The U.S. Department of Veterans Affairs (VA) recently proposed rules to modify the requirements for the reporting of VA guaranteed mortgage loans, and the rules regarding when the VA would assert a defense for a partial or total loss of a guaranty for a VA guaranteed mortgage loan.  Comments on the proposal are due by January 21, 2025.

Reporting of Loans

The VA proposes to require that lenders report information to the VA, and remit the funding fee, using an application program interface (API) that it designates in the Federal Register.  The VA would provide at least 60 days’ notice before a lender is required to use a newly designated API for reporting and remitting. 

For loans closed on an automatic basis, not later than 15 days after the loan closing date the lender would need to submit the following to the VA via the API:

• The appropriate funding fee.
• 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 VA as necessary to issue a loan guaranty certificate.
• Required lender certifications related to the loan.
• The applicable veteran certification regarding the occupancy of the property.

The use of the API would replace the current approach by which lenders use the VA Funding Fee Payment System to remit the funding fee and report the required information using the VA’s online application WebLGY.

For loans that must be approved by the VA before closing, the lender would be required to report certain pre-closing and underwriting loan documents to the VA, and would be required to use an API if so designated by the VA.  The documents would include:

• The loan application (e.g., Uniform Residential Loan Application).
• Credit reports obtained in connection with the loan.
• Certain VA forms as required by the VA.
• The applicable veteran certification regarding the occupancy of the property.
• Any other information requested by the VA.

The VA advises that it expects to require the use of an API for the required reporting for prior approval loans, but that the API is not ready for use.

After the loan closes, not later than 15 days after the loan closing date the lender would need to submit the following to the VA via the API that also is used for loans closed on an automatic basis:

• The appropriate funding fee.
• 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 VA as necessary to issue a loan guaranty certificate.
• Evidence that any conditions identified by the VA in the certificate of commitment are satisfied.
• Evidence showing the property securing the loan is the property 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.
• Required lender certifications related to the loan.
• The applicable veteran certification regarding the occupancy of the property.

Partial or Total Loss of Guaranty

The VA proposes to rewrite section 36.4328 of its existing regulations regarding how lender or holder noncompliance with VA requirements can affect the guaranty and VA’s payment of the guaranty.  The VA explains that “[t]he 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.”

Under the proposal, if a lender made a material misrepresentation when reporting a loan to the VA and the VA identifies the misrepresentation before issuing the loan guaranty certificate (LGC), the VA will notify the lender of VA’s findings and VA will issue the LGC with a maximum guaranty amount of one dollar.  Explaining this approach, the VA advises that “[f]or example, in a situation where a lender reported to VA a $400,000 loan but VA found an improper charge of $100, VA would . . . notify the lender that the LGC is issued in the amount of $1 rather than the expected $100,000.”  In cases in which the lender made a material misrepresentation when reporting a loan to the VA and the VA identifies the misrepresentation after the LGC is issued, the VA will notify the lender as follows: (1) if the originating lender is the current loan holder, that the maximum guaranty amount on the loan has been reduced to one dollar, and (2) if the originating lender is not the current loan holder, that the 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, which often are referred to as “IRRRLs”.

The VA explains the inclusion of a subsequent IRRRL in the indemnification as follows: 

“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.  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, 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.”  (Citations omitted.)

In notifying the lender of the reduced LGC amount or indemnification, the VA will also identify corrective action(s), if any, that the VA determines are necessary to remediate the effects of the material misrepresentation.  If the lender is able to remediate the effects of the material misrepresentation, after VA receives confirming evidence, the VA may either restore the guaranty to the full amount or cancel the indemnification, as applicable.  While the proposed rule provides that in this situation “the VA may either restore the guaranty to the full amount or cancel the indemnification” in the preamble to the proposal the VA states that it “would either restore the guaranty to the full amount or cancel the indemnification.” (Emphasis added.)

The VA explains in the preamble to the proposal that “[c]onsistent 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.”  The VA also notes that while it has for some time offered lenders the opportunity to indemnify the VA against any eventual loss when the lender violated one of VA’s regulations, it has not sought to codify the procedure explicitly until now.

With regard to a party that acquires a VA loan after origination, which the VA refers to as a “holder,” the proposed rule provides that (1) the VA would not have liability on account of a guaranty or insurance, or any LGC, with respect to a transaction in which VA determines the holder or holder’s agent participated in fraud in procuring the guaranty or insurance, and (2) the VA would not have 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.  The proposal also provides that the VA may adjust the amount of the guaranty or insurance, or any LGC, if the VA determines the holder knew or should have known, at the time the holder reports the loan for a 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.  The VA proposes to remove from the existing rule nine specific potential reasons for an adjustment.  However, the VA advises in the preamble that “[s]takeholders 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.”

The proposal also provides that the VA may adjust the amounts payable to the holder if VA determines that (1) 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, which would relate to the servicing of the loan, or (2) the holder knew or should have known of a material misrepresentation in reporting to the VA or in submitting a claim to VA for payment of the guaranty or insurance.  The burden of proof would be on the holder to establish that no increase of ultimate liability is attributable to such failure or misrepresentation.

In cases in which, after a claim has been paid or the loan has been transferred to the VA, the VA discovers any fraud, material misrepresentation, or failure to comply with VA regulations 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 VA for the amount of the loss caused by such fraud, material misrepresentation, or failure.