The Department of Veterans Affairs (“VA”) has proposed new rules that would update VA Home Loan guidelines for both “adjustable-rate mortgage loans” and “hybrid adjustable-rate mortgage loans”, as well as requirements for loans with a temporary buydown agreement. The proposed changes were published in the Federal Register June 21st.
ARM and h-ARM Loans
The VA is updating its regulations to make both technical corrections for a distinction between “adjustable-rate mortgage loans” (“ARM” loans) and hybrid adjustable-rate mortgage loans” (“h-ARM” loans) as well as adding new rules based upon those distinctions. VA’s rules have always included a requirement for the interest rate for ARM loans to adjust on an annual basis. H-Arm loans include a requirement that the interest rate adjust no sooner than the initial 36 months and annually thereafter. However, current VA regulations do not include a distinction for these two types of ARM loans based upon prior updates to VA’s regulations as well as its statutory reauthorization to guarantee ARM loans. The proposed rule will make technical corrections to the VA’s regulations to distinguish these types of ARM loans.
Additionally, the VA is proposing adding new rules to its regulations based upon these distinctions. For instance, the proposal includes limits on interest rate caps on adjustments and specific underwriting rules for the two products. ARM loans would be required to be underwritten at an interest rate of not less than 1% above the initial interest rate, while h-ARM loans would be required to be underwritten using at least the initial interest rate. ARM loans would be subject to interest rate caps of adjustments to the rate of no more than 1% at each annual adjustment and a 5% life-of-loan cap. In contrast, h-ARM loans would be subject to no more than 2% for any individual rate adjustment and a 6% life-of-loan cap.
For both ARM and h-ARM loans, the VA is proposing an update to its regulations for the available index on which the interest rate may be based. Currently VA regulations only allow for the use of an index for the weekly average yield on 1-year Treasury bills adjusted to a constant maturity. Many ARM loans, driven by the removal of loans based on Treasury bills by Fannie Mae and Freddie Mac and the discontinuance of LIBOR, have moved to use an index based on SOFR (Secured Overnight Financing Rate), and the GSEs also made updates to Uniform Adjustable-Rate Notes to provide for the use of replacement indexes based upon those changes to the availability of indexes in the market. VA is proposing a similar change to its regulations that would allow use of replacement indexes other than an index based on a 1-year Treasury bill, without requiring a change to VA’s regulations in the future. The proposed language would instead require use of an index that “correspond[s] to a specified national interest rate index approved by the Secretary, information on which is readily accessible to mortgagors from generally available published sources.”
Temporary Buydown Agreements
The VA is also proposing new regulations for buydown agreements on VA loans. The VA proposes to limit buydown agreements to only fixed-rate loans, as is already common, and to not last beyond the first 36 months of payments. Additionally, similar to the restrictions on ARM loan adjustments, the terms for adjustments to the rate under a buydown agreement would not be allowed to provide for more than 1% change at each adjustment, and to require changes only on an annual basis. The proposed rules would also add specific requirements for the agreement’s terms, including the number of payments for which the subsidy would apply, the total subsidy amount, and the monthly payment schedule reflecting the amount of each monthly subsidy and resulting payment by the veteran. The holder of the loan would be required to hold subsidy funds in a separate escrow account used only for this purpose. If the loan ends prior to the end of the monthly buydown subsidy the remaining subsidy amount must be credited against the loan principal. If the loan is assumed by another party, the subsidy funds must continue to be made available for their original purpose as a monthly payment subsidy. Finally, the proposed rules would not allow the funds used for the subsidy to be borrowed by the veteran (not financed into the loan amount) and would require the loan to be underwritten at the unsubsidized rate.
An additional proposed change would be to update the regulation related to the required pre-loan disclosures to reflect the use of the Loan Estimate under 12 C.F.R. § 1026.37 to satisfy those requirements, and to add a requirement that the LE must be signed by the borrower, not allowing use of the optional “Acceptance Statement” in lieu of borrower signatures.
The VA is requesting comments from the public on the proposed changes to VA regulations until August 20, 2024.
