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CFR Citation: 38 CFR Part 36

RIN ID: RIN 2900-AL65

NOTICE: Part II

DOCUMENT ACTION: Final rule.

SUBJECT CATEGORY: Loan Guaranty: Loan Servicing and Claims Procedures Modifications

DATES: This rule is effective February 1, 2008.

DOCUMENT SUMMARY: This document establishes a new series for the Department of Veterans Affairs (VA) Loan Guaranty regulations, which will be phased in over an approximately elevenmonth timeframe, as mortgage servicing industry segments ``go live'' on a new computerbased tracking system being established by VA. This new series replicates existing regulations for most aspects of the VA Loan Guaranty program, but also includes changes related to several aspects of the servicing and liquidating of guaranteed housing loans in default, and the submitting of guaranty claims by loan holders. Specific topics revised in the new 4800 series include: increasing authority of servicers to implement lossmitigation options, making incentive payments to servicers for successful lossmitigation options, establishing a system of measuring and ranking servicer performance, establishing updated reporting requirements, permitting loan holders to review liquidation appraisals, requiring holders to calculate the net value of the security property prior to foreclosure, establishing a timeframe for when foreclosure of a defaulted loan should be completed, limiting the amount of interest and other fees and charges that may be included in a guaranty claim, establishing allowable attorneys fees to be included in the guaranty claim, establishing a deadline for the submission of guaranty claims, modifying the requirements for title evidence for properties conveyed to VA following foreclosure, modifying the requirements for how long a holder must maintain records relating to loans for which VA has paid a claim on the guaranty, and eliminating the requirement for the submission of legal procedural papers to VA. This document also includes specific revisions to three rules related to increased attorney fee allowances, establishment of a time limit for filing a claim under the guaranty, and granting authority for the Servicer Appraisal Processing Program that will be effective for all program participants upon publication of these rules.

SUMMARY: Veterans Affairs Department,

SUPPLEMENTAL INFORMATION

Under 38 U.S.C. chapter 37, VA guarantees loans made by private lenders to veterans for the purchase, construction, and refinancing of homes owned and occupied by veterans.

Business Process Reengineering Review

Beginning in 2001, VA conducted an internal, indepth review of the entire Loan Administration process that was effectively a business process reengineering (BPR) effort. ``Loan Administration'' includes the servicing of existing loans, dealing with loans in default and loans being terminated, and the processing of claims by loan holders under the guaranty after defaulted loans have been foreclosed or otherwise terminated. Loan Administration also includes efforts by VA and private loan holders to assist homeowners whose loans are in default to cure the default, retain their home if possible, or find other means short of foreclosure. VA's BPR team recommended revising the Loan Administration process to reflect changes in the loan servicing industry in recent years, as well as advances in technology. VA's BPR team also recommended placing greater reliance on private sector servicing in accordance with VA guidelines, with VA using advanced technology to oversee servicing actions.

Regulatory Background

On February 18, 2005 (70 FR 8472), VA proposed to amend its loan guaranty regulations in order to implement the following
recommendations proposed by the BPR team: giving servicers increased authority to implement lossmitigation alternatives to foreclosure and paying servicers an incentive bonus for each successful lossmitigation alternative to foreclosure; establishing a performancebased tier ranking system for servicers; permitting qualified loan holders to review liquidation appraisals and establish the fair market value of the property; requiring loan holders to calculate the net value of properties securing loans prior to foreclosure; establishing timeframes for when VA would expect holders, exercising reasonable diligence, should be able to complete the foreclosure of defaulted loans; limiting the amount of interest and other fees and charges that may be included in a guaranty claim; establishing reasonable and customary attorney fees allowed to be claimed under the guaranty; establishing a deadline for holders to submit claims under the guaranty and to request reconsideration of denied claims; modifying the requirements for title evidence submitted to VA when the holder is conveying the property to VA following the liquidation sale; modifying the requirements for how long a holder must maintain records relating to loans for which VA has paid a claim on the guaranty; modifying the requirements for holders to report key events with regard to loans being serviced; and repealing the requirement for holders to provide VA with procedural papers in legal or equitable proceedings related to a loan on the security property. VA published a supplemental notice on November 27, 2006 (71 FR 68498), to provide specific information regarding the computerbased system that VA proposed to implement as part of the loan servicing and claims procedure modifications. VA published another supplemental notice on June 1, 2007 (72 FR 30505), to provide information on a decision to phasein implementation of most of the new rules, based on previous comments from the industry and the development of VA's computerbased tracking system.

Discussion of Public Comments

The initial public comment period closed on April 19, 2005. VA received 51 comments from the public about various aspects of the proposed changes. The public comment period was reopened following publication of the first supplemental notice and closed December 11, 2006. VA received an additional 8 comments from the public about the proposed reporting requirements for VA's new computerbased system. The public comment period was again reopened following publication of the second supplemental notice and closed June 15, 2007. VA received 2 comments from the public about its proposed phased implementation and clarifications regarding modifications.

The final rule has been revised to incorporate changes that VA agrees are necessary in light of, or as the logical outgrowth of, the comments provided. In order to accommodate the phased implementation of the new rules, VA is establishing a new subpart F (Sec. Sec. 36.4800 through 36.4893, inclusive) of part 36 that contains substantive rules identical
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to those in the current rules (Sec. Sec. 36.4300 through 36.4393). In addition, we redesignate those current rules as subpart B of title 38, CFR. Subpart F will be effective upon publication of this notice only for the first segment of the mortgage servicing industry, as described in the second supplemental notice published June 1, 2007 (72 FR 30505). The table below is similar to the one in that notice, and provides the effective date for the first segment that will be affected by these rules, as well as an indication of the time periods during which we expect to make these rules applicable to all other segments of the industry (although these time periods may change due to unforeseen circumstances). We will publish as notices in the Federal Register the actual applicability dates for industry segments two through nine. Applicability date of phasedin Segment No. rules (by calendar year quarter) 1................................... February 1, 2008.
2................................... 2nd Quarter, 2008.
3................................... 2nd Quarter, 2008.
4................................... 4th Quarter, 2008.
5................................... 2nd Quarter, 2008.
6................................... 3rd Quarter, 2008.
7................................... 3rd Quarter, 2008.
8................................... 3rd Quarter, 2008.

9................................... 4th Quarter, 2008.

Subpart B will continue to be the governing rules for industry segments until the dates they become subject to the new subpart F. VA is aware that certain portions of subpart B, specifically Sec. Sec. 36.4302 and 36.4312, are in need of revision to match recent legislative amendments, as well as to update VA positions on certain requirements. However, in order to avoid confusion with those issues not directly impacting the servicing and liquidating of guaranteed housing loans in default, and the submitting of guaranty claims by loan holders, those changes have not been included in this rulemaking. Instead, VA is preparing proposed changes to Sec. Sec. 36.4302 and 36.4312 in subpart B and in the corresponding Sec. Sec. 36.4802 and 36.4813 in the new subpart F, and will request comments from the public on those changes after the effective date of these new rules.

In our review of subpart B, we also identified a number of minor errors, such as erroneous crossreferences, typographical errors, and hanging provisions (flush text) that needed reformatting, and have corrected these wherever necessary in the new subpart F. However such corrections have not affected the rights, responsibilities, or obligations of program participants.

The following paragraphs discuss the comments VA received in response to the proposed rules and the supplemental notices. The paragraphs are in order by the new subpart F section number and provide VA responses. The preamble does not discuss sections about which we did not receive any public comment. The preamble also does not discuss any section that is substantively the same as its counterpart in Sec. Sec. 36.4300 through 36.4393. However, such a section may contain conforming renumbering changes and/or technical revisions or reorganization. This final rule includes three changes to subpart B in Sec. Sec. 36.4313(b)(5), 36.4321(d), and 36.4344a, and the comments and rationale for those changes are the same as those in the comments and responses on the new final rules in corresponding Sec. Sec. 36.4814(b)(5), 36.4824(d), and 36.4848.
36.4800 Applicability of Sec. Sec. 36.4800 Through 36.4893, Inclusive

Comment: VA should consider the time needed to adapt industry servicing systems and carefully test all aspects of the proposed electronic reporting requirements. This could also include special circumstances such as recent acquisitions, changes in servicing platforms, or other unforeseen situations.

VA Response: VA has carefully considered the factors that are essential to the success of its new electronic reporting environment, and determined that a phased implementation by industry segment offers the best chance for success. Accordingly, VA has established nine industry segments for program participants, with each segment ``going live'' on VA's new computerbased tracking system over an approximately 11month timeframe. Each phase of implementation will include time for data cleanup, system modifications, defect corrections, testing of interfaces and data transmission, and review of lessons learned before initiating the next phase. Throughout this phasein process, VA will remain flexible in adjusting its implementation schedule in order to accommodate participants' unique circumstances, such as changes in servicing platforms or unforeseen events. In addition, VA has the authority under Sec. 36.4838 to administratively offer relief to entities not meeting VA requirements, such as electronic reporting. 36.4801 Definitions

Comments: VA should provide its definitions of ``repayment plans'' and ``special forbearances.''

VA Response: When VA published the proposed rule to replace the existing Sec. 36.4317 with an arrangement to establish incentive payments for loss mitigation options, VA believed that the mortgage industry had a common understanding of the basic concepts of repayment plans and special forbearance agreements. However, while reviewing comments, and in researching definitions established by major industry participants (Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development [HUD]), VA realized that each entity has its own slightly different definition for each of these terms. Accordingly, VA has added detailed definitions of ``repayment plan'' and ``special forbearance'' in this final rule in Sec. 36.4801 to avoid any confusion as to what is required for each of these types of loss mitigation actions. VA is also clarifying the role of the servicer by adding a definition to state that the servicer is the entity which will be assigned a tier ranking based on its performance and will receive any incentive payment on a loan it services for the loan holder. The definitions are only minor clarifications of basic concepts customary in the loan servicing industry and do not impose any new requirements or take away any substantive rights of program participants. VA has listed all of the loss mitigation options in Sec. 36.4819 in their preferred order of consideration (i.e., a hierarchy for review), but recognizes that individual circumstances may lead to ``out of the ordinary'' procedures. VA also plans to provide more detailed examples and advice on a number of issues, including repayment plans and special forbearances, as part of the training it will provide to servicers after publishing these rules.

Comment: VA should clarify the payment of incentives for successful loss mitigation efforts.

VA Response: VA concurs. The holder is the entity ultimately responsible for compliance with VA regulations and under Sec. 36.4801 ``Holder'' includes ``the authorized servicing agent of the lender or assignee or transferee.'' However, for purposes of tier ranking (Sec. 36.4818) and loss mitigation options and incentives (Sec. 36.4819), VA's intent is to measure performance of the actual loan servicer and reward it accordingly. In order to make this distinction clearer, we provide a definition in Sec. 36.4801 of ``servicer.'' The authorized servicer is
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either the servicing agent of a holder; or the holder itself, if the holder is performing all servicing functions on a loan. The servicer is typically the entity reporting all loan activity to VA and filing claims under the guaranty on behalf of the holder. VA will generally issue guaranty claims and other payments to the servicer, who will be responsible for forwarding funds to the holder in accordance with its servicing agreement. Incentives under Sec. 36.4819 will generally be paid directly to the servicer based on its performance under that section and in accordance with its tier ranking under Sec. 36.4818.

Comment: VA should clarify the procedures and implications of debt reductions used to ensure a property is eligible for conveyance to VA.

VA Response: In Sec. 36.4823, we clarify the procedures to be followed to reduce debts in order to gain the right to convey to VA properties acquired at liquidation sales. However, to avoid confusion with multiple definitions of similar terms, we do not use the terms ``Indebtedness'', ``Specified amount'' and ``Unguaranteed portion of the indebtedness'' in this final rule in Sec. 36.4801; that section will instead use the term ``Total indebtedness.'' The terms are defined in Sec. 36.4301 because they are used primarily in Sec. Sec. 36.4320 and 36.4321. However, the new final Sec. Sec. 36.4823 and 36.4824 do not contain them and refer only to the total indebtedness as defined in the statute and the new final Sec. 36.4801.

The other definitions included in Sec. 36.4801 that are different from those in Sec. 36.4301 were previously proposed.
36.4809 Transfer of Title by Borrower or Maturity by Demand or Acceleration

In Sec. 36.4308(g), we refer to a time period specified in Sec. 36.4316, which in turn establishes a threemonth waiting period prior to the filing of a notice of intention to foreclose. The reporting and processing of defaults is handled differently under the new rules in Sec. Sec. 36.4800 through 36.4893, and Sec. 36.4818 does not refer to a waiting period. Therefore, in Sec. 36.4809(g), we do not refer to another section but rather refer to the actual time frame of three months.

36.4814 Advances and Other Charges

Comment: VA should review its proposed foreclosure attorney fee schedule, which is very similar to those published by HUD, Fannie Mae, and Freddie Mac in 2001, to account for reasonable increases in living costs over the past several years, as well as other cost increases since that time due to increased labor and operational expenses for attorneys.

VA Response: VA concurs. VA has carefully reviewed the proposed foreclosure attorney fee schedule and has adjusted the amounts in accordance with the information provided in the comments, as well as updated information obtained from other sources. The table provided below, as referenced in final rules Sec. 36.4313(b)(5)(ii) and Sec. 36.4814(b)(5)(ii), is reasonably consistent with the fees allowed by other agencies for comparable work, and the commitment in paragraph (b)(5)(ii) to review the schedule annually will ensure the opportunity to timely address any imbalance in the schedule. In addition, VA has slightly modified the proposed language in new final rules Sec. 36.4313(b)(5)(iii) and Sec. 36.4814(b)(5)(iii) to allow additional trustee fees, above those allowed for legal services, when the trustee conducting the sale must be a Government official under local law, or if an individual other than the foreclosing attorney (or any employee of that attorney) is appointed as part of judicial proceedings, and local law also establishes the fees payable for the services of the public or judicially appointed trustee.

VA intends to reimburse only for attorney fees for services related to foreclosure of loans. Most of the attorneys commenting on the proposed rule reported that over the past five years many servicers have been outsourcing the foreclosure oversight process (i.e., hiring third parties to perform functions previously handled as part of the servicer's routine duties), and firms providing such outsourcing services are charging attorney firms a fee for providing the file needed to initiate the foreclosure action. While VA understands that servicers may find efficiencies in outsourcing certain functions, the cost for such outsourcing must be considered as an operating expense of the firm contracting for the outsourcing; i.e., the servicer. VA cannot consider outsourcing fees to be part of the cost of an attorney fee for completing a foreclosure. Consistent with our proposed rule, VA is establishing maximum amounts for legal services in each State, and those amounts are intended to reimburse for reasonable attorney fees. This is consistent with the position taken by Freddie Mac, which prohibits payment for referral fees, packaging or other similar fees, and new case startup fees in its Single Family Seller/Servicer Guide, Volume 2, Chapter 71, section 71.18. Fannie Mae also notes in its 2006 Servicing Guide, Part VIII, Chapter 1, section 104.03, that it will not reimburse a servicer for legal fees and expenses related to actions that are essentially servicing functions.

Comment: VA should allow a fee to cover the costs of restarting a foreclosure that has been postponed, for example, by the filing of a bankruptcy petition. This would be in addition to the reimbursement for obtaining relief from the bankruptcy stay.

VA Response: VA concurs. VA recognizes that this is occurring more frequently, and is a true cost of doing business. Therefore, VA has allowed in the table provided herein in accordance with the final rules Sec. 36.4313(b)(5)(ii) and Sec. 36.4814(b)(5)(ii) an additional $350 ``foreclosure restart'' fee when a foreclosure sale is postponed or cancelled through no fault of the servicer or its foreclosure attorney. This includes but is not limited to bankruptcy, VA requested delay, property damage, hazardous conditions, condemnation, natural disaster, property seizure, or relief under the Servicemembers Civil Relief Act.

Comment: VA should consider increasing its maximum allowable bankruptcy fees, for reasons similar to those suggested for foreclosure fees.

VA Response: VA concurs. VA has reviewed the fees allowed by other entities, as well as the arguments made for increasing bankruptcy fees. VA believes that a modest adjustment is appropriate at this time and is revising the table referenced in the final rules in Sec.
36.4313(b)(5)(ii) and Sec. 36.4814(b)(5)(ii) to allow attorney fees of $650 (Chapter 7) or $850 (initial Chapter 13) for obtaining bankruptcy releases directly related to loan termination. For additional relief filed under either chapter, VA will allow an additional $250. VA will continue to monitor these fees on an annual basis.

The current legal services table is as follows:
Foreclosure Jurisdiction Nonjudicial Judicial Deedinlieu restart fee Chapter 13 Chapter 7 foreclosure foreclosure of foreclosure \2\ release \3\ release \3\ Alabama................................................. 550 N/A 350 350 850 650 Alaska.................................................. 1200 N/A 350 350 850 650 [[Page 6297]]
Arizona................................................. 625 N/A 350 350 850 650 Arkansas................................................ 750 N/A 350 350 850 650 California.............................................. 600 N/A 350 350 850 650 Colorado................................................ 800 N/A 350 350 850 650 Connecticut............................................. N/A 1250 350 350 850 650 Delaware................................................ N/A 950 350 350 850 650 District of Columbia.................................... 600 N/A 350 350 850 650 Florida................................................. N/A 1200 350 350 850 650 Georgia................................................. 600 N/A 350 350 850 650 Guam.................................................... 1200 N/A 350 350 850 650 Hawaii.................................................. N/A 1850 350 350 850 650 Idaho................................................... 600 N/A 350 350 850 650 Illinois................................................ N/A 1100 350 350 850 650 Indiana................................................. N/A 1000 350 350 850 650 Iowa.................................................... 550 850 350 350 850 650 Kansas.................................................. N/A 850 350 350 850 650 Kentucky................................................ N/A 1100 350 350 850 650 Louisiana............................................... N/A 900 350 350 850 650 Maine................................................... N/A 1250 350 350 850 650 Maryland................................................ 800 N/A 350 350 850 650 Massachusetts........................................... N/A 1250 350 350 850 650 Michigan................................................ 650 N/A 350 350 850 650 Minnesota............................................... 650 N/A 350 350 850 650 Mississippi............................................. 550 N/A 350 350 850 650 Missouri................................................ 650 N/A 350 350 850 650 Montana................................................. 600 N/A 350 350 850 650 Nebraska................................................ 600 850 350 350 850 650 Nevada.................................................. 600 N/A 350 350 850 650 New Hampshire........................................... 900 N/A 350 350 850 650 New Jersey.............................................. N/A 1300 350 350 850 650 New Mexico.............................................. N/A 900 350 350 850 650 New YorkWestern Counties \1\.......................... N/A 1250 350 350 850 650 New YorkEastern Counties.............................. N/A 1800 350 350 850 650 North Carolina.......................................... 550 N/A 350 350 850 650 North Dakota............................................ N/A 900 350 350 850 650 Ohio.................................................... N/A 1100 350 350 850 650 Oklahoma................................................ N/A 900 350 350 850 650 Oregon.................................................. 675 N/A 350 350 850 650 Pennsylvania............................................ N/A 1250 350 350 850 650 Puerto Rico............................................. N/A 1100 350 350 850 650 Rhode Island............................................ 900 N/A 350 350 850 650 South Carolina.......................................... N/A 850 350 350 850 650 South Dakota............................................ 650 850 350 350 850 650 Tennessee............................................... 550 N/A 350 350 850 650 Texas................................................... 550 N/A 350 350 850 650 Utah.................................................... 600 N/A 350 350 850 650 Vermont................................................. N/A 950 350 350 850 650 Virginia................................................ 600 N/A 350 350 850 650 Virgin Islands.......................................... N/A 1100 350 350 850 650 Washington.............................................. 675 N/A 350 350 850 650 West Virginia........................................... 550 N/A 350 350 850 650 Wisconsin............................................... N/A 1100 350 350 850 650 Wyoming................................................. 600 N/A 350 350 850 650 \1\ Western Counties of New York are: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Livingston, Monroe, Niagara, Ontario, Orleans, Steuben, Wayne, Wyoming, and Yates. The remaining counties are in Eastern New York. \2\ When a foreclosure is stopped due to circumstances beyond control of the holder or its attorney (including, but not limited to bankruptcy, VA requested delay, property damage, hazardous conditions, condemnation, natural disaster, property seizure, or relief under the Servicemembers Civil Relief Act) and then restarted, VA will allow the restart fee in addition to the base foreclosure attorney fee. \3\ For each additional relief of stay under either chapter, VA will pay $250.

Comment: VA should publish a single national reimbursable fee schedule so that servicers will be able to accurately calculate total indebtedness. VA should provide at least 30 days advance notice of changes in fees to allow for system updates and procedural modifications.

VA Response: VA does not concur at this time because this information is maintained at the Regional Loan Center (RLC) level in order to be updated as quickly as possible when local changes occur, so that holders may be reimbursed for actual expenses as they occur, rather than experiencing a lag time. The current schedules provide the local fees and expenses and we believe that this data should continue to be provided at the local level. However, VA will initiate plans to post such a national schedule of fees when this can be accomplished in a timely manner.

36.4815 Loan Modifications

Comment: VA should not require holders to reduce the interest rate on a loan modification where market interest rates have decreased since the date of loan origination.

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VA Response: VA does not concur, but is changing the new final rule in Sec. 36.4815 in an effort to make it easier for servicers to administer. The existing VA regulation dealing with loan modifications (Sec. 36.4314) allows no change to the interest rate on the loan. In fact, another regulation (Sec. 36.4311(c)) specifically states that interest in excess of the rate reported by the lender when requesting evidence of guaranty shall not be payable. The vast majority of VA guaranteed loans are securitized in GNMA (Government National Mortgage Association) insured pools, which require the holder to purchase the loan from the pool in order to modify the loan. The proposed change recognized the difficulty faced by loan servicers in attempting to resecuritize loans with interest rates well below the market average, and thus allowed for increasing interest rates on modifications when market conditions dictate. However, VA also believes it is only fair to veterans to similarly reduce interest rates when market rates have decreased since loan origination. The impact of reduced interest rates would be similar to the effect of other creditworthy borrowers refinancing at lower interest rates, and should not adversely affect VA lenders. Therefore, VA is not departing from requiring an interest rate reduction where market interest rates have decreased since loan origination. VA is, however, removing the one percent cap on interest rate increases that had been contained in the proposed rule so that modifications will become a more widely used tool to help veterans retain their homes. VA is also slightly modifying the language that had been in paragraph (c) of the proposed rule in Sec. 36.4314 to make adjustments easier, by allowing the maximum interest rate to be based on a monthend rate, rather than requiring a daily adjustment as the proposed rule had provided. Therefore, Sec. 36.4812(c) is changed to allow a higher interest rate on a modified loan. The final rule in Sec. 36.4815 is changed as described above to remove the one percent cap on increases and to clarify the date to be used in establishing the new maximum interest rate allowable on a modified loan.

Comment: VA should increase the guaranty on a modified loan to match the percentage guaranteed at loan origination, rather than only allowing an increase in the amount of guaranty if it would otherwise provide less than 25% guaranty of the modified loan amount.

VA Response: VA does not concur. The proposal in Sec. 36.4314(g) to increase the guaranty on a modified loan to 25% of the loan amount was another effort to help modified VAguaranteed loans qualify for resecuritization. Under the existing Sec. 36.4314, the amount of the guaranty does not increase upon loan modification, which means that the percentage of guaranty, in effect, will decrease if the modified loan amount is greater than the original loan amount. This is important because all VAguaranteed loans greater than $144,000 at origination have a maximum 25% guaranty, and the average new loan is often well above that amount. Under the existing Sec. 36.4314 any such loan being modified would retain the same amount of guaranty, and thus have an effective percentage of guaranty less than 25% whenever the modified loan amount is greater than the original loan amount. This final rule in Sec. 36.4815(h) (due to minor realignment of the section paragraphs) allows the guaranty amount on the modified loan to increase up to 25% of the modified loan amount, subject to the maximum amount of guaranty allowable under the law. This should be sufficient to allow repooling in a new GNMAinsured security, and provide adequate risk sharing for the modified loan among VA, the holder, and GNMA. Therefore, no further revision is necessary, other than conforming language in Sec. Sec. 36.4802(h) and 36.4824(a).

Comment: VA should not require the same underwriting standards for loan modifications as those used at loan origination.

VA Response: VA does not concur. VA's existing Sec. 36.4314(a) governing loan modifications requires that the holder determine that the borrower is a satisfactory credit risk, and the proposed rule did the same by referencing the criteria in Sec. 36.4337. In establishing that the veteran is a satisfactory credit risk, there must be an analysis of the veteran's income and obligations, as well as a review of the credit history. The proposed rule specifically addressed the issue of credit history with respect to the event(s) that led to the need for loan modification, and the criteria in Sec. 36.4337 provide for the acknowledgement of compensating factors to address issues that might otherwise preclude the extension of credit. VA therefore believes the proposed regulation was sufficiently flexible to accommodate the assessment of the creditworthiness of borrowers who seek to modify their loans, and no changes are necessary in the final Sec. 36.4815(a). A specific comment requested that the use of ``infile'' credit reports be allowed to reduce costs, and VA agrees this will be in accordance with the way its underwriting criteria have been interpreted in order to expedite processing.

Comment: VA should make provision for other expenses of modification not being rolled into the new loan.

VA Response: VA concurs. The existing Sec. 36.4314 makes no provision for inclusion of any expenses in the modified loan amount. The proposed rule provided that only certain items could be included in the modified indebtedness. VA carefully reviewed the comments on this subject and is clarifying Sec. 36.4815(e) so that it addresses all possible expenses of modification. In addition to allowing holders to include unpaid principal, accrued interest, and deficits in the taxes and insurance impound accounts in the modified indebtedness, holders will also be allowed to capitalize advances required to preserve their lien position, such as homeowner association fees, special assessments, water and sewer liens, etc. By limiting the items that may be included in the modified loan indebtedness, VA is attempting to protect both the interests of the Government and the veteran borrower by keeping the potential loantovalue (LTV) ratio as low as possible, while recognizing that it may often exceed 100%. In a case where modification is determined to be the best alternative early in the course of a default, there will be little else in the way of other fees and expenses that need to be paid. In such a case the borrower should be able to handle those other costs as a demonstration of
creditworthiness, and after including the expenses allowed by the new final rule in the modified loan amount, the resulting LTV ratio may not be significantly different than at loan origination. If a default has continued for quite some time before modification is deemed feasible, then it is likely that the additional fees and costs may have accrued to a sum equal to one or more monthly mortgage payments. VA never envisioned that such fees and costs would be forgiven by the loan holder. Because the modification process involves some period when regular payments are not made on the loan, the borrower should be able to accumulate funds to cover the fees and costs accrued during the default, rather than having them rolled into the modified loan indebtedness. This is similar to the HUD requirements for
modifications. As for any costs associated with processing the modification, VA expects that the incentives paid for successful modifications will offset such expenses, and VA will not allow any processing costs to be charged to the borrower as stated in the final Sec. 36.4815(f).

Comment: VA should not require that all current owners occupy the property
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and should pay for a title insurance policy covering the modified loan.

VA Response: VA agrees that occupancy should not be a requirement because the basic program requirements do not require continued occupancy in order for the guaranty to remain in effect (i.e., at some point a veteran borrower may move from the home securing the VA guaranteed loan, but that does not invalidate the guaranty). Hence, Sec. 36.4815(a) will not require that all current owners occupy the property.

As for title insurance policies, existing VA regulation Sec. 36.4828(b) does require that holders obtain and retain a lien of proper dignity against the security property, and title insurance is often used at loan origination to satisfy this requirement. If a holder decides to require title insurance in connection with a loan modification to ensure its lien status, then VA would not object to a reasonable expense to the buyer for this service. Since in most cases a title insurance policy was obtained at loan origination, any insurance obtained at modification would only need to cover the period from loan origination to the date of modification, and it is expected that the cost for a title endorsement, or other form of insurance ``update,'' would be considerably less than the amount paid at loan origination. The final rule in Sec. 36.4815(f) slightly revises the proposed rule to provide this clarification.

Comment: VA should not require that all current owners agree to the modification.

VA Response: VA does not concur. VA is retaining the provision in the new final rule in Sec. 36.4815(a)(5) that all current owners must be obligated on the loan and participate in any modification, because it would not be fair to allow a change in the terms of a loan secured by a property without first notifying all parties with an ownership interest in that property and obtaining their agreement to the change. If a holder encounters unusual circumstances that lead it to believe a modification not meeting the requirements in Sec. 36.4815(a)(1)(6) would be beneficial to a veteran, then the case may be submitted to VA for prior approval.

Comment: VA should not restrict the number of times that a loan may be modified because other agencies/investors have no such limits.

VA Response: Under Sec. 36.4314, we permit three modifications to any one loan without prior VA approval, but also may allow unlimited modifications with prior VA approval. To that extent, we agree with the comment.

However, to the extent that the comment requests unlimited modifications without VA review, VA does not concur because VA has a responsibility to ensure that loan modifications are fair to the borrower, and to protect the interests of the Government. The final rule in Sec. 36.4815 provides sufficient flexibility to address almost all situations that may arise. Although the rule cannot address every possible circumstance, it does adequately provide for loss mitigation by authorizing holders in advance to modify the vast majority of loans, while allowing holders to seek direct approval from VA for unusual cases that do not fit the general criteria described in the regulation.

In order to avoid any misunderstandings about the authorizations granted, the final rule is modified by adding paragraph (j), which advises that the authority contained in Sec. 36.4815 does not create a right of a borrower to have a loan modified but simply authorizes the loan holder to modify a loan in certain situations without the prior approval of the Secretary. This is in keeping with past VA policy and court decisions over the years that have found that VA's refunding program (Sec. 36.4820) is not a veteran's benefit, but rather an administrative option established by the regulation to enable VA to assist a veteran when VA makes the determination that the option is appropriate.

Comment: VA should include the words ``or default is imminent'' in Sec. 36. 4815(a)(1).

VA Response: VA does not concur. The proposed rule in Sec. 36.4314(a) included those words and the second supplemental notice proposed deleting them. As stated in the second supplemental notice, because VA is proposing a hierarchy of loss mitigation options for consideration within the new regulatory package, it would not be appropriate for a holder to consider modification of a loan until after first considering a repayment plan or a period of forbearance in order to allow loan reinstatement. Therefore, it would not normally be feasible for a holder to consider modification of a loan where default is only imminent, because that would not allow for prior consideration of a repayment plan or a period of forbearance. However, if an unusual circumstance arises, a holder may seek direct approval from VA for approval of a case that does not fit the general criteria. Therefore, the final rule in Sec. 36.4815(a)(1) will remain as proposed in the second supplemental notice.

36.4817 Servicer Reporting Requirements

Comment: VA should review its need for the requested data, should reduce the number of reportable items, and should eliminate the expedited, eventspecific reporting.

VA Response: VA concurs for the most part. VA has carefully reviewed the report timing and the required items in the proposed rule in Sec. 36.4315a in light of industry comments, consultation with information technology specialists, and review of the goals and operating procedures in VA's new loan servicing environment, as well as the reporting requirements of HUD, Fannie Mae, and Freddie Mac. In conducting this review, VA identified and retained only those items for reporting that VA determined absolutely necessary to conduct proper oversight of servicer actions. That oversight must include review of servicer actions that are being newly delegated by VA, servicer actions that were previously reviewed by VA utilizing extensive paper reports provided by servicers, and servicer actions that in the past were reviewed only upon submission of various documentation from servicers. Providing this information electronically should greatly reduce the time required for interaction between VA and servicers via telephone and written communications that occurs under the present operating procedures. VA has determined that a number of items (including escrow disbursements and legal actions other than terminations) will not be included in the list of what must be reported to VA. We discuss these items later in this document, responding to specific comments. In addition, remaining items for loans not in default may all be reported on a monthly basis (i.e., no later than the seventh calendar day of the month following the month in which the event occurred), while most of the items related to loan defaults will also be required on a monthly basis, rather than within five business days of an event. VA is changing these events and most of the remaining events that must be reported expeditiously to require reporting within 7 calendar days, rather than 5 business days because most tracking systems are not equipped to calculate business days, but can easily handle computation of calendar days.

As suggested by the comments, one item previously proposed to be reported on all loans, bankruptcy filing information, will only be required on loans reported in default. Only events denoting significant action on loans
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reported in default (such as referral to an attorney to initiate foreclosure, establishment of a liquidation sale date, advice that a sale has been held, etc.) will still need to be reported within seven calendar days of the event. As in the past, holders will need to notify VA within 15 calendar days of a liquidation sale when they desire to convey a property to VA.

An example of one item that was in the proposed rule Sec. 36.4315a(c)(2) with a five business day reporting requirement was information on assumption of a VAguaranteed loan. Existing rule Sec. 36.4303 presently requires reporting of information on approved assumptions and unauthorized transfers of ownership. The first supplemental notice, which provided more detail on the specific events to be reported, required electronic reporting of transfer of ownership (i.e., an authorized assumption) and unauthorized transfer of ownership. In light of the comments, VA is not, under Sec. 36.4817(c), requiring electronic reporting of unauthorized transfer of ownership, but is requiring electronic reporting of authorized transfer of ownership, which will be renamed accordingly. The final rule in Sec. 36.4803(l)(2) continues to require the holder to notify VA within 60 days of learning of an unauthorized transfer, as in the existing Sec. 36.4303(l)(2).

Comment: Information on the Servicemembers Civil Relief Act should only be required if that is a reason for delay of a foreclosure sale.

VA Response: VA concurs with deleting the requirement to report this event. If the event causes delay in loan termination, then information about it may be reported as part of the claim event reporting.

Comment: VA should allow reporting of multiple events occurring on a single loan during a monthly reporting period.

VA Response: VA agrees with this comment and the file reporting format will allow for multiple events to be reported on each loan.

Comment: The requirement to report substantial equity (25% or more) will necessitate a special title search and should be deleted, as it could require servicers to upgrade their systems to load junior lien information and to calculate the equity.

VA Response: VA concurs with deleting this requirement. VA proposed this requirement in Sec. 36.4315a(f) in order to ensure review of cases where substantial equity could exist. However, after reviewing the other data requested and the computing capabilities offered by its new computer system, VA decided it can instead use the other reported data to calculate its own estimate of equity and take appropriate action to ensure that veterans receive every reasonable opportunity to salvage that equity prior to loss through foreclosure. Therefore, there is no requirement in the final rule to calculate or report substantial equity.

Comment: VA should consider using the HUD Single Family Default Monitoring System (SFDMS) file layout for reporting information, rather than requesting data that may not presently be available in many loan servicing systems.

VA Response: VA considered this possibility, but decided it was not feasible. As VA began developing the computer system that it will use to receive data from servicers, VA obtained considerable information about HUD's file layout and other systems from a leading provider of loan accounting and default tracking services, which is subcontracted to the contractor developing VA's system. As that development continued, it was clear that the information VA needs to monitor servicer activities that have been delegated will require more details than those obtained by HUD's SFDMS. This is due to different processes used by the agencies in conducting oversight, as well as making payments for incentives, acquisitions, and claims. VA has found that almost all of the data fields it is still seeking presently exist in most servicing systems. VA worked collaboratively with the providers of the most widely utilized loan servicing systems, and continued to reduce its data requirements as much as possible, in order to develop the easiest file layout and method of transmission for reporting. That layout has been posted on VA's public Web site. Therefore, VA expects that the industry will be able to easily comply with its remaining reporting requirements in Sec. 36.4817.

Comment: VA should consider the potential cost to servicers of the additional reporting requirements, the time needed to implement those changes, and the security risks of transmitting additional information.

VA Response: VA has carefully considered all of those issues in developing its final reporting rule in Sec. 36.4817.

VA recognizes that few changes can be made without some costs. However, by using a fixed width flat file layout, VA is utilizing the simplest format currently available for reporting data. Moreover, VA has developed a methodology to reduce the amount of computations required by most loan servicing platforms when extracting data from their systems to report events to VA. This should also significantly reduce the cost of changes. There will be a few additional data fields that most servicing systems will need to add over time, and VA realizes that there will be some expenses to accomplish this, but the result will be data that is available electronically rather than manually.

While there may be some programming costs incurred by servicers due to the additional reporting requirements in Sec. 36.4817, VA expects that servicers will benefit in a number of ways. First, with the change to electronic reporting, servicers will greatly reduce their monthly expenses of reporting defaults and loan status updates via paper forms to VA, as well as reducing the time required by their employees to respond to written and telephone inquiries from VA. Second, the additional data required is for purposes of VA oversight, but that data should be of considerable value to servicers in tracking their internal servicing performance (for example, providing greater control over insoluble defaults and ensuring faster referral for termination, allowing closer review of payment plans to monitor performance, etc.). Third, having the data available electronically should eliminate many manual processes that are much more costly. VA expects there will be many more areas in which servicers will benefit from the availability of this new data.

VA is well aware that considerable lead time is needed in order to change loan servicing systems to capture additional data. VA has worked with its contractor and subcontractor to develop a phased approach to implementation of its new, computerbased tracking system, the VA Loan Electronic Reporting Interface (VALERI). VA will implement VALERI over an approximately 11month timeframe, with program participants grouped into nine segments that will ``go live'' on VA's new system during designated phases of implementation. Each phase of implementation will incorporate time for data cleanup, system modifications, defect corrections, testing of interfaces and data transmission, and review of lessons learned before initiating the next phase. VA is also developing a Web portal to allow manual input of information that is not yet contained in major loan servicing systems, and for smaller servicers who may not utilize servicing system providers, although the ultimate goal is automated file transfers of all information.

Data security is of the utmost importance to VA. Servicer suggestions to delete requests for sensitive information, such as Social Security
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Numbers (SSNs), have been honored as much as possible. VA will not request SSNs as part of the basic monthly reporting as originally proposed. Instead, the only request for SSNs will be when servicers report them for new loan assumers. Those SSNs and all other data will be encrypted during transmission, appropriate protocols will be established with each servicer and its loan servicing system (or provider) to ensure secure transmissions, and access to the data at VA and its contractors will be limited to authorized users.

36.4818 Servicer Tier RankingsTemporary Procedures

Comment: In developing its tier rankings, VA should consider a methodology that is publicly disseminated and can easily be determined by servicers based on information available to them. VA should also incorporate some allowance for the purchase of delinquent loans from other servicers.

VA Response: VA concurs to an extent. In our development of a proposed rule to implement the tier ranking system, we will consider the negative impact of the purchase of delinquent loans from other servicers. In the preamble to this proposed rule, VA indicated an intent to model its tier ranking system after that used by the Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac. After VA has collected data under its new reporting requirements for six months, VA intends to review the data and develop the criteria for ranking servicers. Those criteria will then be published in the Federal Register for notice and comment. Whether the final rule that implements the tier ranking system is similar to the Freddie Mac model will depend upon the data we collect and the comments we receive. VA expects that the computer system for collecting data will be operational in 2008, and proposed rules for tier ranking will be published in calendar year 2009. Accordingly, the final rule in Sec. 36.4818 remains as proposed.

Comment: VA should consider paying incentives at higher than the Tier II ranking during the first year, either due to some assessment of higher performance, or else based on a servicer's participation in VA's current Server Loss Mitigation Program (SLMP).

VA Response: VA does not concur. The proposed rule Sec. 36.4316(a) provided for four levels of tier rankings of servicers, with all servicers in Tier II for the initial ranking period as of the effective date of this rule. Because VA will have no published methodology for rating servicer performance during the first year of the new program, it would not be fair to attempt to determine which servicers should be paid at the Tier I or any other level, other than the initial Tier II rating for all servicers. While VA has had the SLMP in operation for many years, that program has not attempted to measure specific performance in a manner similar to the proposed Servicer Tier Ranking system, and the SLMP has only allowed two loss mitigation alternatives, and not the three home retention alternatives in the new program. Accordingly, it would not be fair to grant SLMP participants a higher tier ranking until the criteria for performance have been established. In any event, the proposed incentive payments for Tier II compare favorably to what VA allowed under SLMP, and have been adjusted slightly to account for the time elapsed since the initial publication of the proposed amounts, as well as changes by other agencies during that time. Therefore, the final rule in Sec. 36.4818 remains as proposed.

36.4819 Servicer Loss Mitigation Options and Incentives

Comment: VA should simply adopt HUD (Department of Housing and Urban Development) loss mitigation procedures, fees, and reimbursement schedules, including incentive payment upon execution of a repayment plan, rather than waiting for final or partial completion of the plan to pay for the additional work required in analyzing data and establishing a plan.

VA Response: VA does not concur. VA carefully considered loss mitigation programs developed by HUD, Fannie Mae, Freddie Mac, and private mortgage insurers as part of its BPR project. Although most had attractive features, no one program by itself addressed all the issues of loss mitigation in the manner VA felt was necessary to ensure proper assistance to veterans, while also rewarding loan servicers in an appropriate fashion for success in mitigating potential losses.

As for the comment suggesting that incentives be paid upon execution of a repayment plan or special forbearance agreement because of the work involved in developing the plan, VA believes this is part of the normal activity of servicing a delinquent loan in order to determine whether it may be reinstated or whether the default is insoluble. While one comment was that loss mitigation efforts have historically been considered extraordinary servicing activity, VA believes that any servicer interested in properly managing its portfolio (and ensuring future servicing income) will exert reasonable efforts to obtain borrower financial information to determine the likelihood of loan reinstatement. Therefore, the incentives authorized under this section are in recognition of basic concepts customary in the loan servicing industry, and do not impose any new requirements or take away any substantive rights of program participants. However, paying an incentive simply for executing a repayment or forbearance agreement would not serve as a true incentive for developing a plan that is likely to succeed, but could instead encourage plans where success is improbable. Therefore, VA will not revise its program to make an incentive payable upon execution of a lossmitigation alternative and the new final rules in Sec. Sec. 36.4819 and 36.4822(e) and (f) (adjusted from (f) and (g)) remain generally as proposed. In order to clarify VA's intended use of the options and alternatives, they are listed in Sec. 36.4819(b) from top to bottom in their preferred order of consideration (i.e., a hierarchy for review), but VA recognizes that individual circumstances may occasionally lead to ``out of the ordinary'' considerations.

Comment: VA should provide a partial claim loss mitigation benefit similar to that offered by HUD.

VA Response: VA does not concur. Under the HUD Partial Claim option, a mortgagee will advance funds on behalf of a mortgagor in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months PITI). The mortgagor will execute a promissory note and subordinate mortgage payable to HUD. Currently, these promissory or ``Partial Claim'' notes assess no interest and are not due and payable until the mortgagor either pays off the first mortgage or no longer owns the property.

The issue of a similar VA partial claim program has been discussed for many years within Congress and at VA. However, Congress has not specifically authorized VA to develop such a program. As explained above, partial claim payments are actually payments on behalf of homeowners to their loan holders, but VA has no authorization to make direct loans to borrowers to cover their delinquent payments, so a partial claim program is not feasible. Instead, VA believes that by encouraging holders to consider extended repayment plans or even loan modifications, borrowers should receive the assistance necessary to retain ownership of their homes. Therefore, VA does not concur that a partial claim program should be instituted in the new final rule in Sec. 36.4819.
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36.4820 Refunding of Loans in Default

Comment: VA should establish a process to extend the deadline to allow for recording of documents.

VA Response: VA does not concur. VA proposed in Sec. 36.4318(c) to establish a deadline for submission of title documents on refunded loans, and to allow VA to impose a penalty for continued failure to comply with that deadline. VA must retain the option to take appropriate action when a holder has demonstrated a continued pattern of noncompliance with VA requests for timely delivery of documents that should be readily available, given the routine nature of loan transfers within the industry. VA has slightly modified the language to clarify that in accordance with the general rule, as applied throughout VA's regulations, notice to VA is deemed to be effective as of the date that VA receives such notice; notice from VA to others is deemed effective as of the date that VA sends or transmits such notice. If a holder encounters an occasional delay due to failure by a former servicer to adequately document a servicing transfer, for example, then VA does not expect to take the action authorized by the proposed rule in Sec. 36.4318(c). On the other hand, if a servicer routinely fails to properly perform its duties on behalf of the holder and consistently fails to timely provide documents that should be readily available, and if the servicer fails to correct its practices after VA provides notice, then the final rule in Sec. 36.4820(c) enables VA to focus the attention of the servicer to its problems by temporarily withholding all payments until the specific deficiencies cited by VA have been resolved. Therefore, the ``process'' proposed by the comment is not necessary and the final rule in Sec. 36.4820 remains as proposed.

Comment: VA should make the title document requirements for refunding conform to the liquidation title package requirements.

VA Response: VA does not concur. The proposed rule Sec. 36.4318 required provision of all legal documents required to evidence proper loan transfer. Refunding of a loan is simply an assignment, rather than a liquidation, and therefore does not involve documents establishing ownership of a property. Accordingly, the title document requirements for refunding review and conveyance of properties must be different. The final rule Sec. 36.4820(c) remains as proposed.

36.4821 Service of Process

Comment: VA should define ``procedural papers'' in more detailfor example, does this include pleadings, claim back up, etc.?

VA Response: VA does not concur. The existing rule Sec. 36.4319(a) requires that all ``procedural papers'' be provided to VA whenever a loan holder institutes suit or otherwise becomes a party in any legal or equitable proceeding brought on or in connection with the guaranteed or insured loan indebtedness, or involving title to, or other lien on, the security. The final rule Sec. 36.4821(a) requires only that VA and the United States Attorney be provided with process when the Secretary of Veterans Affairs is actually named as a party to a legal action, which is effectively the definition of ``procedural papers'' that must be delivered to VA. VA has no specific requirement for the retention of pleadings or other actions in the normal course of a loan termination, although the final rule in Sec. 36.4833 requires the holder to maintain a record of the amounts received on the obligation and disbursements chargeable thereto and the dates thereof, including copies of bills and receipts for such disbursements. This is the type of ``claim backup'' referenced in Sec. 36.4824(d)(5), which provides that supporting documents will not be submitted with the claim under guaranty, but are subject to inspection as provided in Sec. 36.4833. The final rule Sec. 36.4821 remains as proposed.

36.4822 Loan Termination

Comment: VA should adjust the timeframes for foreclosure and also establish automatic extensions for many different types of delays.

VA Response: VA has reviewed all of the individual State timeframes for foreclosure in the proposed rule Sec. 36.4319a(a), has taken into consideration the specific information provided in the comments on the processes, and is adjusting the timeframes in the final rule. In addition, VA is slightly revising the final Sec. 36.4814(f)(2) and Sec. 36.4824(a)(3)(ii), which describe the calculation of the maximum interest payable on a foreclosure, so that the calculation of the date to which interest will be paid shall include 210 calendar days from the due date of the last paid installment, in addition to the State calendar day timeframe for foreclosure. This is in response to comments requesting additional time for loss mitigation efforts. It equates to the present guideline used by VA in establishing interest cutoffs, in that it allows 180 days from the date of last paid installment (which is t

FOR FURTHER INFORMATION CONTACT Mike Frueh, Assistant Director for Loan Management (261), Veterans Benefits Administration, Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420, at 2024619521. (This is not a tollfree telephone number.)