VA guidelines

VA Announcement on Loan Modification Regulations

December 30, 2011

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VA Announcement on Loan Modification Regulations

VA Circular 26-11-22 was issued on December 23 to announce final changes to the rules for modifying VA insured home loans. The instructions were previously issued as an “interim final rule” but since that time, the Department of Veterans Affairs has finalized the regulations.

According to the VA circular, in 2008 the Department of Veterans Affairs revised the rulebook to give VA approved lenders more authority to modify loans guaranteed under the VA loan program without having to seek prior approval. “Subsequent to that change,” the VA circular states, “VA noted that some portions of the 2008 rule created burdens or obstacles to modifying VA loans.”

In February of 2011, the VA addressed those obstacles by publishing the interim final rule.”The public submitted comments on the interim final rule and in response VA slightly revised the final rule as published in the Federal Register (76 FR 78827) on December 20, 2011, effective January 19, 2012.”

What were those revisions? According to the announcement, public comments included the suggestion that the Department of Veterans Affairs “change the establishment of the maximum interest rate from the date the modification is executed to the date the modification is approved. VA agreed with this comment and revised 38 CFR 36.4315(a)(8)(i) by replacing the word “executed” with the word “approved”. Other comments suggested that VA set a limit of $1,000 on the amount of legal fees that may be capitalized when a loan is modified.”

The VA circular adds that “In recognition that fees vary from state to state based on legal procedures, VA amended 38 CFR 36.4315(a)(10) to limit the amount of legal fees and costs for a canceled foreclosure that may be included in the modified indebtedness to the maximum amounts prescribed in 38 CFR 36.4314.”

Not all the public comments resulted in changes to the interim final rule. According to the VA, some suggested that the interest rate and payment on a modified VA home loan be lower than the interest rate on the original mortgage.

“VA did not concur because this was considered to be a disincentive for loan servicers to complete modifications.  Another comment suggesting mandatory loss mitigation was not acted upon because existing VA regulations both require and encourage loss mitigation efforts.”

What are the requirements under the newly revised rules for VA loan modification without prior consent from the VA? According to the VA circular, “Paragraph (a) of 38 CFR 36.4315 contains the conditions that must be satisfied for a servicer to modify a loan without first obtaining VA’s prior approval.” Those conditions include, but are not limited to:

(1) The loan is in default;

(2) The event or circumstances that caused the default has been or will be resolved and it is not expected to re-occur;

(3) The obligor is considered to be a reasonable credit risk, based on a review by the holder of the obligor’s creditworthiness under the criteria specified in 36.4840, including a current credit report. The fact of the recent default will not preclude the holder from determining the obligor is now a satisfactory credit risk provided the holder determines that the obligor is able to resume regular mortgage installments when the modification becomes effective based upon a review of the obligor’s current and anticipated income, expenses, and other obligations as provided in 36.4840;

(4) At least 12 monthly payments have been paid since the closing date of the loan

You can view the entire contents of the VA announcement on VA Loan modification rules at http://www.benefits.va.gov/HOMELOANS/circulars/26_11_22.pdf

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