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shall be by certified mail when so provided by $$ 36.4300 to 36.4375. This paragraph does not apply to legal process. (58 FR 29117, May 19, 1993)

$36.4333 Satisfaction of indebtedness.

Upon full satisfaction of a guaranteed loan by payment or otherwise it shall be the duty of the holder to cancel the endorsement, if any, of the Secretary; and forthwith inform the Secretary of such cancellation. In the event the Secretary's liability thereon is evidenced by an instrument separate from the instrument evidencing the debtor's obligation, the instrument evidencing the obligation of the Secretary shall be returned to the Department of Veterans Affairs office issuing same, or to the central office, with the holder's cancellation or endorsement of release thereon. [13 FR 7279, Nov. 27, 1948]

(not substantive) nature, any employee designated in 836.4342 is hereby authorized to grant similar relief if he or she finds the failure or error of the lender was due to misunderstanding or mistake and that the interests of the Government are not adversely affected. Provisions of the regulations considered to be of an administrative or procedural (nonsubstantive) nature are limited to the following:

(a) The requirement in $36.4314(e) that a holder promptly forward an advice of the terms of any agreement effecting a reamortization or extension of a loan.

(b) The 45-day requirement in $36.4315(a) concerning the giving of notice of default.

(c) The requirement in 836.4317 that a holder give 30 days advance notice of its intention to foreclose.

(d) The requirement in $36.4317(b) that a holder give notice of repossession of personal property within 10 days after such repossession has occurred.

(e) The requirement in 836.4307(a) that a lender obtain in prior approval of the Secretary before closing a joint loan if the lender or class of lenders is eligible or has been approved by the Secretary to close loans on the automatic basis pursuant to 38 U.S.C. 3702(d).

(f) The requirements in 836.4303(k) of this part concerning the giving of notice in assumption cases under 38 U.S.C. 3714.

$36.4334 Incorporation by reference.

Regulations issued under 38 U.S.C. Chapter 37 and in effect on the date of any loan which is submitted and accepted or approved for a guaranty or for insurance thereunder, shall govern the rights, duties, and liabilities of the parties to such loan and any provisions of the loan instruments inconsistent with such regulations are hereby amended and supplemented to conform thereto. (24 FR 2655, Apr. 7, 1959)

(Authority: 38 U.S.C. 3714 and 3720) [20 FR 4855, July 8, 1955, as amended at 20 FR 9180, Dec. 10, 1955; 23 FR 2217, Apr. 4, 1958; 27 FR 224, Jan. 9, 1962; 40 FR 34592, Aug. 18, 1975; 45 FR 53809, Aug. 13, 1980; 49 FR 13352, Apr. 4, 1984; 55 FR 37477, Sept. 12, 1990; 61 FR 28058, June 4, 1996; 63 FR 12004, Mar. 12, 1998]

$36.4335 Supplementary administra

tive action. Notwithstanding any requirement, condition, or limitation stated in or imposed by the regulations concerning the guaranty or insurance of loans to veterans, the Under Secretary for Benefits, or the Director, Loan Guaranty Service, within the limitations and conditions prescribed by the Secretary, is hereby authorized, if he or she finds the interests of the Government are not adversely affected, to relieve undue prejudice to a debtor, holder, or other person, which might otherwise result, provided no such action may be taken which would impair the vested rights of any person affected thereby. If such requirement, condition, or limitation is of an administrative or procedural

$36.4336 Eligibility of loans; reason

able value requirements. (a) Evidence of guaranty or insurance shall be issued in respect to a loan for any of the purposes specified in 38 U.S.C. 3710(a) only if:

(1) The proceeds of such loan have been used to pay for the property purchased, constructed, repaired, refinanced, altered, or improved and;

(2)(i) Except as to refinancing loans pursuant to 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), (a)(11), or (b)(7) and energy efficient mortgages pursuant to 38 U.S.C. 3710(d), the loan (including any scheduled deferred interest added to principal) does not exceed the reasonable value of the property or projected reasonable value of a new home which is security for a graduated payment mortgage loan, as appropriate, as determined by the Secretary, and

(ii) For the purpose of determining the reasonable value of a graduated payment mortgage loan to purchase a new home, the reasonable value of the property as of the time the loan is made shall be calculated to increase at a rate not in excess of 2.5 percent per year, but in no event may the projected value of the property exceed 115 percent of the initially established reason able value, and

property as of said date and that vi dence of guaranty or insurance cri di is issued in respect thereof, as betw el the holder and Secretary (for the , ur pose of computing the claim on thi guaranty or insurance and for the j ur poses of $ 36.4320, and all accountin ,s) the indebtedness which is the sub ec of the guaranty or insurance shall b deemed to have been reduced as of th date of the loan by a sum equal to sacl excess, less any amounts secured by liens released or paid on the obliga tions secured by such superior lienii o rights by a holder or others without ex pense to or obligation on the debtor re sulting from such payment, or release of lien or right; and all payments made on the loan shall be applied to the in debtedness as so reduced. Nothing in this paragraph affects any right or li ability resulting from fraud or willfu misrepresentation.

(Authority: 38 U.S.C. 501, 3703(c)(1); 38 U.S.C 501, 3710, 3712) [33 FR 6975, May 9, 1968, as amended at 35 FI 17180, Nov. 7, 1970; 40 FR 34592, Aug. 18, 1975 46 FR 43673, Aug. 31, 1981; 47 FR 15139, Apr. 8 1982; 50 FR 3335, Jan. 24, 1985; 60 FR 38262 July 26, 1995)

(Authority: 38 U.S.C. 3703(d)(2))

(3) The veteran has certified, in such form as the Secretary may prescribe, that the veteran has paid in cash from his or her own resources on account of such purchase, construction, alteration, repair, or improvement a sum equal to the difference, if any, between the purchase price or cost of the property and its reasonable value.

(4) A loan guaranteed under 38 U.S.C. 3710(d) which includes the cost of energy efficient improvements may exceed the reasonable value of the property. The cost of the energy efficient improvements that may be financed may not exceed $3,000; provided, how ever, that up to $6,000 in energy efficient improvements may be financed if the increase in the monthly payment for principal and interest does not exceed the likely reduction in monthly utility costs resulting from the energy efficient improvements.

UNDERWRITING STANDARDS, PROCESSING PROCEDURES, AND LENDER RESPONSI BILITY AND CERTIFICATION

$36.4337 Underwriting standards

processing procedures, lender re sponsibility, and lender certifi

cation. (a) Use of standards. The standards contained in paragraphs (c) through (j of this section will be used to deter mine whether the veteran's present and anticipated income and expenses, and credit history are satisfactory. Thes standards do not apply to loans guar anteed pursuant to 38 U.S.C. 3710(a)(8 except for cases where the Secretary i required to approve the loan in advanc under $36.4306a.

(Authority: 38 U.S.C. 3710)

(b) Notwithstanding that the aggregate of the loan amount in the case of loans for the purposes specified in paragraph (a) of this section, and the amount remaining unpaid on taxes, special assessments, prior mortgage indebtedness, or other obligations of any character secured by enforceable superior liens or a right to such lien existing as of the date the loan is closed exceeds the reasonable value of such

(Authority: 38 U.S.C. 3703, 3710)

(b) Waiver of standards. Use of th standards in paragraphs (c) through (j of this section for underwriting hom

loans will be waived only in extraor- the loan is automatically approved. It dinary circumstances when the Sec- is the lender's responsibility to base retary determines, considering the to the loan approval or disapproval on all tality of circumstances, that the vet- the factors present for any individual eran is a satisfactory credit risk.

veteran. The veteran's credit must be (c) Methods. The two primary under- evaluated based on the criteria set writing tools that will be used in deter- forth in paragraph (g) of this section as mining the adequacy of the veteran's well as a variety of compensating facpresent and anticipated income are tors that should be evaluated. debt-to-income ratio and residual in (5) The following are examples of accome analysis. They are described in ceptable compensating factors to be paragraphs (d) through (f) of this sec- considered in the course of undertion. Ordinarily, to qualify for a loan, writing a loan: the veteran must meet both standards. (i) Excellent long-term credit; Failure to meet one standard, however, (ii) Conservative use of consumer will not automatically disqualify a vet- credit; eran. The following shall apply to cases (iii) Minimal consumer debt; where a veteran does not meet both (iv) Long-term employment; standards:

(v) Significant liquid assets; (1) If the debt-to-income ratio is 41 (vi) Downpayment or the existence of percent or less, and the veteran does equity in refinancing loans; not meet the residual income standard, (vii) Little or no increase in shelter the loan may be approved with jus- expense; tification, by the underwriter's super- (viii) Military benefits; visor, as set out in paragraph (c)(4) of (ix) Satisfactory homeownership exthis section.

perience; (2) If the debt-to-income ratio is (x) High residual income; greater than 41 percent (unless it is (xi) Low debt-to-income ratio; larger due solely to the existence of (xii) Tax credits of a continuing natax-free income which should be noted ture, such as tax credits for child care; in the loan file), the loan may be ap- and proved with justification, by the under- (xiii) Tax benefits of home ownerwriter's supervisor, as set out in para- ship. graph (c)(4) of this section.

(6) The list in paragraph (c)(5) of this (3) If the ratio is greater than 41 per section is not exhaustive and the items cent and the residual income exceeds are not in any priority order. Valid the guidelines by at least 20 percent, compensating factors should represent the second level review and statement unusual strengths rather than mere of justification are not required.

satisfaction of basic program require(4) In any case described by para- ments. Compensating factors must be graphs (c)(1) and (c)(2) of this section, relevant to the marginality or weakthe lender must fully justify the deci ness. sion to approve the loan or submit the (d) Debt-to-income ratio. A debt-to-inloan to the Secretary for prior ap- come ratio that compares the veteran's proval in writing. The lender's state- anticipated monthly housing expense ment must not be perfunctory, but and total monthly obligations to his or should address the specific compen her stable monthly income will be sating factors, as set forth in para computed to assist in the assessment of graph (c)(5) of this section, justifying the potential risk of the loan. The the approval of the loan. The state- ratio will be determined by taking the ment must be signed by the under sum of the monthly Principal, Interest, Writer's supervisor. It must be stressed Taxes and Insurance (PITI) of the loan that the statute requires not only con- being applied for, homeowners and sideration of a veteran's present and other assessments such as special asanticipated income and expenses, but sessments, condominium fees, homeAlso that the veteran be a satisfactory owners association fees, etc., and any credit risk. Therefore, meeting both long-term obligations divided by the de debt-to-income ratio and residual total of gross salary or earnings and income standards does not mean that other compensation or income. The ratio should be rounded to the nearest home purchase may not compel such two digits; e.g., 35.6 percent would be expenditures. It should also be clearly rounded to 36 percent. The standard is understood from this information that 41 percent or less. If the ratio is greater no single factor is a final determinant than 41 percent, the steps cited in para in any applicant's qualification for a graphs (c)(1) through (c)(6) of this sec VA-guaranteed loan. Once the residual tion apply.

income has been established, other im(e) Residual income guidelines. The

portant factors must be examined. One guidelines provided in this paragraph

such consideration is the amount being for residual income will be used to de

paid currently for rental or housing extermine whether the veteran's monthly

penses. If the proposed shelter expense residual income will be adequate to

is materially in excess of what is curmeet living expenses after estimated

rently being paid, the case may require monthly shelter expenses have been paid and other monthly obligations

closer scrutiny. In such cases, consilierhave been met. All members of the

ation should be given to the ability of household must be included in deter

the borrower and spouse to accumulate mining if the residual income is suffi

liquid assets, such as cash and bonds, cient. They must be counted even if the and to the amount of debts incurred veteran's spouse is not joining in title while paying a lesser amount for shelor on the note, or if there are any other ter. For example, if an application inindividuals depending on the veteran dicates little or no capital reserves and for support, such as children from a excessive obligations, it may not be spouse's prior marriage who are not reasonable to conclude that a substanthe veteran's legal dependents. It is ap- tial increase in shelter expenses can be propriate, however, to reduce the num- absorbed. Another factor of prime imber of members of a household to be portance is the applicant's manner of counted for residual income purposes if meeting obligations. A poor credit histhere is sufficient verified income not tory alone is a basis for disapproving a otherwise included in the loan anal- loan, as is an obviously inadequate inysis, such as child support being regu come. When one or the other is marlarly received as discussed in para ginal, however, the remaining aspect graph (e)(4) of this section. In the case

must be closely examined to assure of a spouse not to be obligated on the

that the loan applied for will not exnote, verification that he/she has sta

ceed the applicant's ability or capacity ble and reliable employment as dis

to repay. Therefore, it is important to cussed in paragraph (f)(3) of this sec

remember that the figures provided tion would allow not counting the

below for residual income are to be spouse in determining the sufficiency

used as a guide and should be used in of the residual income. The guidelines

conjunction with the steps outlined in for residual income are based on data supplied in the Consumer Expenditure

paragraphs (c) through (j) of this secSurvey (CES) published by the Depart

tion. The residual income guidelines ment of Labor's Bureau of Labor Sta

are as follows: tistics. Regional minimum incomes

(1) Table of residual incomes by rehave been developed for loan amounts

gion (for loan amounts of $79,999 and up to $79,999 and for loan amounts of below): $80,000 and above. It is recognized that

TABLE OF RESIDUAL INCOMES BY REGION the purchase price of the property may affect family expenditure levels in indi

(For loan amounts of $79,999 and below) vidual cases. This factor may be given

Family size Northeast Midwest South West consideration in the final determination in individual loan analyses. For

390

382

425 example, a family purchasing in a

654 641 641 713 788

772 higher-priced neighborhood may feel a

859 888

868 967 need to incur higher-than-average ex

5 ...................
921 902

902 1.004 penses to support a lifestyle comparable to that in their environment,

*For families with more than five members, add $75 te

each additional member up to a family of seven. "Family” ir whereas a substantially lower-priced cludes all members of the household.

382

2

772

4 ....

868

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(3) Geographic regions for residual income guidelines: Northeast-Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont; Midwest-Illinois, Indiana, Iowa, Kansas, Michigan Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin; South-Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia, West Virginia; West-Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.

(4) Military adjustments. For loan applications involving an active-duty servicemember or military retiree, the residual income figures will be reduced by a minimum of 5 percent if there is a clear indication that the borrower or spouse will continue to receive the benefits resulting from the use of facilities on a nearby military base. (This reduction applies to tables in paragraph (e) of this section.)

(1) Stability and reliability of income. Only stable and reliable income of the veteran and spouse can be considered in determining ability to meet mortgage payments. Income can be considered stable and reliable if it can be concluded that it will continue during the foreseeable future.

(1) Verification. Income of the borrower and spouse which is derived from employment and which is considered in determining the family's ability to meet the mortgage payments, payments on debts and other obligations,

and other expenses must be verified. If the spouse is employed and will be contractually obligated on the loan, the combined income of both the veteran and spouse is considered when the income of the veteran alone is not sufficient to qualify for the amount of the loan sought. In other than community property states, if the spouse will not be contractually obligated on the loan, Regulation B (12 CFR part 202), promulgated by the Federal Reserve Board pursuant to the Equal Credit Opportunity Act, prohibits any request for, or consideration of, information concerning the spouse (including income, employment, assets, or liabilities), except that if the applicant is relying on alimony, child support, or maintenance payments from a spouse or former spouse as a basis for repayment of the loan, information concerning such spouse or former spouse may be requested and considered (see paragraph (f)(4) of this section). In community property states, information concerning a spouse may be requested and considered in the same manner as that for the applicant. The standards applied to income of the veteran are also applicable to that of the spouse. There can be no discounting of income on account of sex, marital status, or any other basis prohibited by the Equal Credit Opportunity Act. Income claimed by an applicant that is not or cannot be verified cannot be considered when analyzing the loan. If the veteran or spouse has been employed by a present employer for less than 2 years, a 2-year history covering prior employment, schooling, or other training must be secured. Any periods of unemployment must be explained. Employment verifications and pay stubs must be no more than 120 days (180 days for new construction) old to be considered valid. For loans closed automatically, this requirement will be considered satisfied if the date of the employment verification is within 120 days (180 days for new construction) of the date the note is signed. For prior approval loans, this requirement will be considered satisfied if the verification of employment is dated within 120 days of the date the application is received by VA.

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