Loan Guaranty: Loan Reporting and Partial or Total Loss of Guaranty or Insurance, 91624-91635 [2024-26776]

Agencies

• DEPARTMENT OF VETERANS AFFAIRS

[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Proposed Rules]
[Pages 91624-91635]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26776]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AS16


Loan Guaranty: Loan Reporting and Partial or Total Loss of 
Guaranty or Insurance

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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SUMMARY: The Department of Veterans Affairs (VA) proposes to amend its 
regulations governing loan reporting requirements for lenders that 
participate in the VA-guaranteed home loan program and circumstances 
when VA would assert a defense for partial or total loss of guaranty or 
insurance for lenders and holders. These proposed amendments would 
support VA's ongoing efforts to modernize and transform technology and 
processes within the guaranteed home loan program, capitalizing on 
industry standard datasets. In addition, the proposed regulatory 
changes would update and enhance the loan guaranty reporting 
requirements for lenders, providing veterans stronger protections 
against noncompliant loans through improved transparency and oversight 
of the program.

DATES: Comments must be received on or before January 21, 2025.

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 
www.regulations.gov as soon as possible after they have been received. 
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; however, we will post 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. In accordance with the Providing 
Accountability Through Transparency Act of 2023, a 100 word Plain-
Language Summary of this proposed rule is available at Regulations.gov, 
under RIN 2900-AS16(P).

FOR FURTHER INFORMATION CONTACT: Stephanie Li, Assistant Director for 
Regulations, Legislation, Engagement, and Training; Terry Rouch, 
Assistant Director for Loan Policy and Valuation; and Colin Deaso, 
Assistant Director for Data and Technology Solutions, Loan Guaranty 
(26), Veterans Benefits Administration, Department of Veterans Affairs, 
1800 G Street NW, Washington DC 20006, (202) 632-8862. (This is not a 
toll-free telephone number.)

SUPPLEMENTARY INFORMATION:

I. Purpose of This Rulemaking

    VA proposes to amend its reporting regulation at 38 CFR 36.4303 and 
its partial or total loss of guaranty or insurance regulation at 38 CFR 
36.4328 to support its ongoing efforts to modernize and transform 
technology and processes within its VA-guaranteed home loan program and 
to make the regulations more reader-friendly. VA is accomplishing the 
technological transformation by updating reporting requirements and 
connecting with lenders and holders through application programming 
interfaces (APIs). Utilizing APIs will more efficiently and effectively 
support veterans, lenders, servicers, and other stakeholders who 
participate in the VA-guaranteed home loan program. Specifically, VA 
would launch an API ecosystem in which VA and veterans would, through 
increased VA oversight capabilities, have stronger protections against 
noncompliant lenders and holders. Additionally, lenders and holders 
would have more assurance and confidence in using their authority to 
close VA-guaranteed loans on an automatic basis and in carrying out 
lending and servicing functions in VA's home loan program.
    To help ensure success, updates to 38 CFR 36.4303 and 36.4328 are 
necessary. Amendments to Sec.  36.4303 would expand loan reporting 
requirements by allowing VA, lenders, and holders to take advantage of 
technological improvements that APIs provide, resulting in more 
efficient and more effective program administration. Section 36.4328 
amendments would clarify provisions addressing partial or total loss of 
the guaranty or insurance when VA identifies fraud, material 
misrepresentations, or other noncompliance with VA requirements.

II. Section-by-Section Analysis of the Proposed Regulatory Amendments

A. 38 CFR 36.4303--Reporting Requirements

1. Reporting Loans Closed on an Automatic Basis
    VA proposes to revise Sec.  36.4303(a) to add the heading, 
``Automatically guaranteed loans'', and provide that, for loans 
automatically guaranteed under 38 U.S.C. 3703(a)(1), a lender of a 
class described under 38 U.S.C. 3702(d), would be required to report 
the loan, after loan closing, in an electronic

[[Page 91625]]

format using an API, as designated by the Secretary. The proposed rule 
would further require that such a lender must, not later than 15 days 
after the loan closing date, use the designated API to report a loan to 
VA. When reporting the loan, the lender must also use the designated 
API to submit the appropriate funding fee as prescribed by 38 U.S.C. 
3729 and required information regarding the loan, including the loan 
application (e.g., the Uniform Loan Application Dataset--ULAD), closing 
disclosures (e.g., the Uniform Closing Dataset--UCD), and any other 
information required by the Secretary.
    VA further proposes to explain that VA would announce in the 
Federal Register any designation of a new API at least 60 days before a 
lender would be required to use the API for reporting the loan and 
submitting the funding fee and loan information. The notice would 
provide the name of the newly designated API(s) and a link to VA's 
website where VA would maintain and update technical details about the 
operative API(s). At the expiration of the notice period, using the 
designated API(s) when reporting the loan, including submission of the 
funding fee and loan information to VA, would be a pre-condition to VA 
issuing a loan guaranty certificate (LGC).
    The proposed amendments would be more consistent with standard 
industry practice for electronic reporting. Additionally, they would 
allow for more efficient loan oversight. For example, currently, if a 
funding fee is required, the lender collects the fee at closing and 
electronically remits the funds to VA within 15 days of closing via 
VA's electronic Funding Fee Payment System (FFPS). The lender also 
reports the loan using WebLGY, a different system. Thus, lenders have 
to submit documents and remittances to two VA systems, using manual 
processes. Due to the manual processes and separate systems necessary, 
VA currently allows the lender 60 days within which to submit the loan 
information. See 38 CFR 36.4313(e)(3) and (4). But under the new 
electronic reporting system, VA would retire FFPS and combine reporting 
the loan and remittance of the VA funding fee into one automated 
process. Furthermore, because of the simplification and automation, the 
60-day submission process could be handled efficiently within 15 days.
    VA is committed to a user-friendly API environment that improves 
the overall experience with VA--not launching technological 
improvements for their own sake. VA also understands that many lenders 
have already been working with other API environments. Accordingly, VA 
welcomes feedback, including technical, on how VA can maximize the 
efficiencies that come through reporting loans using APIs and how VA's 
proposed process might be further refined. To that end, VA has already 
published on VA's website the specifications for five APIs that are in 
various stages of development, including the API the Secretary plans to 
designate as the first API for reporting guaranteed loans.
    The designated API would allow lenders to report loan information 
electronically utilizing their Loan Origination Software (LOS). This is 
another advantage to the API ecosystem, because the LOS is already 
widely accepted throughout the industry. Most lenders use the Mortgage 
Industry Standards Maintenance Organization (MISMO's) standards in the 
delivery of closing disclosure data to other federal, or federally 
sponsored, housing agencies such as Fannie Mae, Freddie Mac, and the 
Department of Housing and Urban Development (HUD). With VA's designated 
API for reporting the loan, lenders would be able to electronically 
report information in the UCD and ULAD via API directly from the 
lenders' LOS in accordance with MISMO standards. In the end, the 
designated API for loan reporting would allow for the full automation 
of the funding fee payment, loan reporting, and issuance of the LGC via 
lenders' LOS. Overall, based on industry data and widely held 
principles, VA assesses that the standardization of data reporting 
would lead to better accuracy, consistency, and clarity surrounding the 
loans VA guarantees and would promote a more consistent approach 
between VA and lenders.
    Lenders would also make the required certifications related to the 
loan, using the API, including, for example, that the loan conforms 
with the applicable provisions of 38 U.S.C. chapter 37 and of the 
regulations concerning guaranty or insurance of loans to veterans.
    The lender certifications are consistent with current regulations 
and approved information collections. See Office of Management and 
Budget (OMB) Control Number 2900-0909. The primary difference under the 
proposal is that the certifications would be submitted using the 
designated API(s), again saving resources and time for lenders and VA.
    VA would also continue to require that a veteran make certain 
certifications at the time the loan is closed. Veterans would not 
notice any change. The primary change for lenders would be that, as 
with their own certifications, they would report a veteran's 
certifications using the designated API(s). One veteran certification 
would relate to past or present occupancy of the property. In the case 
of a loan for the purchase or construction of a residential property, 
or for a cash-out refinance, the veteran would be required to certify 
that the veteran intends to occupy such property as the veteran's home. 
See 38 U.S.C. 3704(c). In the case of a loan for the repair, 
alteration, or improvement of residential property, the veteran would 
be required to certify that the veteran occupies the property as the 
veteran's home. An exception to this is if the home improvement or 
refinancing loan is for extensive changes to the property that would 
prevent the veteran from occupying the property while the work is being 
completed. In such a case, the veteran would be required to certify 
that the veteran intends to occupy or reoccupy the property as the 
veteran's home upon completion of the substantial improvements or 
repairs. Another exception would be for an interest rate reduction 
refinance loan (commonly referred to as an IRRRL), where the veteran 
would be required to certify that the veteran either occupies the 
property as the veteran's home or had previously occupied it as the 
veteran's home. The certifications are required by statute, as are the 
differing occupancy requirements based on loan type. See 38 U.S.C. 
3703(c), 3704(c), 3710(e).
    In the event a veteran is in active-duty status as a member of the 
Armed Forces and is unable to occupy the property because of such 
status, VA would accept a certification from the spouse of the veteran 
that the veteran's spouse occupies or intends to occupy the property as 
his or her home or a certification from the veteran's attorney-in-fact 
or from the legal guardian of a dependent child of the veteran that the 
dependent child occupies or intends to occupy the property as the 
dependent child's home. See 38 U.S.C. 3704(c)(2).
    In the case of an interest rate reduction refinancing loan, the 
veteran must certify as to meeting one of the occupancy requirements at 
38 CFR 36.4307(a)(2). See U.S.C. 3710(e)(1)(F). The certifications 
required are consistent with current statutory and regulatory 
requirements. Id.
    Lastly, VA would provide that upon VA's acceptance of the 
information, VA would issue the LGC, subject to provisions of proposed 
Sec.  36.4328.
2. Reporting Loans That Require VA's Prior Approval
    VA proposes to remove current paragraphs (b), (c), and (d) of 38 
CFR 36.4303 and add a new paragraph (b).

[[Page 91626]]

Proposed paragraph (b) would include the heading, ``Prior-approval 
loans'', and provide that, in the case of any loan made by a lender 
without the authority to close loans on an automatic basis or any loan 
where the Secretary provides advance notice of the need for prior 
approval, the lender would be required to report the loan to the 
Secretary before the loan closing for the Secretary's review. Lenders 
would be required to report the loan in an electronic format and using 
an API, if an API is designated by the Secretary for this purpose. 
While VA anticipates releasing an API for lenders to submit loans that 
require prior approval by the Secretary, this API is not currently 
ready. As such, the Secretary would direct lenders under the proposed 
rule to continue using VA's current loan reporting system, WebLGY, to 
submit certain pre-closing and underwriting loan information for the 
Secretary's review. As with automatically guaranteed loans, VA would 
propose to include language in paragraph (b) that would require VA to 
announce in the Federal Register any designation of a new API at least 
60 days before a lender would be required to use the API.
    The loan information that must be submitted before loan closing 
would include the loan application (that is, the Uniform Residential 
Loan Application (URLA), credit reports obtained in connection with the 
loan application, certain VA forms as required by the Secretary, the 
occupancy certification as noted in proposed Sec.  36.4303(a)(2)(iv) 
obtained at the time of loan application, and any other information the 
Secretary determines necessary for a determination.
    Upon VA's review and approval of the above information, VA would 
issue a certificate of commitment, which would commit an LGC to the 
holder of the loan upon the payment of the full proceeds of the loan 
for the purposes described in the original report and provided the 
requirements in proposed Sec.  36.4303(b)(4) are met. If VA does not 
approve the loan, VA would notify the lender that the loan cannot be 
closed as a VA-guaranteed loan; however, the lender may resubmit the 
loan to VA for prior approval after the lender corrects any issues 
identified by VA.
    The lender would be required to report the loan to VA not later 
than 15 days after the loan closing date using the same API as when 
reporting loans closed on an automatic basis. The submission would also 
include the following items: the appropriate funding fee as prescribed 
by 38 U.S.C. 3729; the information prescribed in proposed Sec.  
36.4303(a)(2)(ii); evidence that any conditions identified by the 
Secretary in the certificate of commitment are satisfied in order for 
the Secretary to issue an LGC; evidence showing the property securing 
the loan is that for which the certificate of commitment was issued; 
evidence that all property purchased or acquired with the proceeds of 
the loan has been encumbered as required by VA; and lender and veteran 
certifications prescribed in proposed Sec.  36.4303(a)(2)(iii) and 
(iv), respectively.
    Lastly, VA would provide that upon VA's acceptance of the 
information, VA would issue the LGC, subject to provisions of proposed 
Sec.  36.4328.
    These reporting requirements for loans that require pre-approval 
from VA are generally not new. The change would be the method of 
transmission to VA, meaning that the lender would transmit the 
information using the designated API. VA notes, too, that prior-
approval loans constitute less than one percent of VA's guaranty 
portfolio.
3. Failure To Close Prior-Approval Loans and Late Reporting of Loans
    VA proposes to redesignate current paragraphs (e) and (f) of 38 CFR 
36.4303 as new paragraphs (b)(6) and (c), respectively. VA would also 
revise newly redesignated paragraphs (b)(6) and (c).
    Proposed paragraph (b)(6) would provide that if the lender does not 
close the loan on which prior approval was obtained, the certificate of 
commitment would have no further effect.
    Proposed paragraph (c) would include a heading to be styled, ``Late 
reporting of closed loans'', and would provide that, for loans not 
reported in accordance with the timing requirements of this section, 
evidence of guaranty would be issued only if the loan report is 
accompanied by a statement from the lending institution that explains 
why the loan was reported late and whether, since origination, the loan 
was in default. VA would require the statement to identify the case or 
cases in issue and to set forth the specific reason or reasons why the 
loan was not submitted on time. Upon receipt of such a statement, VA 
would issue evidence of guaranty. A pattern of late reporting and the 
reasons therefore would be considered by VA in taking action under 
Sec. Sec.  36.4336 and 36.4353. VA believes that this change, to 
include referencing existing authority to take action under Sec.  
36.4336, would serve as a deterrence for late reporting of loans to VA.
4. Evidence of Guaranty and Clarifying or Conforming Amendments
    VA proposes to redesignate current paragraph (g) as new paragraph 
(d). The heading would be styled, ``Form of guaranty evidence.'' 
Substantively, proposed paragraph (d) would provide that, for 
guaranteed loans, evidence of a guaranty would be issued by the 
Secretary as an LGC and that, for insured loans, notice of credit to an 
insurance account would be given to the lender. This revision would be 
to improve clarity and readability.
    VA would remove current paragraphs (h) and (j) and redesignate 
current paragraph (i) as new paragraph (e). VA would also revise new 
paragraph (e) by adding the heading, ``Exclusions from the guaranty or 
insurance amount'', and clarifying that the amounts referenced are 
those disbursed by a lender.
    Lastly, VA would redesignate current paragraphs (k) and (l) as new 
paragraphs (f) and (g) and would revise new paragraphs (f) and (g) by 
adding the headings, ``Veteran's right to exit purchase contract'' and 
``Processing and reporting a loan assumption'', respectively. VA also 
proposes to revise new paragraph (g) to conform any internal references 
to this new paragraph and correct the references in new paragraph 
(g)(1)(ii)(D), which currently references paragraphs (l)(1)(i), 
(I)(1)(i)(B), and (l)(1)(i)(A), rather than (g)(1)(i), (g)(1)(i)(B), 
and (g)(1)(i)(A), respectively.
5. Information Collections and Authority Citations
    Section 36.4303 already contains collections of information under 
the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3521) that are approved by the Office of Management and Budget (OMB). 
The information collection associated with proposed Sec.  36.4303(g), 
pertaining to assumptions, is currently approved under OMB control 
number 2900-0516. The information collection associated with proposed 
Sec.  36.4303(a)(2)(iv), pertaining to the veteran's occupancy 
certification, is currently approved under OMB control number 2900-
0521. VA is not proposing any substantive revisions to these provisions 
or the information collections but is proposing to add OMB control 
number 2900-0521 to the list of approved information collections at the 
end of the section.
    Similarly, VA proposes to add OMB control number 2900-0909 to the 
list of approved information collections at the end of Sec.  36.4303. 
This approved information collection pertains to existing lender 
reporting requirements

[[Page 91627]]

for both automatically guaranteed loans and prior-approval loans. This 
includes information and certifications required under current Sec.  
36.4303(a), (c), (d), and (f). With this proposed rule, VA is revising 
the information required by a lender to include additional loan 
origination information including but not limited to the loan 
application (e.g., ULAD) and closing disclosures (e.g., UCD). VA also 
proposes to amend the format (i.e., collection instrument) lenders will 
use to submit this information to reflect the use of APIs. Accordingly, 
VA has outlined these changes in the below Paperwork Reduction Act 
section and any incremental burden costs or savings to the public.
    VA notes that it currently has approval from OMB to collect loan 
application information and closing disclosures under the information 
collection associated with 38 CFR 36.4333. This rule, in part, pertains 
to lenders' requirement to maintain loan origination records and VA's 
authority to request an audit of such records as necessary for 
oversight and program management. Under the current approved 
information collection (OMB control number 2900-0515), VA requires 
lenders to upload the ULAD and UCD for any loan selected for audit 
(also known as Full File Loan Review). With this proposed rule, lenders 
will have already submitted this information when they report the loan 
to VA for an LGC. As such, separate from this rulemaking, VA intends to 
revise the information collection at 38 CFR 36.4333 to remove the 
duplicate information collection.
    Finally, VA proposes to remove the paragraph-specific authority 
citations and amend the authority citation at the end of Sec.  36.4303.

B. Partial or Total Loss of Guaranty or Insurance

    VA proposes to rewrite Sec.  36.4328, which addresses how lender or 
holder noncompliance with VA requirements can affect the guaranty and 
VA's payment of the guaranty. The rule has not been updated for some 
time, and VA believes modernizing the style would promote transparency, 
help stakeholders better understand VA's longstanding policy, and 
improve VA's oversight function. For example, VA would add headings at 
the paragraph level, as headings throughout the section would help VA 
employees and stakeholders better understand which provisions apply to 
a given situation, such as material misrepresentations in origination 
compared to servicing. The goal is to minimize legalese and arrange the 
section under a more orderly framework. In addition, VA would codify a 
requirement for indemnifying VA when a lender fails to comply with 
certain requirements.
1. Forgeries and Falsifications of Documents
    Paragraph (a) of Sec.  36.4328 would be revised under the heading 
``No liability on the guaranty or insurance due to forgery or 
falsification of documents.'' The revision would explain that VA would 
have no liability on account of a guaranty or insurance of a loan, or 
any certificate or other evidence thereof, if--a signature to the note, 
the mortgage, or any other loan papers is a forgery; the application 
for guaranty or insurance is a forgery; or the certificate of discharge 
or the certificate of eligibility is counterfeited or falsified, or is 
not issued by the Government.
    The current rule's phrase, ``Subject to the incontestable 
provisions,'' would be deleted. The deletion is because, for some 
readers, the phrase can perhaps give the wrong impression that VA has 
no enforcement authority over a guaranteed loan. It is VA's position 
that the introductory clause was inserted originally to emphasize what 
was, at the time, a newly enacted law providing more guaranty 
stability. VA has not intended the phrase to imply that VA has no way 
of addressing losses caused by forgeries, fraud, or material 
misrepresentations, nor has VA applied it that way.
    Another historical reference that is not necessary anymore is the 
date, July 1, 1948. References in paragraph (a) to the date ``July 1, 
1948'' would be deleted, because VA's guaranty portfolio no longer 
includes any loans made that long ago. Any substantive difference that 
may have applied at one point has been overtaken by time.
    In short, the substance under which VA applies paragraph (a) today 
would not change under the proposed rule's paragraph (a). The proposal 
would instead eliminate outdated text for clearer intent.
2. Material Misrepresentation by a Lender
    VA would replace current paragraph (b) of Sec.  36.4328 by 
inserting the heading, ``Material misrepresentation by a lender'', and 
specifying the actions VA may take after learning of a material 
misrepresentation. Specifically, the rule would provide that if a 
lender knew or should have known of a material misrepresentation at the 
time of reporting the loan to VA under Sec.  36.4303, VA may adjust the 
maximum guaranty amount on the LGC or demand indemnification from the 
lender. Paragraph (b)(1) would apply to instances where a material 
misrepresentation is identified before VA issues the LGC. Paragraph 
(b)(2) would apply to instances where a material misrepresentation is 
identified after VA issues the LGC. Paragraph (b)(3) would provide an 
opportunity for the lender to take corrective action, when the 
Secretary determines it appropriate, and either have the full guaranty 
amount restored or cancel the indemnification, as applicable.
    Under paragraph (b)(1) of Sec.  36.4328, which would include the 
heading, ``Material misrepresentation is identified before VA issues 
the loan guaranty certificate'', VA would notify the lender of VA's 
findings that the lender made a material misrepresentation when 
reporting the loan and would issue the loan guaranty certificate with a 
maximum guaranty amount of one dollar. For example, in a situation 
where a lender reported to VA a $400,000 loan but VA found an improper 
charge of $100, VA would, under paragraph (b)(1), notify the lender 
that the LGC is issued in the amount of $1 rather than the expected 
$100,000.
    Under paragraph (b)(2), which would address, as the heading would 
indicate, instances where a ``Material misrepresentation is identified 
after VA issues the loan guaranty certificate,'' VA would notify the 
originating lender of VA's findings and that the maximum guaranty 
amount on the loan has been reduced to $1, if the originating lender is 
the current loan holder. Alternatively, if the originating lender is 
not the current loan holder, VA would require the originating lender to 
indemnify VA, as provided in paragraph (c).
    Paragraph (b)(3) of Sec.  36.4328 would be introduced with the 
heading, ``Corrective action by lender.'' Paragraph (b)(3)(i) would 
explain that, when notifying the lender of VA's findings under 
paragraph (b)(1) or (2), VA would also identify corrective action(s), 
if any, VA determines necessary to remediate the effects of the 
material misrepresentation. After VA receives evidence confirming the 
effects of the material misrepresentation have been remediated, VA 
would either restore the guaranty to the full amount or cancel the 
indemnification, as applicable. Paragraph (b)(3)(ii) would state that, 
if VA determines the effects of the material misrepresentation cannot 
be remediated, VA would not offer the originating lender the 
opportunity to take corrective action. VA would require the originating 
lender to indemnify VA, as provided in paragraph (c).

[[Page 91628]]

    The proposed revisions would improve the readability of the 
regulation; not change the substantive way VA conducts oversight and 
works with lenders and holders to help ensure a fair outcome for VA, 
veterans, lenders, and holders. For example, consistent with current 
policy, VA would not limit the application of the regulation to 
commissions of fraud, as violations resulting from misrepresentations 
that were made without malintent can be just as damaging to veterans 
and the Government as an act of fraud. It is longstanding policy that, 
when VA finds a veteran has been wrongly charged a fee, for example, VA 
does not need a finding of fraud to instruct the lender to reimburse 
the veteran for the improper charge. VA instructs the lender that the 
charge must be reimbursed. VA notes, too, that the applicable statute 
does not, in authorizing VA to assert defenses, mention intent. See 38 
U.S.C. 3721.
    Similarly, VA has for some time offered lenders the opportunity to 
indemnify VA against any eventual loss when the lender violated one of 
VA's regulations. Although VA has not codified the procedure explicitly 
until now, the indemnification process has proven effective for all 
stakeholders. The veteran continues to receive all the advantages that 
accompany a VA-guaranteed loan. The holder continues to be able to rely 
on the guaranty. The market continues to consider the VA guaranty a 
premium certification. Importantly, too, VA continues to be able to 
protect the taxpayer against losses VA would not have incurred had VA 
known of a violation at the time of issuing the LGC, using a common 
risk-shifting mechanism in the financial industry.
    VA would delete the term ``willful'' from the current rule, but 
again, VA does not expect that lenders or holders would notice a change 
in VA's approach. As with the illustration regarding the improper $100 
charge, VA already considers the improper charge a material 
misrepresentation, even if just the lender's mistake. This is because 
the lender is responsible for ensuring its own compliance with VA's 
statutes and regulations. Yet, the lender submitted the loan for 
guaranty, requesting a higher guaranty amount than VA would have 
guaranteed had VA known of the improper charge. Plus, the veteran who 
obtained the guaranteed loan has been wrongly required to pay $100, and 
VA believes that, in such a circumstance, the veteran deserves to be 
made whole by the lender. VA also already works with the lender to 
ensure the veteran is reimbursed for the improper charge. Thus, the 
proposed rule would more specifically outline current procedures than 
the current rule does but would not change the expectations lenders and 
holders have come to rely on.
    VA understands the importance of being able to rely on VA's 
guaranty, particularly given how critical it is to the secondary 
investment market, which supplies to many in the lending industry the 
liquidity necessary for making VA-guaranteed loans. VA believes the 
additional clarity under the proposed rule would help further that 
stability, rather than detract from it, as it would make clearer the 
policies and procedures VA has employed for some time in addressing 
noncompliance. Yet at the same time, the revision would serve as a 
clear reminder to lenders that in originating loans or servicing loans 
of veterans with VA-guaranteed loans, the lender must ensure the 
representations they make to VA align with the facts as represented.
3. Indemnification by the Lender
    VA would, under the heading ``Indemnification after VA issues the 
loan guaranty certificate,'' replace paragraph (c) of Sec.  36.4328 to 
codify the indemnification process applicable to a loan where fraud or 
a material misrepresentation is identified after VA has issued the LGC. 
One type of indemnification, applicable to noncompliance with 
underwriting requirements in Sec.  36.4340, would have a 5-year term, 
including any subsequent interest rate reduction refinancing loans, 
under proposed paragraph (c)(1). The other type of indemnification 
would apply to noncompliance for reasons other than underwriting 
decisions under Sec.  36.4340. Under proposed paragraph (c)(2), the 
duration of this latter type would last the life of the loan, including 
any subsequent interest rate reduction refinancing loans.
    Proposed paragraph (c)(1) of Sec.  36.4328 would include the 
heading of, ``Violations of underwriting requirements'', and state 
that, if VA determines the originating lender made a material 
misrepresentation relating to the credit underwriting of a loan 
pursuant to the provisions of Sec.  36.4340, the originating lender 
must abstain from filing a guaranty or insurance claim in the event of 
a loan default and must indemnify VA for any and all losses arising 
from or related to a guaranty or insurance claim made on the loan 
within five years of the date of the loan guaranty certificate, 
including any subsequent interest rate reduction refinancing loans. A 
few examples of material misrepresentations related to the provisions 
of Sec.  36.4340 are failures to (i) verify assets, employment, and 
credit reports (38 CFR 36.4340(j)); (ii) determine or accurately 
determine the veteran's acceptable debt-to-income ratio (38 CFR 
36.4340(c)); or (iii) ensure residual income guidelines were met (38 
CFR 36.4340(e)).
    The proposed five-year indemnification for underwriting 
deficiencies would reflect VA's longstanding policy that underwriting 
is critical to a lender's assessment of a veteran's ability to repay, 
while also recognizing that as time passes any underwriting 
deficiencies are less likely to be responsible for a loan default by 
the veteran. VA believes that five years of stable payment history by 
the veteran provides enough time to assure VA that any default 
thereafter is likely due to factors unrelated to any underwriting 
deficiencies at origination. VA also believes a shorter period does not 
offer adequate protection against preventable defaults or deterrence 
against lenders who might otherwise adopt a pattern of noncompliance as 
a business model. A longer timeframe, however, may unduly damage 
lenders' interests and affect lender participation in helping to 
deliver the home loan benefit to veterans.
    To further support VA's proposed five-year indemnification policy, 
VA reviewed the performance of 157 indemnified loans with five-year 
agreements signed on or after January 12, 2017. Historically, VA-
guaranteed loans have maintained some of the lowest foreclosure rates 
in the industry, often below one percent. However, VA observed 12 
foreclosures that occurred within the five-year indemnification period 
as opposed to only two foreclosures outside of the five-year 
indemnification period. Further, one-third of foreclosures occurring 
during the indemnification period (four out of 12 foreclosures) 
happened between years three and five. Based on this analysis, VA 
proposes to continue its current policy of requiring a five-year 
indemnification period for any underwriting deficiencies.
    The proposed carryover to include interest rate reduction refinance 
loans likewise reflects VA's longstanding policy. Interest rate 
reduction refinance loans, unlike purchase loans and cash-out refinance 
loans, are guaranteed using the veteran's same entitlement from the 
loan being refinanced and do not require a new, full underwriting. See 
38 U.S.C. 3710(e) and 38 CFR 36.4307. Because of this, the same risks 
associated with noncompliance in the original underwriting violations 
are associated with the interest rate reduction refinance loan. If VA 
were not to apply the indemnification,

[[Page 91629]]

unscrupulous lenders could avoid accountability because of a loophole 
(for example, through strategic noncompliance, then an interest rate 
reduction refinance loan, along with another origination fee to the 
lender, to thwart enforcement). Thus, VA believes it is necessary to 
close the loophole by ensuring the indemnification continues to cover 
interest rate reduction refinances, as well as the original loan, 
during the five-year indemnification period.
    VA also proposes that recovery under the indemnification would be 
irrespective of whether the material misrepresentation in the loan 
underwriting directly leads to a loan default. VA's current standard 
practice for indemnification agreements is not based on VA having to 
establish a causal connection between the violation and the default, 
and VA believes establishing causation as a threshold would be 
inconsistent with proper risk management practices. Additionally, 
investigations necessary to establish the cause would be overly taxing 
on VA's limited resources, especially when viewed in light of the fact 
that, if VA had known of the underwriting violation, VA never would 
have guaranteed the loan in the first place.
    Under proposed paragraph (c)(2) of Sec.  36.4328, an originating 
lender would be required to indemnify VA for a longer period for the 
originating lender's fraud or for the originating lender's material 
misrepresentation related to non-underwriting violations. Specifically, 
paragraph (c)(2) would include the heading, ``Non-underwriting related 
violations'', and would state that if VA determines the originating 
lender committed fraud or made an uncorrectable material 
misrepresentation relating to noncompliance with requirements other 
than those prescribed in Sec.  36.4340, the originating lender must 
abstain from filing a guaranty or insurance claim in the event of a 
loan default and must indemnify VA for any and all losses arising from 
or related to a guaranty or insurance claim, for the life of the loan, 
including any subsequent interest rate reduction refinancing loans.
    Regarding fraud, VA believes there should not be a scenario where a 
lender can choose whether defrauding the Government is financially 
worth the risk. VA does not tolerate fraud. Indemnification for the 
life of the loan, as well as for any later interest rate reduction 
refinance loans, would protect the veteran by ensuring that the veteran 
receives all the loan servicing advantages that accompany a VA-
guaranteed loan and would protect the government against any losses.
    Even if made without fraudulent intent, a material 
misrepresentation that cannot be remediated or one that is not related 
to underwriting noncompliance can leave violations unresolved over the 
duration of the loan. The defects simply cannot be resolved. 
Accordingly, VA believes it is appropriate, and consistent with sound 
financial practice common among industry participants, to shift the 
risk from the entity harmed by the material misrepresentation (in this 
case, veterans, the integrity of VA's program, and taxpayers at-large) 
back to the originating lender that knew or should have known of an 
uncorrectable noncompliance. The indemnification would be irrespective 
of whether material misrepresentation is causally connected to a 
default and would apply to later interest rate reduction refinance 
loans, for the reasons explained above.
    In proposed paragraph (c)(3), under the heading ``Notice of 
indemnification'', VA would specify that the Secretary would notify the 
lender when VA determines that a loan is subject to indemnification.
    Procedurally, a paper agreement would no longer be used when 
completing an indemnification agreement. When VA discovers a fraud or 
material misrepresentation, VA and the originating lender would 
communicate via one or more of the designated APIs described under 
proposed Sec.  36.4303. This would provide more efficiency, require 
fewer resources, and align with industry expectations of using 
technology to help ease administrative burden.
4. Guaranty Adjustments to Holders
    VA proposes to add a new paragraph (d) to 38 CFR 36.4328, under the 
heading, ``Guaranty adjustments to holder'', to reduce possible 
confusion surrounding the current regulation's application to holders. 
VA proposes paragraph (d)(1), with the heading, ``Fraud in obtaining 
the guaranty or insurance'', to provide that VA would have no liability 
on account of a guaranty or insurance, or any loan guaranty 
certificate, with respect to a transaction in which VA determines the 
holder or holder's agent participated in fraud in obtaining the 
guaranty or insurance. In other words, the holder is not a holder in 
due course if the holder colluded with the originating lender in 
defrauding VA. So, the rule would mean that, even if a holder was not 
the originating lender, if the holder was directly involved or 
complicit in the fraud at origination, VA would not have liability on 
the guaranty.
    In proposed paragraph (d)(2), VA would state, under the heading 
``Holder fraud in obtaining a claim payment on the guaranty or 
insurance'', that VA would have no liability on a guaranty or insurance 
claim if the holder commits fraud in obtaining a claim payment from VA 
on the guaranty or insurance of a loan. As explained in the paragraphs 
related to fraud by lenders, VA believes a holder that commits fraud 
against the government forfeits the protections Congress wanted to 
provide the secondary market under 38 U.S.C. 3721.
    Paragraph (d)(3) would include the heading ``Material 
misrepresentations related to the quantum or quality of title'', and 
would state that VA may adjust the amount of the guaranty or insurance, 
or any loan guaranty certificate, if VA determines the holder knew or 
should have known, at the time the holder reports the loan for guaranty 
claim, of a material misrepresentation as to the quantum or quality of, 
or title to, the property securing the loan such that the property 
would not have been acceptable to prudent lending institutions, 
investors, informed buyers, title companies, and attorneys, generally, 
in the community in which the property is situated. VA would not, 
however, adjust the guaranty or insurance amount for title exceptions 
enumerated as acceptable under Sec.  36.4354(b), unless otherwise 
specified in subpart B.
    The proposed phrasing is almost identical to the current rule. The 
changes are intended as clarifications. For instance, VA would replace 
``limitations'' under Sec.  36.4354(b) with ``title exceptions 
enumerated as acceptable,'' to eliminate some of the current ambiguity 
that may surround VA's intent. Similarly, VA would add the caveat 
``unless otherwise specified'' in subpart B, to remind readers that the 
rule is part of a coherent and consistent framework and cannot be taken 
out of context. A good example of how this might apply can be found in 
Sec.  36.4327, which addresses authorized and unauthorized releases of 
security. If a holder allowed a new oil and gas lease--a type of title 
exception that could generally be acceptable under Sec.  36.4354(b)--
but did so without following the steps prescribed in Sec.  36.4327 for 
partial releases in interest, the unauthorized release could affect the 
amount of guaranty payable on an eventual default. This is the way VA 
applies the current rule, but VA believes the current rule's text may 
not express it clearly enough. Thus, VA believes that, as a part of 
this regulatory update, VA should specify the scope of the rule more 
explicitly.

[[Page 91630]]

    Paragraph (d)(4) would include the heading ``Noncompliance with 
servicing requirements and material misrepresentation in reporting.'' 
Paragraph (d)(4)(i) would provide that VA may adjust amounts payable to 
the holder if VA determines the holder failed to comply with the 
statutory requirements under 38 U.S.C. chapter 37 or the implementing 
regulations concerning guaranty or insurance of loans to veterans at 38 
CFR part 36 or if VA determines the holder knew or should have known of 
a material misrepresentation in reporting to the Secretary or in 
submitting a claim to VA for payment of the guaranty or insurance. 
Paragraph (d)(4)(ii) would specify that the burden of proof would be 
upon the holder to establish that no increase of ultimate liability is 
attributable to such failure or misrepresentation. Paragraph 
(d)(4)(iii) would explain that the amount of increased liability of the 
Secretary would be offset by deduction from the amount of the guaranty 
or insurance otherwise payable, or if based upon loss related to 
property that secured the guaranteed loan, would be offset by crediting 
to the indebtedness the amount of the impairment as proceeds of the 
sale of security in the final accounting to the Secretary. Paragraph 
(d)(4)(iv) would provide that, to the extent the loss resultant from 
the failure or misrepresentation prejudices the Secretary's right of 
subrogation, acceptance by the holder of the guaranty or insurance 
payment would subordinate the holder's right to those of the Secretary.
    In revising the rule, VA would eliminate the list of potential 
reasons for adjustment found in current paragraphs (b)(1) through (9). 
Stakeholders should not misconstrue this change to mean that VA would 
no longer consider the failures outlined in the current rule as reasons 
to adjust the guaranty. Rather, VA simply believes that the new rewrite 
would eliminate the need to enumerate them in the current way. For 
instance, current paragraph (b)(1) of Sec.  36.4328 reminds that one of 
the fundamental requirements for a VA-guaranteed loan is that it be 
obtained and retained as a superior lien. See 38 CFR 36.4328(b)(1). See 
also, for example, 38 U.S.C. 3703(d) and 38 CFR 36.4327. The proposed 
rule would omit the specific enumeration of this as an example of a 
failure that would result in an adjustment. But even so, VA would, 
under the proposed rule, still adjust the guaranty for such a failure, 
because proposed paragraph (d)(4)(i) would provide that VA may adjust 
the amount of the guaranty or insurance, or any loan guaranty 
certificate, if VA determines the holder failed to comply with the 
statutory requirements under 38 U.S.C. chapter 37 or the implementing 
regulations concerning guaranty or insurance of loans to veterans. VA 
welcomes comment on whether stakeholders would prefer to retain a more 
illustrative list as a way of providing stakeholders further 
understanding. VA does not intend for an attempt at simplification of 
the rule to result in holders being unsettled about the reliability of 
the guaranty; nor does VA want veterans, consumer advocates, or those 
concerned about the welfare of program solvency to be concerned about 
the scope of the change.
5. Liability After Payment of Guaranty or Insurance, or VA Purchase
    VA would redesignate current paragraph (c) of 38 CFR 36.4328 as new 
paragraph (e). VA would revise new paragraph (e) to clarify the wording 
for readability, but the proposed change is not substantive.
6. Additional Remedies
    In Sec.  36.4328, VA would add a new paragraph (f), under the 
heading, ``Additional remedies'', to ensure full transparency related 
to VA's enforcement authorities. VA would provide that, any action VA 
takes under this section may be taken in addition to other remedies 
available to VA, such as debarment and suspension pursuant to 38 U.S.C. 
3704 and 2 CFR parts 180 and 801 or loss of automatic processing 
authority pursuant to 38 U.S.C. 3702, or other actions by the 
Government under any other law including but not limited to title 18 
U.S.C. and 31 U.S.C. 3732. Although the paragraph is not legally 
necessary to preserve VA's rights of enforcement, VA believes an 
intentional, explicit redundancy would be helpful in emphasizing the 
point that this section does not constitute the full range of potential 
action VA could or would take if VA discovered, for instance, a pattern 
of intentional material misrepresentations, seemingly incorporated into 
business practices after a monetary cost-benefit calculus.
    Lastly, VA would revise the authority citation for Sec.  36.4328 to 
note 38 U.S.C. 3703, 3704, 3710, 3720, 3721, and 3732.

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 
proposed rulemaking 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.

Regulatory Flexibility Act

    The Secretary hereby certifies that 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). To assess whether the proposed rule could be expected 
to have a ``significant economic impact'' on a substantial number of 
small entities, VA considers the annual costs and transfer payments of 
the rule for and from small entities compared to their annual revenue. 
As described in the impact analysis, the estimated impacts of this 
rulemaking on lenders include transfers from lenders to VA associated 
with overcharge fees and guarantee claim amounts, the cost of rule 
familiarization and system updates to lenders, and cost savings 
associated with reduced burden associate with API utilization. A more 
detailed discussion of these impacts can be found in the impact 
analysis.
    VA was able to estimate the size of 1,203 out of 1,450 active 
lenders that originated VA loans within the past three fiscal years 
using a combination of sources. VA relied on the size standards from 
the Small Business Administration (SBA) \1\ and used data from Data 
Axle and Factiva (two business data providers) along with data from the

[[Page 91631]]

Federal Deposit Insurance Corporation (FDIC) and the National Credit 
Union Administration (NCUA).\2\ Of the 1,203 lenders with sufficient 
data for VA to estimate their size, 703 (58.4%) are considered small. 
The average annual revenue of these 640 lenders is estimated at $25.51 
million.\3\
---------------------------------------------------------------------------

    \1\ U.S. Small Business Administration, SBA Table of Size 
Standards, Retrieved from: https://www.sba.gov/document/support-table-size-standards.
    \2\ VA uses data from Data Axle and Factiva to determine the 
industry (as identified by the primary North American Industry 
Classification System [NAICS] code) for the active VA home loan 
lenders. For industries where size standards are determined by 
annual revenue, VA compares the revenue of each lender in these 
industries as reported in Data Axle and Factiva to the SBA annual 
revenue threshold for small businesses. For industries where size 
standards are determined by assets, VA compares the relevant SBA 
threshold for small businesses to asset data from the FDIC for 
lenders with primary NAICS codes 522110 (Commercial Banking) and 
522180 (Savings Institutions and Other Depository Credit 
Intermediation), and asset data from the NCUA for lenders with a 
primary NAICS code of 522130 (Credit Unions).
    \3\ VA averages the sales volumes from Data Axle and Factiva for 
all lenders considered small, including those primarily considered 
commercial banks, savings institutions, and credit unions.
---------------------------------------------------------------------------

    The costs of the one-time rule familiarization in the first year of 
the rule (fiscal year [FY] 2025) are estimated at approximately $240 
for each lender, including the small lenders. VA estimates that the net 
cost savings to lenders from the reduction in reporting burdens and 
system updates ranges from $1,066 (FY 2025) to $1,110 (FY 2034) per 
small lender.\4\ The estimated transfer payment from lenders in the 
form of overcharge fees and guarantee claim amounts ranges from $2,547 
(FY 2025) to $9,373 (FY 2034) per small lender. Adding these impacts 
results in the average estimated annual burden of [$2,547 + $240 -
$1,066 = ] $1,721 to [$9,373 -$1,110 = ] $8,263 per small lender from 
the first and final years of the analysis period (FY 2025 and FY 2034), 
respectively. VA considers a significant economic impact to equal or 
exceed 3 percent of annual revenue. The burden of the rule as a 
proportion of small lender revenue ranges from 0.007 percent to 0.032 
percent for FY 2025 and FY 2034, respectively. On this basis, the 
Secretary certifies that adopting 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. Therefore, under 
5 U.S.C. 605(b), the initial and final regulatory flexibility analysis 
requirements of 5 U.S.C. 603 and 604 do not apply.
---------------------------------------------------------------------------

    \4\ VA scales the costs/transfers by first dividing the total 
average annual volume of loans guaranteed by small lenders in the 
past three full fiscal years (319,924) by the total average annual 
loans guaranteed in the same period by all lenders with enough 
information to classify their size (1,004,465). Multiplying that 
ratio (31.85) by the total costs and transfers that vary depending 
on lender size gives VA the total costs and transfers that fall on 
small lenders. Dividing the total costs and transfers that fall on 
small lenders by the total estimated number of small lenders (703), 
which is the percent of small lenders from the classified population 
(58.4%) multiplied by all VA lenders (1,450)) provides the average 
annual cost and transfers for and from each small lender.
---------------------------------------------------------------------------

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 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

    As noted above, this proposed rule contains collections of 
information under the provisions of the Paperwork Reduction Act of 1995 
(44 U.S.C. 3501-3521) that are currently approved by OMB but do not 
require revision. These information collections have valid OMB control 
numbers of 2900-0516 and 2900-0521. Additionally, this proposed rule 
includes provisions constituting a revised collection of information 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) that 
requires approval by OMB under existing OMB control number 2900-0909. 
Accordingly, under 44 U.S.C. 3507(d), VA has submitted a copy of this 
rulemaking action to OMB for review and approval.
    OMB assigns control numbers to collections of information it 
approves. VA may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. If OMB does not approve the 
collection of information as requested, VA will immediately remove the 
provisions containing the collection of information or take such other 
action as is directed by OMB.
    Comments on the revised collection of information contained in this 
rulemaking should be submitted through www.regulations.gov. Comments 
should be sent within 60 days of publication of this rulemaking. The 
collection of information associated with this rulemaking can be viewed 
at: www.reginfo.gov/public/do/PRAMain.
    OMB is required to make a decision concerning the collection of 
information contained in this rulemaking between 30 and 60 days after 
publication of this rulemaking in the Federal Register. Therefore, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. This does not affect the 
deadline for the public to comment on the provisions of this 
rulemaking.
    The Department considers comments by the public on a revised 
collection of information in--
     Evaluating whether the revised collection of information 
is necessary for the proper performance of the functions of the 
Department, including whether the information will have practical 
utility;
     Evaluating the accuracy of the Department's estimate of 
the burden of the revised collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    The revised collection of information associated with this 
rulemaking contained in 38 CFR 36.4303 is described immediately 
following this paragraph, under its respective title.
    Title: Guaranteed or Insured Loan Reporting Requirements.
    OMB Control No: 2900-0909.
    CFR Provision: 38 CFR 36.4303.
     Summary of collection of information: The revised 
collection of information would require all lenders that participate in 
the VA-guaranteed home loan program to submit the reporting and 
certification requirements as noted in proposed 38 CFR 36.4303 in an 
electronic format using an API, as designated by the Secretary. While 
VA currently requires lenders to report certain loan information and 
certifications as part of the existing loan guaranty certificate and 
reporting process, this proposed rule would require additional 
information including the loan application (e.g., Uniform Loan 
Application Dataset), closing disclosures (e.g., Uniform Closing 
Dataset), and other information necessary for VA evaluation and 
oversight purposes. Additionally, lenders would be required to submit 
information using an API rather than the current system, WebLGY.
     Description of need for information and proposed use of 
information: VA would use this information to ensure that veterans have 
stronger protections

[[Page 91632]]

against lenders closing nonconforming loans through increased VA 
oversight, as the Guaranty Remittance API would allow VA to review 100 
percent of guaranteed loans for policy conformance with certain VA 
statutory and regulatory requirements that VA only currently evaluates 
on three percent of loans as part of its full file loan review and 
audit processes. Specifically, VA would be able to evaluate loan 
closing data on 100 percent of guaranteed loans for VA policy 
conformance with certain statutory, regulatory, or other requirements. 
As a result, VA would be able to cite defenses to paying the guaranty 
based on fraud or material misrepresentation and establish partial 
defenses to the amount payable on the guaranty or insurance. Lenders 
and holders would have a clear understanding of how failure to comply 
with VA's statutory and regulatory requirements affect the guaranty to 
be paid by VA.
     Description of likely respondents: Lenders.
     Estimated number of respondents:
    Loans reported and certified: 484,019 annually.
    Loans requiring VA prior approval: 1,815 annually.
    Loans requiring Late Reporting Statements: 24,201 annually.
     Estimated frequency of responses: One time per 
transaction.
     Estimated average burden per response:
    Loans reported and certified: 0.008 hours (about 30 seconds). This 
proposed rulemaking would result in an estimated reduction of 0.15 
average burden hour per response (about 9 minutes) for this information 
collection.
    Loans requiring VA prior approval: 0.008 hours (about 30 seconds). 
This proposed rulemaking would result in an estimated reduction of 0.04 
average burden hour per response (about 2 minutes and 30 seconds) for 
this information collection.
    Loans requiring Late Reporting Statements: 0.03 hours (about 2 
minutes). VA does not estimate any incremental change to the average 
burden hour per response for this information collection.
     Estimated total annual reporting and recordkeeping burden: 
VA estimates a total annual reporting and recordkeeping burden of 4,612 
hours for lenders. Using VA's revised estimate of total annual 
responses (loans) of 484,019 (down from 843,150 loans) loan estimate, 
this rulemaking would result in incremental annual burden hour savings 
of 72,675 burden hours.
    Loans reported for Guaranty (including prior approval): 3,886 hours 
((484,019+1,815) x 0.008 hours).
     Estimated cost to respondents per year: VA estimates the 
annual burden cost to lenders to be $187,339.\5\ Using VA's revised 
estimate of total annual responses (loans) of 484,019, this rulemaking 
would result in incremental annual burden cost savings of $2,836,172 
for FY 2025 (average of high/low estimated net cost savings) and 
incremental annual burden cost savings of $2,952,050 in the following 
outyears.
---------------------------------------------------------------------------

    \5\ Bureau of Labor Statistics. (2024). May 2023-National 
Occupational Employment and Wage Estimates. Retrieved from: https://www.bls.gov/oes/current/oes_nat.htm; Occupation code 13-2072.
---------------------------------------------------------------------------

     VA also estimates this proposed rulemaking results in a 
one-time system alignment cost to lenders and LOS providers ranging 
from $88,288 to $143,468. More details about this estimate can be found 
in the impact analysis.

List of Subjects in 38 CFR Part 36

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

Signing Authority

    Denis McDonough, Secretary of Veterans Affairs, approved and signed 
this document on November 12, 2024, 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.

    For the reasons stated in the preamble, the Department of Veterans 
Affairs proposes to amend 38 CFR part 36 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 3720.

Subpart B--Guaranty or Insurance of Loans to Veterans with 
Electronic Reporting

0
2. Revise and republish Sec.  36.4303 to read as follows:


Sec.  36.4303  Reporting requirements.

    (a) Automatically guaranteed loans. (1) For loans automatically 
guaranteed under 38 U.S.C. 3703(a)(1), a lender of a class described 
under 38 U.S.C. 3702(d) shall report the loan in an electronic format 
using an application programming interface, as designated by the 
Secretary. VA will announce in the Federal Register any designation of 
a new application programming interface at least 60 days before a 
lender would be required to use the application programming interface 
for reporting the loan. The lender must also submit the information 
required under paragraph (a)(2) of this section using the application 
programming interface designated by the Secretary.
    (2) The lender must submit the following not later than 15 days 
after the loan closing date:
    (i) The appropriate funding fee as prescribed by 38 U.S.C. 3729;
    (ii) Required information regarding the loan, including but not 
limited to the loan application (e.g., Uniform Loan Application 
Dataset), closing disclosures (e.g., Uniform Closing Dataset), and any 
other information required by the Secretary as necessary to issue a 
loan guaranty certificate;
    (iii) Required lender certifications related to the loan; and
    (iv) Certification of the veteran at the time the loan is closed as 
to their occupancy of the property.
    (A) In the case of a loan for the purchase or construction of a 
residential property, the veteran shall certify that the veteran 
intends to occupy such property as the veteran's home.
    (B) In the case of a loan for the repair, alteration, or 
improvement of residential property, the veteran shall certify that the 
veteran presently occupies the property as the veteran's home. An 
exception to this paragraph (a)(2)(iv)(B) is if the home improvement or 
refinancing loan is for extensive changes to the property that will 
prevent the veteran from occupying the property while the work is being 
completed. In such a case, the veteran shall certify that the veteran 
intends to occupy or reoccupy the property as the veteran's home upon 
completion of the substantial improvements or repairs.
    (C) In the event a veteran is in active-duty status as a member of 
the Armed Forces and is unable to occupy the property because of such 
status, VA will accept:
    (1) A certification from the spouse of the veteran that the 
veteran's spouse occupies or intends to occupy the property as their 
home as required by paragraphs (a)(2)(iv)(A) and (B) of this section; 
or
    (2) A certification from the veteran's attorney-in-fact or from the 
legal guardian of a dependent child of the veteran that the dependent 
child

[[Page 91633]]

occupies or intends to occupy the property as the dependent child's 
home as required by paragraphs (a)(2)(iv)(A) and (B) of this section.
    (D) In the case of an interest rate reduction refinancing loan, the 
veteran shall certify as to meeting one of the occupancy requirements 
at Sec.  36.4307(a)(2).
    (3) Upon acceptance of the information prescribed in paragraph 
(a)(2) of this section, VA shall issue the loan guaranty certificate 
subject to the provisions of Sec.  36.4328.
    (b) Prior-approval loans. (1) In the case of a loan made by a 
lender without the authority to close loans on an automatic basis or 
any loan where the Secretary provides advance notice of the need for 
prior approval, the lender must report the loan to the Secretary before 
the loan closing for the Secretary's review. The lender must report the 
loan in an electronic format and, if designated by the Secretary, using 
an application programming interface. VA will announce in the Federal 
Register any designation of a new application programming interface at 
least 60 days before a lender would be required to use the application 
interface for reporting the loan for review prior to the loan closing. 
The lender must also submit the information required under paragraph 
(b)(2) of this section.
    (2) The lender must submit certain pre-closing and underwriting 
loan documents, including but not limited to--
    (i) The loan application (e.g., Uniform Residential Loan 
Application);
    (ii) Credit reports obtained in connection with the loan;
    (iii) Certain VA forms as required by the Secretary;
    (iv) The occupancy certification prescribed in paragraph (a)(2)(iv) 
of this section obtained at the time of loan application; and
    (v) Any other information requested by the Secretary.
    (3) Upon review and approval of the of the information prescribed 
by paragraph (b)(2) of this section, VA shall:
    (i) Issue a certificate of commitment which shall commit a loan 
guaranty certificate to the holder of the loan upon the payment of the 
full proceeds of the loan for the purposes described in the original 
report and provided the requirements in paragraph (b)(4) of this 
section are met; or
    (ii) Notify the lender that the loan cannot close as a VA-
guaranteed loan; however, the lender may resubmit the loan to VA for 
prior approval after the lender corrects any issues identified by VA.
    (4) The lender would be required to report the loan to VA not later 
than 15 days after the loan closing date using the same application 
programming interface (API) as when reporting loans closed on an 
automatic basis. The lender must also submit the following, using the 
designated API, not later than 15 days after the loan closing date:
    (i) The appropriate funding fee as prescribed by 38 U.S.C. 3729;
    (ii) The information prescribed in paragraph (a)(2)(ii) of this 
section;
    (iii) Evidence that any conditions identified by the Secretary in 
the certificate of commitment are satisfied in order for the Secretary 
to issue a loan guaranty certificate;
    (iv) Evidence showing the property securing the loan is that for 
which the certificate of commitment was issued;
    (v) Evidence that all property purchased or acquired with the 
proceeds of the loan has been encumbered as required by VA;
    (vi) Required lender certifications for the loan; and
    (vii) The occupancy certification prescribed in paragraph 
(a)(2)(iv) of this section obtained at the time of loan closing.
    (5) Upon acceptance of the information prescribed in paragraph 
(b)(4) of this section, VA shall issue the loan guaranty certificate 
subject to the provisions of Sec.  36.4328.
    (6) If the lender does not close the loan for which VA prior 
approval was obtained, the certificate of commitment shall have no 
further effect.
    (c) Late reporting of closed loans. For loans not reported within 
the timing requirements of this section, evidence of guaranty will be 
issued only if the loan report is accompanied by a statement from the 
lending institution that explains why the loan was reported late and 
whether, since origination, the loan was in default. The statement must 
identify the case or cases in issue and set forth the specific reason 
or reasons why the loan was not submitted on time. Upon receipt of such 
a statement, evidence of guaranty will be issued. A pattern of late 
reporting and the reasons therefore will be considered by VA in taking 
action under Sec. Sec.  36.4336 and 36.4353.
    (d) Form of guaranty evidence. Evidence of a guaranty shall be 
issued by the Secretary as a loan guaranty certificate. For insured 
loans, notice of credit to an insurance account will be given to the 
lender.
    (e) Exclusions from the guaranty or insurance amount. Any amounts 
that are disbursed by a lender for an ineligible purpose shall be 
excluded in computing the amount of guaranty or insurance credit.
    (f) Veteran's right to exit purchase contract. No guaranty or 
insurance commitment or evidence of guaranty or insurance will be 
issuable in respect to any loan to finance a contract that:
    (1) Is for the purchase, construction, repair, alteration, or 
improvement of a dwelling or farm residence;
    (2) Is dated on or after June 4, 1969;
    (3) Provides for a purchase price or cost to the veteran in excess 
of the reasonable value established by the Secretary; and
    (4) Was signed by the veteran prior to the veteran's receipt of 
notice of such reasonable value; unless such contract includes, or is 
amended to include, a provision that reads substantially as follows:

Figure 1 to Paragraph (f)(4)

    It is expressly agreed that, notwithstanding any other provisions 
of this contract, the purchaser shall not incur any penalty by 
forfeiture of earnest money or otherwise be obligated to complete the 
purchase of the property described herein, if the contract purchase 
price or cost exceeds the reasonable value of the property established 
by the Department of Veterans Affairs. The purchaser shall, however, 
have the privilege and option of proceeding with the consummation of 
this contract without regard to the amount of the reasonable value 
established by the Department of Veterans Affairs.
    (g) Processing and reporting a loan assumption. With respect to any 
loan for which a commitment was made on or after March 1, 1988, the 
Secretary must be notified whenever the holder receives knowledge of 
disposition of the residential property securing a VA-guaranteed loan.
    (1) If the seller applies for prior approval of the assumption of 
the loan, then:
    (i) A holder (or its authorized servicing agent) who is an 
automatic lender must examine the creditworthiness of the purchaser and 
determine compliance with the provisions of 38 U.S.C. 3714. The 
creditworthiness review must be performed by the party that has 
automatic authority. If both the holder and its servicing agent are 
automatic lenders, then they must decide between themselves which one 
will make the determination of creditworthiness, whether the loan is 
current, and whether there is a contractual obligation to assume the 
loan, as required by 38 U.S.C. 3714. If the actual loan holder does not 
have automatic authority and

[[Page 91634]]

its servicing agent is an automatic lender, then the servicing agent 
must make the determinations required by 38 U.S.C. 3714 on behalf of 
the holder. The actual holder will remain ultimately responsible for 
any failure of its servicing agent to comply with the applicable law 
and VA regulations.
    (A) If the assumption is approved and the transfer of the security 
is completed, then the notice required by this paragraph (g) shall 
consist of the credit package (unless previously provided in accordance 
with paragraph (g)(1)(i)(B) of this section) and a copy of the executed 
deed and/or assumption agreement as required by VA office of 
jurisdiction. The notice shall be submitted to the Department with the 
VA receipt for the funding fee provided for in Sec.  36.4313(e)(2).
    (B) If the application for assumption is disapproved, the holder 
shall notify the seller and the purchaser that the decision may be 
appealed to the VA office of jurisdiction within 30 days. The holder 
shall make available to that VA office all items used by the holder in 
making the holder's decision in case the decision is appealed to VA. If 
the application remains disapproved after 60 days (to allow time for 
appeal to and review by VA), then the holder must refund $50 of any fee 
previously collected under the provisions of Sec.  36.4313(d)(8). If 
the application is subsequently approved and the sale is completed, 
then the holder (or its authorized servicing agent) shall provide the 
notice described in paragraph (g)(1)(i)(A) of this section.
    (C) In performing the requirements of paragraph (g)(1)(i)(A) or (B) 
of this section, the holder must complete its examination of the 
creditworthiness of the prospective purchaser and advise the seller no 
later than 45 days after the date of receipt by the holder of a 
complete application package for the approval of the assumption. The 
45-day period may be extended by an interval not to exceed the time 
caused by delays in processing of the application that are documented 
as beyond the control of the holder, such as employers or depositories 
not responding to requests for verifications, which were timely 
forwarded, or follow-ups on those requests.
    (ii) If neither the holder nor its authorized servicing agent is an 
automatic lender, the notice to VA shall include:
    (A) Advice regarding whether the loan is current or in default;
    (B) A copy of the purchase contract; and
    (C) A complete credit package developed by the holder which the 
Secretary may use for determining the creditworthiness of the 
purchaser.
    (D) The notice and documents required by this section must be 
submitted to the VA office of jurisdiction no later than 35 days after 
the date of receipt by the holder of a complete application package for 
the approval of the assumption, subject to the same extensions as 
provided in paragraph (g)(1)(i) of this section. If the assumption is 
not automatically approved by the holder or its authorized agent, 
pursuant to the automatic authority provisions, $50 of any fee 
collected in accordance with Sec.  36.4313(d)(8) must be refunded. If 
the Department of Veterans Affairs does not approve the assumption, the 
holder will be notified and an additional $50 of any fee collected 
under Sec.  36.4313(d)(8) must be refunded following the expiration of 
the 30-day appeal period set out in paragraph (g)(1)(i)(B) of this 
section. If such an appeal is made to the Department of Veterans 
Affairs, then the review will be conducted at the Department of 
Veterans Affairs office of jurisdiction by an individual who was not 
involved in the original disapproval decision. If the application for 
assumption is approved and the transfer of security is completed, then 
the holder (or its authorized servicing agent) shall provide the notice 
required in paragraph (g)(1)(i)(A) of this section.
    (2) If the seller fails to notify the holder before disposing of 
property securing the loan, the holder shall notify the Secretary 
within 60 days after learning of the transfer. Such notice shall advise 
whether or not the holder intends to exercise its option to immediately 
accelerate the loan and whether or not an opportunity will be extended 
to the transferor and transferee to apply for retroactive approval of 
the assumption under the terms of this paragraph (g).

(The Office of Management and Budget has approved the information 
collection requirements in this section under control numbers 2900-
0516, 2900-0521, and 2900-0909).

(Authority: 38 U.S.C. 3702, 3703, 3704, 3710, 3714, and 3729)

0
3. Revise and republish Sec.  36.4328 to read as follows:


Sec.  36.4328  Partial or total loss of guaranty or insurance.

    (a) No liability on the guaranty or insurance due to forgery or 
falsification of documents. VA will have no liability on account of a 
guaranty or insurance of a loan, or any certificate or other evidence 
thereof, if--
    (1) A signature to the note, the mortgage, or any other loan papers 
is a forgery;
    (2) The application for guaranty or insurance is a forgery; or
    (3) The certificate of discharge or the certificate of eligibility 
is counterfeited or falsified or is not issued by the Government.
    (b) Material misrepresentation by a lender. If a lender knew or 
should have known of a material misrepresentation at the time of the 
reporting of the loan to VA under Sec.  36.4303, VA may adjust the 
maximum guaranty amount on the loan guaranty certificate or VA may 
demand indemnification from the lender, as provided in paragraph (c) of 
this section.
    (1) Material misrepresentation is identified before VA issues the 
loan guaranty certificate. VA will notify the lender of VA's findings 
that the lender made a material misrepresentation when reporting the 
loan and VA will issue the loan guaranty certificate with a maximum 
guaranty amount of one dollar.
    (2) Material misrepresentation is identified after VA issues the 
loan guaranty certificate. VA will notify the originating lender of 
VA's findings and that--
    (i) If the originating lender is the current loan holder, the 
maximum guaranty amount on the loan has been reduced to one dollar; or
    (ii) If the originating lender is not the current loan holder, VA 
is requiring the lender to indemnify VA for a guaranty or insurance 
claim for the life of the loan, including any subsequent interest rate 
reduction refinancing loans, as provided in paragraph (c) of this 
section.
    (3) Corrective action by lender. (i) When notifying the lender of 
VA's findings under paragraph (b)(1) or (2) of this section, VA will 
also identify corrective action(s), if any, VA determines necessary to 
remediate the effects of the material misrepresentation. After VA 
receives evidence confirming the effects of the material 
misrepresentation have been remediated, VA may either restore the 
guaranty to the full amount or cancel the indemnification, as 
applicable.
    (ii) If VA determines the effects of the material misrepresentation 
cannot be remediated, VA will require the originating lender to 
indemnify VA, as provided in paragraph (c) of this section.
    (c) Indemnification after VA issues the loan guaranty certificate. 
Except as provided in paragraph (b) of this section, for loans closed 
on or after [EFFECTIVE DATE OF FINAL RULE], a

[[Page 91635]]

lender agrees to indemnify VA in accordance with the following:
    (1) Violations of underwriting requirements. If VA determines the 
originating lender made a material misrepresentation relating to the 
credit underwriting of a loan pursuant to the provisions of Sec.  
36.4340, the originating lender must abstain from filing a guaranty or 
insurance claim in the event of a loan default and must indemnify VA 
for any and all losses arising from or related to a guaranty or 
insurance claim made on the loan within five years of the date of the 
loan guaranty certificate, including any subsequent interest rate 
reduction refinancing loans. Examples of a material misrepresentation 
related to the provisions of Sec.  36.4340 include the lender's failure 
to--
    (i) Verify assets, employment, and credit reports (Sec.  
36.4340(j));
    (ii) Determine or accurately determine the veteran's acceptable 
debt-to-income ratio (Sec.  36.4340(c)); or
    (iii) Ensure residual income guidelines were met (Sec.  
36.4340(e)).
    (2) Non-underwriting related violations. If VA determines the 
originating lender committed fraud or made an uncorrectable material 
misrepresentation relating to noncompliance with requirements other 
than those prescribed in Sec.  36.4340, the originating lender must 
abstain from filing a guaranty or insurance claim in the event of a 
loan default and must indemnify VA for any and all losses arising from 
or related to a guaranty or insurance claim, for the life of the loan, 
including any subsequent interest rate reduction refinancing loans.
    (3) Notice of indemnification. The Secretary will notify the lender 
when VA determines that a loan is subject to indemnification.
    (d) Guaranty adjustments to holder--(1) Fraud in obtaining the 
guaranty or insurance. There shall be no liability on account of a 
guaranty or insurance, or any loan guaranty certificate, with respect 
to a transaction in which VA determines the holder or holder's agent 
participated in fraud in procuring the guaranty or insurance.
    (2) Holder fraud in obtaining a claim payment on the guaranty or 
insurance. There shall be no liability on a guaranty or insurance claim 
if the holder commits fraud in obtaining a claim payment from VA on the 
guaranty or insurance of a loan.
    (3) Material misrepresentations related to the quantum or quality 
of title. VA may adjust the amount of the guaranty or insurance, or any 
loan guaranty certificate, if VA determines the holder knew or should 
have known, at the time the holder reports the loan for guaranty claim, 
of a material misrepresentation as to the quantum or quality of, or 
title to, the property securing the loan such that the property would 
not have been acceptable to prudent lending institutions, investors, 
informed buyers, title companies, and attorneys, generally, in the 
community in which the property is situated. VA will not, however, 
adjust the guaranty or insurance amount for title exceptions enumerated 
as acceptable under Sec.  36.4354(b), unless otherwise specified in 
this subpart.
    (4) Noncompliance with servicing requirements and material 
misrepresentation in reporting. (i) VA may adjust the amounts payable 
to the holder if VA determines--
    (A) The holder failed to comply with the statutory requirements 
under 38 U.S.C. chapter 37 or the implementing regulations concerning 
guaranty or insurance of loans to veterans at 38 CFR part 36; or
    (B) The holder knew or should have known of a material 
misrepresentation in reporting to the Secretary or in submitting a 
claim to VA for payment of the guaranty or insurance.
    (ii) The burden of proof would be upon the holder to establish that 
no increase of ultimate liability is attributable to such failure or 
misrepresentation.
    (iii) The amount of increased liability of the Secretary would be 
offset by deduction from the amount of the guaranty or insurance 
otherwise payable, or if based upon loss related to property that 
secured the guaranteed loan, would be offset by crediting to the 
indebtedness the amount of the impairment as proceeds of the sale of 
security in the final accounting to the Secretary.
    (iv) To the extent the loss resultant from the failure or 
misrepresentation prejudices the Secretary's right of subrogation, 
acceptance by the holder of the guaranty or insurance payment would 
subordinate the holder's right to those of the Secretary.
    (e) Liability after payment of guaranty or insurance, or VA loan 
purchase. If after the payment on a guaranty or an insurance loss, or 
after a loan is transferred pursuant to Sec.  36.4320(a), the Secretary 
discovers any fraud, material misrepresentation, or failure to comply 
with the regulations at 38 CFR part 36 and determines that an increased 
loss to the Government resulted therefrom, then the transferor or 
person to whom such payment was made shall be liable to the Secretary 
for the amount of the loss caused by such fraud, material 
misrepresentation, or failure.
    (f) Additional remedies. Any action VA takes under this section may 
be taken in addition to other remedies available to VA, such as 
debarment and suspension pursuant to 38 U.S.C. 3704 and 2 CFR parts 180 
and 801 or loss of automatic processing authority pursuant to 38 U.S.C. 
3702, or other actions by the Government under any other law including 
but not limited to title 18 U.S.C. and 31 U.S.C. 3732.

 (Authority: 38 U.S.C. 3703, 3704, 3710, 3720, 3721, and 3732)


[FR Doc. 2024-26776 Filed 11-19-24; 8:45 am]
BILLING CODE 8320-01-P