyed for this rulemaking 
ranged from $350 (including the cost of the credit report) to $1300 
(however, the $1300 fee also included attorney fees).
    The rule would also permit VA to charge the borrower a fee, not to 
exceed $350, for processing a subordination request to ensure that a 
modified vendee loan retains first lien position over

[[Page 74385]]

another debt on the same property. VA will only modify a loan if it 
will retain its priority lien position on that property. State laws 
differ as to whether a basic loan modification will affect priority 
status of a senior loan holder, and in which situations such a 
modification would affect priority status. Accordingly, if VA consents 
to the modification of a loan, VA must ensure that its modified 
mortgage loan retains first-lien position. The maximum subordination 
fee disclosed by the private servicers surveyed for this rulemaking was 
$350.
    The proposed rule would permit a reasonable partial release fee, 
not to exceed $350, to be charged when a borrower seeks to exclude some 
of the collateral from the mortgage contract once a certain amount of 
the mortgage loan has been paid. A borrower might request a partial 
release of real property from the security for a number of reasons; for 
example, to release acreage from the original secured lot so that it 
can be used for other purposes or to release some portion of the 
property to adjust the lot line or resolve a lot line dispute. Of the 
private servicers surveyed, two disclosed a maximum fee of $350 and the 
third disclosed a maximum fee for this service of $500.
    If VA agrees to release an obligor from a mortgage loan in 
connection with a division of real property, this rule would permit VA 
to charge a release of lien fee not to exceed $15 for executing and 
providing documentation of this release. Occasionally, joint owners of 
real property may be subject to a judicial decree (such as a divorce 
judgment) that divides the property into separately owned parcels 
according to each owner's proportionate share in the property. 
Generally, neither owner receives any cash consideration in connection 
with the partition. In these circumstances, following this division, 
the fee may be incurred if the borrower who has possession of the land 
that is to be released from the security requests a release from 
liability under the mortgage loan. Consistent with VA's proposed 
maximum, the maximum fee disclosed in VA's survey of private industry 
is $15.
    VA could charge a fee not to exceed $30 for processing payoff 
statements. Consistent with VA's proposed maximum, the private industry 
servicers VA surveyed disclosed a maximum payoff statement fee of $30.
    VA could charge a reasonable fee to the borrower to offset the 
costs of processing payments a borrower may elect to submit by phone. 
To cover the expenses associated with providing this service, which 
borrowers may prefer to traditional payment by check, the fee would not 
exceed $12 when a representative handles the payment, and would not 
exceed $10 when an interactive voice response system (an automated 
phone system) handles the payment. The industry fee schedules that VA 
surveyed for this rulemaking disclosed maximum payment by phone fees 
that ranged from $9 to $20. The schedules also showed that, when a 
borrower makes a payment by phone, it usually costs the borrower $3 to 
$10 more to speak with a representative than it does for the borrower 
to use an interactive voice response system.
    In addition to the proposed fees being standard in private 
industry, there is precedent for the collection of fees in exchange for 
the performance of special ad hoc services in another Federal 
Government direct home loan program. Specifically, the Rural Housing 
Service (RHS) at the Department of Agriculture (USDA) regulates the 
collection of fees in exchange for the performance of certain special 
services. RHS provides financing to help very low and low income 
individuals, who cannot obtain credit from other sources, obtain 
housing in rural areas. VA notes that RHS permits these fees even 
though its loan program is targeted to very low and low income 
families, whereas sales of REO properties with vendee financing are 
intended to help VA dispose of its REO inventory helping fund the 
VHBPF.
    For example, 7 CFR 3550.161(c) states that RHS may charge a fee for 
payoff statements if more than two statements are requested for the 
same account in any 30-day period. Under Sec.  3550.161(d), RHS 
explains that borrowers who make cash payments, rather than submitting 
payment through check, money order, or bank draft, will be assessed a 
fee to cover the conversion to money order. RHS stated in its Interim 
Final Rule, Reengineering and Reinvention of the Direct Section 502 and 
504 Single Family Housing Programs, published on November 22, 2006 (61 
FR 59762, 59772), that two commentators strongly opposed RHS's 
requirement that a cash payment must be accompanied by an amount 
sufficient to cover the cost of a money order, stating that such 
proposal was unfair to very low and low income families. It explained, 
however, that RHS provides supervised credit. RHS encourages, like all 
lenders, customers to send payments by check, money order or bank 
draft. Cash payments in local offices are discouraged. Since RHS must 
obtain a money order in order to transmit the payment, the customer 
should pay that fee. Id.
    In addition, RHS regulations at 7 CFR 3550.159 provide that certain 
borrower actions require RHS approval. Specifically, Sec.  3550.159(c) 
explains that RHS may consent to a transaction affecting the security, 
such as a sale or exchange of security property, and grant a partial 
release of the security, so long as certain conditions are met. Among 
those conditions is the requirement that the proceeds from the sale of 
any portion of the security property or other similar transaction 
requiring RHS consent must first be used to pay customary and 
reasonable costs related to the transaction that must be paid by the 
borrower. Additionally, if an appraisal must be conducted, the 
regulation states that the appraisal fee will be charged to the 
borrower.
    As authority for its rule permitting such fees, RHS cites 42 U.S.C. 
1480, which provides that the Secretary of Agriculture shall have the 
power to sell RHS-acquired properties based on terms and conditions the 
Secretary of Agriculture determines reasonable and to make loans to the 
purchasers of such properties. The statutory authority cited by RHS to 
permit fees to cover the costs of performing additional post-
origination services is analogous to 38 U.S.C. 3720, which provides the 
Secretary the power to dispose of VA-owned properties on terms the 
Secretary determines reasonable. Thus, the proposed rule would be 
consistent with the rule of at least one other Federal Government 
direct home loan program that authorizes reasonable fees to cover 
unanticipated, additional expenses incurred after loan origination.
    The rule would state expressly, at proposed Sec.  36.4529(b), that 
the Secretary may negotiate fees on a case-by-case basis. It would also 
require the Secretary to review, bi-annually, the maximum fees proposed 
under Sec.  36.4529(a) to ensure that the fees continue to reflect the 
reasonable costs for the services performed. If VA determines that the 
maximum fees listed in Sec.  36.4529(a) no longer reflect the 
reasonable amounts necessary to perform the associated services, VA 
would propose amendment of the regulation. This would allow VA to 
timely address any imbalance in the maximum fee schedule and keep the 
vendee loan program both cost-effective and competitively priced for 
its participants.
    In addition to the ad hoc post-origination fees proposed under 
Sec.  36.4529(a), proposed Sec.  36.4529(c) would identify, for 
informational purposes, standard fees as established in loan 
instruments. Fees established in loan instruments are generally 
considered deterrents to default, and a means by which the lender can

[[Page 74386]]

minimize losses if a loan does default. These expenses often relate to 
termination of the loan, regardless of whether the loan is ultimately 
foreclosed, and are capitalized into the indebtedness.
    VA, like many lenders, uses the standard loan documents developed 
and adopted by the Federal National Mortgage Association (Fannie Mae). 
Fannie Mae's security instruments usually provide that the lender may 
charge reasonable fees for services performed in connection with 
default and loan termination to protect the lender's interest in the 
property and rights under the deed of trust. Various Fannie Mae 
security instruments can be viewed at https://www.fanniemae.com/singlefamily/security-instruments.
    Fannie Mae's standard security instruments also generally provide 
that if the borrower fails to perform the covenants and agreements 
contained in the security instrument, the lender may do and pay for 
whatever is reasonable or appropriate to protect the lender's interest 
in the property and rights under the security instrument. A lender may 
not charge any fees prohibited by the instrument or by applicable 
federal, state, or local laws or regulations. State laws control 
whether any fees charged by the lender, or amounts expended by the 
lender to protect its interest in the property and rights under the 
loan instrument, are to be added to the borrower's indebtedness.
    Pursuant to proposed Sec.  36.4529(d), any fee included in the loan 
instrument and permitted under proposed Sec.  36.4529(c) would be based 
on the amount customarily charged in the industry for the performance 
of the service in the particular area, the status of the loan, and the 
characteristics of the affected property. VA is not prescribing 
specific maximum amounts for these fees. Rather, as these fees are 
governed by the loan instrument and may be capitalized into the 
principal balance of the loan, state law sets the maximum amounts for 
these fees. Nevertheless, VA seeks to clarify through this rulemaking 
that any borrower obtaining vendee financing may incur reasonable fees 
as provided for in standard loan instruments.
    An example of a fee permitted by the standard loan instrument would 
be a property inspection fee that VA could collect. For instance, when 
a foreclosure seems necessary, VA must perform a limited inspection to 
determine the physical condition or occupancy status of a property 
purchased with vendee financing. In situations where VA must perform 
work to maintain a vacant property, the loan instrument permits a 
reasonable property preservation fee to be charged to the borrower. As 
a result, this fee would cover services to protect a vacant property 
from further damage or to maintain a property to prevent city code 
violations. Such services could range from mowing the yard to 
constructing a fence around the property to winterizing the property. 
The fees charged would need to reflect the reasonable cost of 
performing the particular type of property preservation service.
    Additionally, standard loan instruments used by VA permit VA to 
collect reasonable appraisal or attorneys' fees. Appraisal fees would 
include, for example, the cost of obtaining a liquidation appraisal in 
the event of default to determine the value of a property prior to a 
liquidation sale or short sale. Appraisal fees could also include the 
cost of an appraisal of property to determine its value prior to a 
partial release. Attorneys' fees may be incurred in cases where the 
property goes into serious delinquency and servicers must hire 
attorneys to assure VA's interests are protected. Examples of legal 
work incurring attorneys' fees include providing proper and timely 
notice to borrowers in the event of foreclosure, determining lien 
position if there are multiple liens on the property, and, in judicial 
foreclosure states, assuring correct paperwork is submitted to the 
court. In addition, attorneys' fees may be incurred in cases where a 
loan is referred to foreclosure, but the foreclosure is not completed, 
the default is cured, and the loan is reinstated.
    Along with the fees for default-related services, there are other 
reasonable fees that are specified in the loan instrument that, if 
incurred, can be capitalized as part of the borrower's total 
indebtedness. These fees offset the additional expense of collection 
activities and usually serve as incentives for repaying a loan 
obligation in a timely manner or, more aptly, as deterrents to 
delinquency that might otherwise interrupt the Government's scheduled 
flow of income. These fees include, but are not limited to, late fees 
incurred to cover the added expense involved in handling delinquent 
payments, and a returned-check (non-sufficient funds) fee incurred when 
a mortgage payment is made from an account that does not have 
sufficient funds to cover the payment. Other fees that are reasonably 
necessary for the protection of the lender's investment are also 
permitted under the loan instrument.
    VA notes that RHS, in addition to including standard fees in its 
loan instrument, also addresses some of these fees in regulation. For 
example, RHS servicing regulations state that RHS may assess reasonable 
fees including a tax service fee, fees for late payments, and fees 
returned for insufficient funds (7 CFR 3550.153). In justifying the 
potential to charge late fees to its very low and low income borrowers, 
RHS explains that it recognizes its mission to provide supervised 
credit, but that it also believes a late fee encourages its clients to 
make payments on a timelier basis. See 61 FR 59763. Further, Sec.  
3550.156(a) explains that RHS borrowers are expected to meet a variety 
of obligations outlined in the loan documents, including maintaining 
the security property and paying hazard and flood insurance and other 
related costs when due. Paragraph (b) of the rule states that if a 
borrower fails to fulfill these obligations, RHS may obtain the needed 
service and charge the cost to the borrower's account. Accordingly, VA 
is similarly including reasonable fees established in loan instruments 
under this proposed rulemaking.

Section 36.4530 Vendee Loan Other Fees

    The loan fee required by 38 U.S.C. 3729 and the fees included in 
proposed 38 CFR 36.4528 and 36.4529 are not the only types of fees 
associated with vendee loans. There are other types of fees necessary 
for the origination and servicing of vendee loans that may be permitted 
under this rulemaking. As such, VA is proposing to add Sec.  36.4530 to 
clarify for borrowers of vendee loans that they may incur fees 
associated with their financing, in addition to, and unaffected by, 
those fees specified in 38 U.S.C. 3729 and proposed Sec. Sec.  36.4528 
and 36.4529.
    Other types of fees that that may be charged in connection with 
vendee loans are fees charged by third parties. These fees, which are 
also permitted in connection with the guaranteed loan benefit program, 
are not collected on behalf of the Secretary. These types of fees are 
collected to pay for goods or services such as termite inspections, 
hazard and force-placed insurance premiums, courier fees, tax 
certificates, and recorder's fees. They are standard in closing 
transactions, and borrowers of vendee loans would be expected to pay 
these fees for the goods and services provided by the third parties. VA 
is identifying these fees in this proposed rule to help clarify the 
types of expenses that may be incurred in connection with vendee 
financing and ensure that borrowers of vendee loans clearly understand 
the financial obligations that may be expected of them. The list of 
third-party fees in proposed 38 CFR

[[Page 74387]]

36.4530 is not exhaustive. Rather, it is meant to provide examples.

Safe Harbor Qualified Mortgages

    VA proposes a change to Sec.  36.4500(c)(2) to clarify that all 
direct loans would be safe harbor qualified mortgages. VA's qualified 
mortgage rule was first published on May 9, 2014. See 79 FR 26620. 
Although VA intended to designate as qualified mortgages all VA direct 
loans, VA did not expressly include all authorities under which VA 
makes loans. Consequently, it might appear as if VA intentionally 
excluded some of VA's direct loans from qualified mortgage status.
    To eliminate ambiguity, the proposed change would state expressly 
that any VA direct loan made by the Secretary pursuant to chapter 20 or 
37 of title 38, U.S.C., is to be considered a safe harbor qualified 
mortgage. VA would also revise the authority citation for paragraph 
(c)(2) to include citations to 38 U.S.C. 2041, 3711, 3720, 3733, and 
3761 in addition to the current citation to 38 U.S.C. 3710 and 15 
U.S.C. 1639C(b)(3)(B)(ii). Again, this change is not intended to be 
substantive, but rather, would ensure the paragraph's authority 
reflects all of the different statutory authorities under which VA may 
make direct loans.

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'' requiring review by the Office of 
Management and Budget (OMB), unless OMB waives such review, as ``any 
regulatory action that is likely to result in a rule that may: (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 it has 
been determined not to be a 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://www.va.gov/orpm/, by following the link for VA 
Regulations Published from FY2004 to FYTD.

Unfunded Mandates

    The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532, requires 
agencies to prepare an assessment of anticipated costs and benefits 
before issuing any rule that may result in the 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 proposed rule would have no such effect on State, 
local, and tribal governments, or on the private sector.

Paperwork Reduction Act

    This proposed rule contains no provisions constituting a collection 
of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3521).

Regulatory Flexibility Act

    This proposed rule would affect individuals and small businesses 
who choose to obtain a vendee loan from VA to finance the purchase of a 
VA-owned property rather than alternate financing. A party who wants to 
purchase a VA-owned property may choose whatever source of financing he 
wishes. Presumably the purchaser would select the least expensive 
financing option available, which may or may not be a VA vendee loan. 
VA does not believe that this proposed rule would impose any 
significant economic impact for the following reasons. Should the 
purchaser decide that the VA vendee program was not the most 
economically advantageous to the purchaser then he would obtain 
alternate financing. Parties would have to choose to be subject to the 
impact, if any, imposed by this rule.
    Accordingly, the Secretary certifies that the adoption of this 
proposed rule would not have a significant economic impact on a 
substantial number of small entities as they are defined in the 
Regulatory Flexibility Act (5 U.S.C. 601-612). Therefore, under 5 
U.S.C. 605(b), this rulemaking is exempt from the initial and final 
regulatory flexibility analysis requirements of sections 603 and 604.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance 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. Gina S. 
Farrisee, Deputy Chief of Staff, Department of Veterans Affairs, 
approved this document on October 18, 2016, for publication.

    Dated: October 18, 2016.
Jeffrey Martin,
Office Program Manager, Office of Regulation Policy & Management, 
Office of the Secretary, Department of Veterans Affairs.

List of Subjects in 38 CFR Part 36

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

    For the reasons set out in the preamble, VA proposes to amend 38 
CFR part 36, subpart D as set forth below:

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.

Subpart D--Direct Loans

0
2. Amend Sec.  36.4500 by:
0
a. Revising paragraph (c)(2).
0
b. Revising the authority citation for paragraph (c)(2).
0
c. Adding paragraph (e).
    The revisions and addition read as follows:

[[Page 74388]]

Sec.  36.4500  Applicability and qualified mortgage status.

* * * * *
    (c) * * *
    (2) Applicability of safe harbor qualified mortgage. Any VA direct 
loan made by the Secretary pursuant to chapter 20 or 37 of title 38, 
U.S.C., is a safe harbor qualified mortgage.

(Authority: 15 U.S.C. 1639C(b)(3)(B)(ii), 38 U.S.C. 2041, 3710, 
3711, 3720, 3733, and 3761)
* * * * *
    (e) Sections 36.4528, 36.4529, and 36.4530, which concern vendee 
loans, shall be applicable to all vendee loans.
0
3. Amend Sec.  36.4501 by adding in alphabetical order a definition for 
``Safe harbor qualified mortgage'' and revising the definition ``Vendee 
Loan'' to read as follows:


Sec.  36.4501  Definitions.

* * * * *
    Safe harbor qualified mortgage means a mortgage that 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).
* * * * *
    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. The terms of a vendee loan (e.g., amount 
of down payment; amortization term; whether to escrow taxes, insurance 
premiums, or homeowners' association dues; fees, etc.) are negotiated 
between the Secretary and the borrower on a case-by-case basis, subject 
to the requirements of 38 U.S.C. 2041 or 3733. Terms related to 
allowable fees are also subject to Sec. Sec.  36.4528 through 36.4530 
of this part.

(Authority: 38 U.S.C. 2041, 3720, 3733)
* * * * *
0
4. Add Sec. Sec.  36.4528, 36.4529, and 36.4530 to read as follows:


Sec.  36.4528  Vendee loan origination fee.

    (a) In addition to the loan fee required pursuant to 38 U.S.C. 
3729, the Secretary may, in connection with the origination of a vendee 
loan, charge a borrower a loan origination fee not to exceed one-and-a-
half percent of the loan amount.
    (b) All or part of such fee may be paid in cash at loan closing or 
all or part may be included in the loan. The Secretary will not 
increase the loan origination fee because the borrower chooses to 
include such fee in the loan amount financed.
    (c) In no event may the total fee agreed upon between the Secretary 
and the borrower result in an amount that will cause the loan to be 
designated as a high-cost mortgage as defined in 15 U.S.C. 1602(bb) and 
12 CFR part 1026.

(Authority: 38 U.S.C. 2041, 3720, 3733)


Sec.  36.4529  Vendee loan post-origination fees.

    (a) The Secretary may charge a borrower the following reasonable 
fees, per use, following origination, in connection with the servicing 
of any vendee loan:
    (1) Processing assumption fee for the transfer of legal liability 
of repaying the mortgage when the individual assuming the loan is 
approved. Such fee will not exceed $300, plus the actual cost of the 
credit report. If the assumption is denied, the fee will not exceed the 
actual cost of the credit report.
    (2) Processing subordination fee, not to exceed $350, to ensure 
that a modified vendee loan retains its first lien position;
    (3) Processing partial release fee, not to exceed $350, to exclude 
collateral from the mortgage contract once a certain amount of the 
mortgage loan has been paid;
    (4) Processing release of lien fee, not to exceed $15, for the 
release of an obligor from a mortgage loan in connection with a 
division of real property;
    (5) Processing payoff statement fee, not to exceed $30, for a 
payoff statement showing the itemized amount due to satisfy a mortgage 
loan as of a specific date;
    (6) Processing payment by phone fee, not to exceed $12, when a 
payment is made by phone and handled by a servicing representative;
    (7) Processing payment by phone fee, not to exceed $10, when a 
payment is made by phone and handled through an interactive voice 
response system, without contacting a servicing representative.
    (b) The specific fees to be charged on each account may be 
negotiated between the Secretary and the borrower. The Secretary will 
review the maximum fees under paragraph (a) of this section bi-annually 
to determine that they remain reasonable.
    (c) The Secretary may charge a borrower reasonable fees established 
in the loan instrument, including but not limited to the following:
    (1) Property inspection fees;
    (2) Property preservation fees;
    (3) Appraisal fees;
    (4) Attorneys' fees;
    (5) Returned-check fees;
    (6) Late fees; and
    (7) Any other fee the Secretary determines reasonably necessary for 
the protection of the Secretary's investment.
    (d) Any fee included in the loan instrument and permitted under 
paragraph (c) of this section would be based on the amount customarily 
charged in the industry for the performance of the service in the 
particular area, the status of the loan, and the characteristics of the 
affected property.

(Authority: 38 U.S.C. 2041, 3720, 3733)


Sec.  36.4530  Vendee loan other fees.

    (a) In addition to the fees that may be charged pursuant to 38 CFR 
36.4528 and 36.4529 and the statutory loan fee charged pursuant to 38 
U.S.C. 3729, the borrower may be required to pay third-party fees for 
services performed in connection with a vendee loan.
    (b) Examples of the third party fees that may be charged in 
connection with a vendee loan include, but are not limited to:
    (1) Termite inspections;
    (2) Hazard insurance premiums;
    (3) Force-placed insurance premiums;
    (4) Courier fees;
    (5) Tax certificates; and
    (6) Recorder's fees.

(Authority: 38 U.S.C. 2041, 3720, 3733)

[FR Doc. 2016-25738 Filed 10-25-16; 8:45 am]
 BILLING CODE 8320-01-P