Loan Guaranty: Adjustable Rate Mortgages, Hybrid Adjustable Rate Mortgages, and Temporary Buydown Agreements

DEPARTMENT OF VETERANS AFFAIRS <CFR>38 CFR Part 36</CFR> <RIN>RIN 2900-AS08</RIN> <SUBJECT>Loan Guaranty: Adjustable Rate Mortgages, Hybrid Adjustable Rate Mortgages, and Temporary Buydown Agreements</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Department of Veterans Affairs. <HD SOURCE="HED">ACTION:</HD> Proposed rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Department of Veterans Affairs (VA) proposes to amend its rules on interest rates for adjustable rate mortgage (ARM) loans and hybrid adjustable rate mortgage (h-ARM) loans. The proposed rule would ensure VA's existing interest rate regulation reflects current statutory requirements regarding these loans, in a way that makes the loans a more viable, safe product for Veterans. The proposed rule would also solidify requirements for temporary buydown agreements to help Veterans temporarily reduce their interest rates and, in effect, lower their monthly mortgage payments for a specific period of time. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Comments must be received on or before August 20, 2024. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Comments must be submitted through <E T="03">www.regulations.gov.</E> Except as provided below, comments received before the close of the comment period will be available at <E T="03">www.regulations.gov</E> 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 <E T="03">www.regulations.gov</E> as soon as possible after they have been received. VA will not post on <E T="03">Regulations.gov</E> 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 plain language summary (not more than 100 words in length) of this proposed rule is available at <E T="03">www.regulations.gov,</E> under RIN 2900-AS08(P). <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> 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.) </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background and Legal Authority</HD> VA's home loan guaranty program assists eligible Veterans  <SU>1</SU> <FTREF/> to purchase, construct, improve, or refinance a home. Since the benefit was initially introduced in 1944, <SU>2</SU> <FTREF/> Congress has enacted laws expanding the types of loans VA may guarantee. Additionally, sections 3703(c), 3710, and 3720 further provide the Secretary broad discretion in regulating the terms and conditions of loans, establishing underwriting standards, and consenting to modified loan terms such as interest rates. 38 U.S.C. 3703, 3710, and 3720. Lastly, under 38 U.S.C. 501, “[t]he Secretary has authority to prescribe all rules and regulations which are necessary or appropriate to carry out the laws administered by the Department.” Based on these authorities, VA proposes to amend 38 CFR part 36 as discussed below. <FTNT> <SU>1</SU>  The term “Veteran” is more expansive for the home loan program than for some other VA benefits. In addition to Veterans defined at 38 U.S.C. 101, the term includes active duty service members, members of the National Guard and Selected Reserve, surviving spouses, and spouses of those individuals who are determined missing in action or prisoners of war. <E T="03">See</E> 38 U.S.C. 101, 3701, and 3702. For more information, please visit VA's website at <E T="03">https://www.va.gov/housing-assistance/home-loans/eligibility/.</E> </FTNT> <FTNT> <SU>2</SU>  Servicemen's Readjustment Act of 1944, Public Law 78-346, 58 Stat. 284. </FTNT> <HD SOURCE="HD2">A. Adjustable Rate Mortgages and Hybrid Adjustable Rate Mortgages</HD> Two types of loans VA may guarantee are ARM loans pursuant to 38 U.S.C. 3707 and h-ARM loans pursuant to 38 U.S.C. 3707A. Initially, Congress allowed VA to guarantee ARM and h-ARM loans under temporary programs, but VA's authority was eventually made permanent. <SU>3</SU> <FTREF/> <FTNT> <SU>3</SU>  In 1992, Congress authorized VA to guarantee ARM loans beginning in fiscal year (FY) 1993. Veterans Home Loan Program Amendments of 1992, Public Law 102-547, sec. 3(a)(1), 106 Stat. 3633, 3634. This authority, which expired at the end of FY 1995, was later extended through FY 2008, then through FY 2012, and then, in 2012, made permanent. Veterans Benefits Improvement Act of 2004, Public Law 108-454, sec. 404, 118 Stat. 3598, 3616; Veterans' Benefits Improvement Act of 2008, Public Law 110-389, sec. 505, 122 Stat. 4145, 4176; Honoring America's Veterans and Caring for Camp Lejeune Families Act of 2012, Public Law 112-154, sec. 208, 126 Stat. 1165, 1179. Legislation authorizing VA to guarantee h-ARM loans was first enacted in 2002. Veterans Benefits Act of 2002, Public Law 107-330, title III, sec. 303(a), 116 Stat. 2820, 2825. The statutory authority, codified at 38 U.S.C. 3707A, expired at the end of FY 2005 but was later extended through FY 2008, and then through FY 2012. Veterans Benefits Improvement Act of 2004, Public Law 108-454, sec. 405, 118 Stat. 3616-3617; Veterans' Benefits Improvement Act of 2008, Public Law 110-389, sec. 505, 122 Stat. 4176. In 2012, Congress made permanent VA's authority to guarantee h-ARM loans. Public Law 112-154, sec. 209, 126 Stat. 1179. </FTNT> <HD SOURCE="HD2">B. Temporary Buydown Agreements</HD> A temporary buydown agreement is commonly included in a mortgage contract and involves using up-front funds deposited into an escrow account to temporarily reduce the interest rate, effectively lowering the monthly mortgage payment for a specific period lasting anywhere from one to three years. These agreements are often used as a marketing tool for lenders, sellers, and builders, as they provide the Veteran with a lower payment at the beginning of their loan. The up-front funds deposited into an escrow account may be funded by the seller, lender, builder, or Veteran. VA has in recent years permitted the use of temporary buydown agreements  <FTREF/> <SU>4</SU> and proposes to amend 38 CFR part 36 as discussed below to codify the terms and conditions VA finds acceptable. <FTNT> <SU>4</SU>  When temporary buy-down agreements were still considered novel, VA was concerned that a Veteran's payment of the up-front escrows could be considered a “cash-advance fee,” in violation of the regulation at 38 CFR 36.4313. VA published administrative guidance explaining the position. <E T="03">See</E> Circular 26-18-4, “Policy Reminder for Lender's Payment or Credit of Veterans Costs in VA Home Loans” (Feb. 23, 2018), <E T="03">https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_18_4.pdf.</E> Upon better understanding of the buydown arrangements, however, and upon learning that the position could prejudice Veterans' position in the marketplace, VA allowed the Circular to expire (Jan. 1, 2020) without renewal. </FTNT> <HD SOURCE="HD1">II. Discussion of Proposed Changes</HD> VA is proposing changes to regulations in 38 CFR part 36 that would define ARM loans, h-ARM loans, and temporary buydown agreements, as well as outline requirements for guarantee. Through this proposed rulemaking, VA is looking to provide clarity in the regulations to improve Veterans' and lenders' understanding of VA requirements for guarantee of these loan products. <HD SOURCE="HD2">A. Definitions and Clarifying or Conforming Amendments</HD> <HD SOURCE="HD3">1. Defining ARM Loans and h-ARM Loans</HD> In 38 CFR 36.4301, VA proposes to define an “adjustable rate mortgage loan” as “[a] loan for the purpose of acquiring, constructing, or refinancing a single-family dwelling unit with an interest rate that may change on an annual basis” and “hybrid adjustable rate mortgage loan” as “[a] loan for the purpose of acquiring, constructing, or refinancing a single-family dwelling unit with an interest rate that is fixed for a period of time, after which the interest rate may change on an annual basis.” While “adjustable rate mortgage loan” and “hybrid adjustable rate mortgage loan” are commonly used terms in the housing finance industry, VA notes that many lending programs consider a h-ARM loan to be a subset or type of ARM loan. <SU>5</SU> <FTREF/> For purposes of VA-guaranteed loans, each loan type is distinct and subject to separate statutory requirements. <SU>6</SU> <FTREF/> Thus, VA proposes to add definitions for these terms to avoid confusion among Veterans and lenders. <FTNT> <SU>5</SU>  Daniel Liberto, <E T="03">Adjustable-Rate Mortgage (ARM): What It Is and Different Types,</E> Investopedia (Apr. 11, 2023), <E T="03">https://www.investopedia.com/terms/a/arm.asp.</E> </FTNT> <FTNT> <SU>6</SU>   <E T="03">See</E> 38 U.S.C. 3707 and 3707A. </FTNT> <HD SOURCE="HD3">2. Conforming Amendments Related to Proposed ARM Loan and h-ARM Loan Definitions</HD> VA's current regulations do not differentiate between ARM and h-ARM loans and refer only to “an adjustable rate mortgage.” Because VA is proposing to provide specific definitions for each ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 60k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━