Current Issues

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Current Issues

VA Pamphlet 26-7, Revised Current Issues

    Current Issues


In this chapter This chapter contains the following topics.

    Topic See Page

    CI.01 Electronic Publication of Lender’s Handbook CI-2

    CI.02 Misleading Advertisements CI-3

    CI.03 Automated Underwriting CI-5

    CI.04 Home Mortgage Disclosure Act (HMDA) CI-6

    CI.05 VA Restructuring of the Loan Processing Function CI-10

    CI.06 Modified Guaranty Submission Procedure CI-11


Current Issues VA Pamphlet 26-7, Revised

    CI.01 Electronic Publication of Lender’s Handbook

    Which VA Pamphlet 26-7, VA Lender’s Handbook, along with H26-94-1, VA

    Servicing Guide, are now available electronically on the Internet. Changes to Publications are

    the handbook and Servicing Guide will be available on the Internet when signed, Available

    which will often be before they are printed and mailed. Lenders are strongly Electronically?

    encouraged to begin accessing these publications electronically.

    Excerpts from certain Loan Guaranty circulars beginning in 1996 are also

    available electronically. Circulars contain information about changes to VA

    policies and/or procedures and information that regional offices are required to

    release to lenders and/or servicers in their area. Circulars which only discuss

    internal VA procedures are not included.

    Internet The Internet address is: Address

Commercial There are also commercial services distributing VA documents electronically.

    For example, the Mortgage Resource Center (800-848-4904) offers them on Services

    diskettes for those without access to the Internet as well as over the Internet

    (http:/ They can notify lenders by electronic mail when

    lender’s handbook changes or circulars are issued.


    VA Pamphlet 26-7, Revised Current Issues

    CI.02 Misleading Advertisements

    Policy The Department of Veterans Affairs always strives to provide all veterans the most up-to-date and pertinent information about their benefits. Toward that end,

    all appropriate efforts by lenders to further educate or remind veterans about

    their home loan benefit and the lender’s availability to assist the veteran in

    obtaining the benefit is appreciated. However, it is inappropriate to direct any

    information about benefits to veterans which is in any way misleading.

It must be clearly understood that VA has a very specific mission to serve

    veterans, who are declared by Congress to be a “special class of citizen,” and

    veterans rely on VA to provide dependable service and reliable information

    concerning their benefits. Any action on the part of lenders or other program

    participants which jeopardizes VA’s credibility with veterans or induces veterans

    to obtain loans which are clearly not in their best interests would be viewed by

    VA as actions which are detrimental to the best interests of veterans. If such a

    determination is made, grounds for suspension from participation in the VA Loan Guaranty Program could be established.

    Examples Example 1:

    In increasing numbers, VA has been receiving inquiries and complaints from

    veterans concerning advertisements and solicitations they have received from

    lenders which state that VA has a new program to refinance their VA loan and

    lower their interest rate. In fact, the IRRRL (Interest Rate Reduction

    Refinancing Loan) program has been available to veterans since the enactment

    of The Veterans’ Disability Compensation and Housing Benefits Amendments of 1980 (Public Law 96-385).

In addition, many of these solicitations suggest that the lender has some special

    relationship with VA which enables only them to offer this loan opportunity. Some even clearly attempt to give the impression that the “letter” the veteran

    received came from VA.

    [Public Law 96-385]

    Continued on next page


Current Issues VA Pamphlet 26-7, Revised

    CI.02 Misleading Advertisements, Continued

Examples Example 2:

    (continued) Another unacceptable advertising approach that some lenders have been using is

    to invite veterans to “skip” payments and refinance their loan. It generally gives

    the appearance that VA condones skipping payments and rolling them into the

    new IRRRL. This is not the case. It is irresponsible to suggest to any mortgagor

    that this program encourages skipping payments, or that this is an appropriate

    means of getting around the prohibition against receiving cash from the

    transaction. Any advertising that promotes skipping payments as a means of

    obtaining cash for other purposes is unacceptable.

Lender VA encourages all lenders to continue offering VA financing to all eligible and

    qualified veterans, and it is recognized that mortgage lending is a competitive Responsibility

    industry. However, VA insists that lenders refrain from any and all practices

    which might mislead veterans into actions which are contrary to their own best


    If your firm has been engaging in such advertising, or is considering doing so,

    VA strongly recommends that anything in your promotional material which is in

    any way inaccurate or misleading be deleted. If there is uncertainty about the

    accuracy or propriety of the advertisement or solicitation, please consult with the

    appropriate local VA office or the Loan Policy staff at VA Central Office at

    (202) 273-7368.


VA Pamphlet 26-7, Revised Current Issues

    CI.03 Automated Underwriting

General VA has approved the use of several automated underwriting systems. The

    systems are

    ? Freddie Mac’s Loan Prospector

    ? Fannie Mae’s DU, and

    ? Countrywide’s CLUES System.

    Note: Countrywide’s system is only for use in connection with Countrywide


    The systems are only for use by VA automatic lenders, and only on loans

    eligible for automatic processing.

    These systems assign a risk classification which determines the level of

    underwriting and documentation needed.

Lender The automated systems do not approve or disapprove loans. They merely

    determine a risk classification. It is still the lender’s decision whether or not to Responsibility

    approve the loan.

    Lenders are still responsible for meeting all VA requirements for all loans;

    however they may take advantage of certain documentation waivers based on

    the risk classification.

VA’s Role Although VA has approved the use of these systems, we are not the vendor. The

    terms and conditions of use must be negotiated directly with Fannie Mae and/or

    Freddie Mac.


    Current Issues VA Pamphlet 26-7, Revised

    CI.04 Home Mortgage Disclosure Act (HMDA)

    Compatibility of As a result of releases of Home Mortgage Disclosure Act (HMDA) data, many

    lenders are increasingly concerned that they are taking all appropriate measures VA Program

    to assure access by minorities and lower income households to home mortgage with HMDA

    loans. VA believes that it is important for lenders to be aware of how effectively

    the VA Home Loan Program can assist them in meeting this goal.

    The no down payment feature is, of course, a primary advantage for individuals

    with low-to-moderate incomes. However, lenders should not overlook other

    aspects of the VA program that will help in underwriting loans for such

    applicants. The “VA Credit Standards” are written as guidelines and are meant

    to be interpreted and used just that way, taking into consideration all of an

    individual loan applicant’s financial, employment and family circumstances.

    This topic provides guidance on areas of underwriting that may be of particular

    concern when processing applications for low-to-moderate income borrowers.

    Many of the concepts are discussed in Chapter 4, Credit Underwriting, but are

    repeated here to emphasize their importance and applicability to underwriting

    loans to minority and low-to-moderate income applicants.

    Purpose This topic in the “VA Lender's Handbook” is intended to encourage

    underwriters to find ways to approve loan applications which ought to be

    approved but may not appear approvable upon direct application of the credit

    standards. The examples discussed are certainly not all inclusive, but they

    should help the underwriter recognize that there are those whose lifestyle,

    minority status, or location require consideration of extraordinary, yet valid,

    factors in the underwriting process in order to find a basis for correctly making

    an approval decision.

    Underwriters are encouraged to give consideration to every possible appropriate

    factor in seeking a proper basis for approving loan applications for every

    qualified veteran.

    Continued on next page


    VA Pamphlet 26-7, Revised Current Issues

    CI.04 Home Mortgage Disclosure Act (HMDA), Continued

    Use of VA Prior Although lenders that have automatic authority should use that authority to the

    maximum extent possible, another important tool available to lenders seeking to Approval

    increase credit access by minority and lower income borrowers is the optional Procedure

    use of VA’s prior-approval processing.

Loan applications that may not be clearly approvable under VA’s published

    credit standards but which, in the lender’s view, contain compensating strengths,

    may be sent to VA on the prior-approval basis. Lenders should submit an

    explanation as to why the loan was not closed automatically and point out the

    reasons why they believe the loan may be approvable.

    Employment A borrower’s employment and income stability are vital to the underwriting of a

    loan. There are characteristics that should be considered when underwriting and Income

    loans for low-to-moderate income borrowers when evaluating acceptable Stability

    employment and income.

Changing of Jobs

    It is possible to establish stable and reliable income without having established a

    stable employment history in one position or job. It is not unusual for some

    borrowers to change jobs frequently, even changing lines of work. The borrower

    may be simply going where there is available work. To establish stability and

    continuance of income, the borrower must demonstrate the ability to maintain an

    income at a constant level over the recent 2-year period even if he or she has worked for a variety of employers.

Part-Time Employment

    It is not uncommon for people with limited income from their primary

    employment to take on part-time jobs to supplement their incomes. Ideally the

    borrower should show a two-year history, but one year may be considered for an

    otherwise strong borrower. Underwriters must review such income for probable

    continuance and try to assure that the part-time employment is reasonable and sustainable.

    Continued on next page


Current Issues VA Pamphlet 26-7, Revised

    CI.04 Home Mortgage Disclosure Act (HMDA), Continued

    Employment Periods of Unemployment

    In parts of the country, it is not unusual for some individuals to work for certain and Income

    times of the year and draw unemployment for the remainder of the year (such as Stability

    field workers). A period or periods of unemployment will not automatically be (continued)

    considered unfavorably, provided the unemployment is regular and seasonal, or

    is a limited occurrence between jobs, and unemployment compensation has been

    received during those periods. If the applicant has a history of such an income

    pattern, unemployment compensation as well as income received during periods

    of employment may be used when calculating an individual’s income for loan

    approval purposes.

    Source of Funds Another area where low-to-moderate income borrowers sometimes differ from

    others is the source of funds to close loans. It is not unusual or unacceptable for to Close

    some borrowers to save money at home versus using depositories. In order to be

    acceptable, a reasonable explanation of how the borrower saved the funds should

    be provided.

Credit History In the area of credit, the lack of an established credit history should not be a

    deterrent to loan approval. As provided in the credit standards, a satisfactory

    payment history on items such as rent, utilities, phone bills, etc., may be used to

    establish a satisfactory credit history.

    Continued on next page


    VA Pamphlet 26-7, Revised Current Issues

    CI.04 Home Mortgage Disclosure Act (HMDA), Continued

As stated in the credit standards, no single factor is a determinant in any Consider All applicant’s qualification for a VA-guaranteed loan. Factors

    ? A veteran who has maintained an excellent credit history, (such as satisfactory

    payment of a shelter expense comparable to the proposed shelter expense) may

    be approvable in spite of shortfall in the residual income. In such an instance,

    it might be appropriate to consider that the veteran has established a lifestyle

    which is substantially different from the average used in establishing the

    residual income tables in the credit standards. ? A veteran with a good credit record who meets the residual income guideline

    (without exceeding it by 20 percent) may be approvable in spite of a high debt-

    to-income ratio if the proposed shelter expense is not significantly greater than

    the amount the veteran has been accustomed to paying.

    Compensating The use of compensating factors is encouraged for marginally approvable VA

    loans, and a detailed explanation of their use in underwriting loans is provided in Factors

    the credit standards.

A compensating factor that has come into play quite recently is the numerous

    financial and homeownership counseling programs being provided by a variety

    of sources including banks, mortgage lenders, and community groups. These

    counseling programs are designed to help applicants work out payment plans for

    old debts, design savings plans, and teach basic budgeting skills. Programs often

    include homebuyer education lessons and post-closing counseling to assist the new homeowners once the loan is made. Participation by an applicant in such a

    counseling program can be viewed as a strong compensating factor for a case in

    which it is otherwise difficult to conclude that a borrower is qualified under a

    traditional interpretation of the credit standards.


    Current Issues VA Pamphlet 26-7, Revised CI.05 VA Restructuring of the Loan Processing Function

Rationale Due to reduced staffing in many VA offices, it has become extremely difficult

    for VA to process prior approval loan applications in a timely manner. Lenders

    with automatic authority must therefore use their automatic authority in every

    possible instance.

Use of Prior Except for cases specifically precluded from automatic processing, such as joint

    loans, the only cases lenders should consider submitting to VA for prior Approval

    approval are those in which the underwriter firmly believes approval can be Processing by

    justified. However, the specific facts of the case appear to preclude approval. In Automatic

    such instances, the underwriter must include a Lenders

    ? detailed explanation of why the loan should be approved by VA, plus

    ? thorough justification for not approving the loan on the automatic basis.

    It will not be sufficient to justify submitting the loan to VA solely to comply

    with the veteran’s or the real estate agent’s request to do so.


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