Loan Guaranty: Minimum Property Requirements for VA-Guaranteed and Direct Loans, 85863-85865 [2023-27068]

Agencies

• DEPARTMENT OF VETERANS AFFAIRS

[Federal Register Volume 88, Number 236 (Monday, December 11, 2023)]
[Proposed Rules]
[Pages 85863-85865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-27068]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AS02


Loan Guaranty: Minimum Property Requirements for VA-Guaranteed 
and Direct Loans

AGENCY: Department of Veterans Affairs.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Department of Veterans Affairs (VA) is requesting public 
comment on the minimum property requirements (MPRs) for VA-guaranteed 
and direct loans. VA will consider information received in response to 
this advance notice of proposed rulemaking (ANPRM) in implementing the 
Improving Access to the VA Home Loan Benefit Act of 2022 (the Act). The 
Act requires VA to consider making changes to MPRs in prescribing 
updated regulatory requirements regarding appraisals. This ANPRM seeks 
public input to better understand areas for improvement in MPRs, 
including whether VA should consider adopting an approach that aligns 
with other industry-wide property standards already in existence.

DATES: Comments must be received on or before February 9, 2024.

ADDRESSES: Comments must be submitted through www.regulations.gov. 
Except as provided below, comments received before the close of the 
comment period will be available at www.regulations.gov for public 
viewing, inspection, or copying, including any personally identifiable 
or confidential business information that is included in a comment. We 
post the comments received before the close of the comment period on 
the following website as soon as possible after they have been 
received: https://www.regulations.gov. VA will not post on 
www.regulations.gov public comments that make threats to individuals or 
institutions or suggest that the commenter will take actions to harm an 
individual. VA encourages individuals not to submit duplicative 
comments. We will post acceptable comments from multiple unique 
commenters even if the content is identical or nearly identical to 
other comments. Any public comment received after the comment period's 
closing date is considered late and will not be considered in the final 
rulemaking.

FOR FURTHER INFORMATION CONTACT: Stephanie Li, Assistant Director for 
Regulations, Legislation, Engagement and Training, and Terry Rouch, 
Assistant Director for Loan Policy and Valuation, Loan Guaranty Service 
(26), Veterans Benefits Administration, Department of Veterans Affairs, 
810 Vermont Avenue NW, Washington, DC 20420, 202-632-8862. (This is not 
a toll-free telephone number.)

SUPPLEMENTARY INFORMATION: VA must ensure that any property financed 
through a VA-guaranteed or direct loan is suitable for dwelling 
purposes.\1\ Additionally, any loan for either the purchase or 
construction of a residential property, in which construction was 
completed within one year of the loan, must meet or exceed minimum 
requirements for planning, construction, and general acceptability, as 
prescribed by VA.\2\ Also, any direct housing loan made by VA under the 
Native American Direct Loan (NADL) program must meet minimum 
requirements for planning, construction, improvement, and general 
acceptability, as prescribed by VA.\3\
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    \1\ 38 U.S.C. 3710(b)(4); see also 38 U.S.C. 3711.
    \2\ 38 U.S.C. 3704(a).
    \3\ 38 U.S.C. 3762(c)(2).
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    In 38 CFR 36.4351 and 36.4527(c)(4), VA implemented the above noted 
statutory requirements, and in the Lenders Handbook, VA maintains a 
list of MPRs.\4\ The following table reflects that list.\5\
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    \4\ Lenders Handbook, VA Pamphlet 26-7, https://www.benefits.va.gov/warms/pam26_7.asp.
    \5\ Id.

                                 Table 1--VA Pamphlet 26-7, Lenders Handbook, Chapter 12--Minimum Property Requirements
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                 Topic                                  Topic name                            Topic                           Topic name
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1.....................................  Minimum Property Requirement Procedures.    23......................  Heating.
2.....................................  Marketable Real Estate Entity.              24......................  Leased Mechanical Systems and Equipment.
3.....................................  Space Requirements.                         25......................  Alternative Energy Equipment.
4.....................................  Access.                                     26......................  Roof Covering.
5.....................................  Encroachments.                              27......................  Attics.
6.....................................  Drainage and Topography.                    28......................  Crawl Spaces.
7.....................................  Geological or Soil Instability,             29......................  Basements.
                                         Subsidence, and Sinkholes.
8.....................................  Special Flood Hazard Area.                  30......................  Swimming Pools.
9.....................................  Coastal Barrier Resources System.           31......................  Burglar Bars.
10....................................  Lava Flow Hazard Areas.                     32......................  Lead-Based Paint.
11....................................  Non-Residential Use.                        33......................  Wood Destroying Insects/Fungus/Dry Rot.
12....................................  Zoning.                                     34......................  Radon Gas.
13....................................  Local Housing/Planning Authority Code       35......................  Potential Environmental Problem.
                                         Enforcement.
14....................................  Utilities.                                  36......................  Stationary Storage Tanks.
15....................................  Water Supply and Sanitary Facilities.       37......................  Mineral, Oil and Gas Reservations or
                                                                                                               Leases.
16....................................  Individual Water Supply.                    38......................  High Voltage Electric Transmission Lines.
17....................................  Individual Sewage Disposal.                 39......................  High Pressure Gas and Liquid Petroleum
                                                                                                               Pipelines.
18....................................  Shared Wells.                               40......................  Properties Near Airports.
19....................................  Community Water Supply/Sewage Disposal      41......................  Manufactured Home Classified as Real
                                         Requirements.                                                         Estate.
20....................................  Hazards.                                    42......................  Modular Homes.
21....................................  Defective Conditions.                       43......................  Energy Conservation and Sustainability.
22....................................  Mechanical Systems.                         44......................  Requests for Waiver of MPR Repairs.
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[[Page 85864]]

    In addition to MPRs being a legal requirement, they also serve as a 
safeguarding function by exposing potential defects or maintenance 
issues that could have a significant effect on a property's value.
    Section 3 of the Act \6\ directs the Secretary to consider making 
changes applicable to MPRs.\7\ Therefore, VA is issuing this ANPRM to 
request public comment as the agency considers regulatory amendments 
pertaining to MPRs. While VA welcomes all comments regarding MPRs, VA 
is particularly interested in hearing from the public on the below 
noted questions.
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    \6\ Public Law 117-308, 136 Stat. 4393.
    \7\ Id.
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Questions for Comment

    (1)(a) What are the advantages and/or disadvantages of VA MPRs 
noted in the above table as compared with similar requirements found in 
other Federal housing programs and conventional sources of financing 
(e.g., property condition requirements)?
    (b) What policies or processes specific to VA MPRs could be 
streamlined, modified, or eliminated to enhance your experience with 
the VA home loan program?
    (c) Please also provide any general suggestions for improvement or 
comments on the current VA MPRs.
    (2)(a) Should VA replace the above noted VA MPRs with the property 
condition ratings outlined in Fannie Mae's Selling Guide or Freddie 
Mac's Single-Family Seller/Servicer Guide, and included in the Uniform 
Appraisal Dataset (UAD) \8\
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    \8\ Selling Guide: Fannie Mae Single Family, B4-1.3-06, Fannie 
Mae, (Aug. 2, 2023), https://selling-guide.fanniemae.com; The 
Single-Family Seller/Servicer Guide, Exhibit 36 Condition and 
Quality Ratings and Level of Updating Definitions, Freddie Mac, (May 
31, 2017), https://guide.freddiemac.com/app/guide/exhibit/36; 
Uniform Appraisal Dataset, Freddie Mac, https://sf.freddiemac.com/tools-learning/uniform-mortgage-data-program/uad#business-resources 
(last visited Aug. 23, 2023).
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    (b) If VA were to guarantee or make loans only on properties with a 
condition rating of C1, C2, C3, or C4, either based on the initial 
appraisal or following repairs, what would be the advantages and/or 
disadvantages for a borrower? For VA and taxpayers? For lenders and 
servicers?
    (c) Could the below noted property condition ratings be used by VA 
in another way to determine MPRs?
    By way of background, the UAD defines all fields required for an 
appraisal submission for specific appraisal forms (e.g., Fannie Mae 
Form 1004) and standardizes definitions and responses for a key subset 
of fields. When completing an appraisal that conforms to the UAD, the 
appraiser assigns one of the standardized condition ratings pursuant to 
the definitions in the Fannie Mae Selling Guide or Freddie Mac Seller/
Servicer Guide and presented in Table 2 below. These ratings identify 
the condition of the improvements for the subject property and 
comparable sales.
    VA appraisers utilize industry-standard forms to complete 
appraisals for VA-guaranteed loans. As such, VA already collects 
information regarding the UAD property condition rating as part of a VA 
appraisal.\9\ As VA considers how to streamline the appraisal process, 
one option could be to utilize this existing appraisal information to 
determine whether a property is suitable for dwelling purposes rather 
than provide appraisers with a lengthy list of specific MPRs to 
evaluate. In reviewing the UAD property condition ratings, VA believes 
that properties rated C1 through C4 would best align with VA's 
statutory requirement and existing MPRs, but is open to public feedback 
on this issue.
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    \9\ This information collection is approved by the Office of 
Management and Budget (OMB) under Control Number 2900-0890.

   Table 2--Uniform Appraisal Dataset (UAD) Property Condition Ratings
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                           Description in Fannie Mae Selling and Freddie
          Rating                     Mac Seller/Servicer Guides
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C1.......................  The improvements have been very recently
                            constructed and have not previously been
                            occupied. The entire structure and all
                            components are new and the dwelling features
                            no physical depreciation.
C2.......................  The improvements feature no deferred
                            maintenance, little or no physical
                            depreciation, and require no repairs.
                            Virtually all building components are new or
                            have been recently repaired, refinished, or
                            rehabilitated. All outdated components and
                            finishes have been updated and/or replaced
                            with components that meet current standards.
                            Dwellings in this category either are almost
                            new or have been recently completely
                            renovated and are similar in condition to
                            new construction.
C3.......................  The improvements are well-maintained and
                            feature limited physical depreciation due to
                            normal wear and tear. Some components, but
                            not every major building component, may be
                            updated or recently rehabilitated. The
                            structure has been well-maintained.
C4.......................  The improvements feature some minor deferred
                            maintenance and physical deterioration due
                            to normal wear and tear. The dwelling has
                            been adequately maintained and requires only
                            minimal repairs to building components/
                            mechanical systems and cosmetic repairs. All
                            major building components have been
                            adequately maintained and are functionally
                            adequate.
C5.......................  The improvements feature obvious deferred
                            maintenance and are in need of some
                            significant repairs. Some building
                            components need repairs, rehabilitation, or
                            updating. The functional utility and overall
                            livability are somewhat diminished due to
                            condition, but the dwelling remains useable
                            and functional as a residence.
C6.......................  The improvements have substantial damage or
                            deferred maintenance with deficiencies or
                            defects that are severe enough to affect the
                            safety, soundness, or structural integrity
                            of the improvements. The improvements are in
                            need of substantial repairs and
                            rehabilitation, including many or most major
                            components.
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    (3) VA is interested in hearing how the current MPRs may be 
impacting certain groups of veteran borrowers, including those 
traditionally underserved in the housing finance industry. As VA 
considers changes to the MPRs, VA is exploring how best to ensure all 
eligible individuals for the VA home loan benefit are served.
    (a) Please describe any needs of groups of veterans who might be 
underserved due to the current MPRs and how the VA home loan program 
could address those needs.
    (b) Please describe any VA MPRs that might restrict utilization by 
any group(s) of veterans that are traditionally underserved in the 
housing finance industry. What changes could VA make to its MPRs to 
encourage more utilization by these groups?
    (4) VA is interested in hearing how changes to the MPRs might 
affect lender participation which, in turn, could affect a veteran 
borrower's access to the benefit.
    (a) As an interested stakeholder, in your opinion, what type(s) of 
MPRs are helpful in protecting veteran borrowers, lenders, servicers, 
and VA?
    (b) What type(s) of changes related to MPRs would encourage more 
lenders

[[Page 85865]]

and broker/agent entities to increase their participation in the VA 
home loan program?
    (5)(a) As an interested stakeholder, in your opinion, are waivers 
of certain MPRs necessary in the VA home loan buying process? If so, 
please explain.
    (b) Would your answer change if VA adopted a more generalized 
approach to MPRs, such as the property condition ratings in the Fannie 
Mae Selling Guide or Freddie Mac Seller/Servicer Guide and UAD, versus 
the current MPRs?

Executive Orders 12866, 13563 and 14094

    Executive Order 12866 (Regulatory Planning and Review) directs 
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 14094 (Executive order on 
Modernizing Regulatory Review) supplements and reaffirms the 
principles, structures, and definitions governing contemporary 
regulatory review established in Executive Order 12866 of September 30, 
1993 (Regulatory Planning and Review), and Executive Order 13563 of 
January 18, 2011 (Improving Regulation and Regulatory Review). The 
Office of Information and Regulatory Affairs has determined that this 
rule is a significant regulatory action under Executive Order 12866, as 
amended by Executive Order 14094. The Regulatory Impact Analysis 
associated with this rulemaking can be found as a supporting document 
at www.regulations.gov.

Signing Authority

    Denis McDonough, Secretary of Veterans Affairs, approved and signed 
this document on December 4, 2023, 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.

Jeffrey M. Martin,
Assistant Director, Office of Regulation Policy & Management, Office of 
General Counsel, Department of Veterans Affairs.
[FR Doc. 2023-27068 Filed 12-8-23; 8:45 am]
BILLING CODE 8320-01-P