The U.S. Department of Veterans Affairs (VA) recently proposed rules under its home loan guaranty program regarding adjustable rate mortgage (ARM) loans, hybrid ARM (h-ARM) loans and temporary buydown agreements. Comments are due August 20, 2024.
ARM Loans and H-ARM Loans
The VA’s rules currently provide that “Interest rate adjustments must occur on an annual basis, except that the first adjustment may occur no sooner than 36 months from the date of the borrower’s first mortgage payment.” In contrast, current statutes governing VA home loans provide that (1) the interest rate on ARM loans must adjust on an annual basis, and (2) the interest rate on h-ARM loans must be fixed for a period of not less than the first three years of the mortgage term, and after the fixed period then must adjust on an annual basis. Nevertheless, the VA advises in the preamble to the proposed rule that it has been guaranteeing loans on the basis provided for in the statute. To conform existing VA regulations with VA home loan statutory provisions, the proposed rule provides that (1) the interest rate on ARM loans must adjust on an annual basis starting from the date of the veteran’s first scheduled monthly mortgage payment due date, and (2) for h-ARM loans the first adjustment must not occur sooner than 36 months from the date of the veteran’s first scheduled monthly mortgage payment due date, and after the fixed interest rate period adjustments must occur on an annual basis.
Consistent with current VA rules, changes in the interest rate would need to correspond to changes in the weekly average yield on 1 year (52 weeks) Treasury bills adjusted to a constant maturity, although the language of the index provision would be updated.
With regard to the method of implementing a rate adjustment, the proposed rule would replace the language of the existing rule providing for “adjustments to the borrower’s monthly payments’’ with ‘‘adjustments to the [V]eteran’s scheduled monthly payment amount” to clarify that adjustments may only be made by changing the payment amount and not, for example, the number of payments.
With rate adjustments, consistent with current VA rules the new index value would be added to the margin and then rounded to the nearest one-eighth of one percent. With regard to the amount of rate adjustments, the proposed rule would add provisions specifically for h-ARM loans that provide as follows:
- For loans with an initial fixed interest rate period of less than 5 years (a) no single annual adjustment to the interest rate may result in a change in either direction of more than 1 percentage point from the interest rate in effect for the period immediately preceding that adjustment, (b) index rate changes in excess of 1 percentage point may not be carried over for inclusion in an adjustment in a subsequent year, and (c) adjustments to the interest rate over the entire term of the loan are limited to a maximum increase of 5 percentage points from the initial interest rate.
- For loans with an initial fixed interest rate period of 5 or more years (a) no single annual adjustment to the interest rate may result in a change in either direction of more than 2 percentage points from the interest rate in effect for the period immediately preceding that adjustment, (b) index rate changes in excess of 2 percentage points may not be carried over for inclusion in an adjustment in a subsequent year, and (c) adjustments to the interest rate over the entire term of the loan are limited to a maximum increase of 6 percentage points from the initial interest rate.
The proposed rule would add a provision expressly addressing underwriting requirements with ARM loans and h-ARM loans for cases in which a loan must be underwritten under general VA standards. Under the provision (1) for ARM loans lenders would be required to use an interest rate not lower than 1 percentage point above the initial interest rate, and (2) for h-ARM loans lenders would be required to use an interest rate not lower than the initial interest rate. Lenders would be permitted to underwrite loans based on rates higher than the minimum specified rates to account for other applicable credit and risk factors.
The proposed rule would modify an existing rule requiring that the veteran be provided with a pre-loan disclosure that must contain specified information regarding the adjustable rate terms by replacing the list of required information with a reference to certain Loan Estimate disclosure requirements under the TILA/RESPA Integrated Disclosure (TRID) rule. Consistent with the existing pre-loan disclosure requirements, the lender would be required to obtain the veteran’s signature on the Loan Estimate, and retain a copy of the signed Loan Estimate in the lender’s permanent record on the loan. Under the TRID rule, obtaining the borrower’s signature on the Loan Estimate is optional.
The proposed rule would replace the existing annual disclosure provision with a provision that incorporates ARM loan adjustment notice requirements under Regulation Z. Lenders would need to make a copy of the notices part of the lender’s permanent record on the loan.
The proposed rule also would implement various other conforming and clarifying changes.
Temporary Buydown Agreements
The proposed rule would add a new provision addressing requirements and limitations for temporary buydown agreements. The provision would prohibit the inclusion of buydown funds in the loan amount would, and also prohibit the use of temporary buydown agreements “as a cash-advance on principal, such as through subsidizing payments through an above market interest rate, discount points, or a combination of discount points and above market interest rate.” The provision would limit the use of temporary buydown agreements to fixed rate loans.
The provision would impose the following requirements regarding terms of temporary buydown agreements:
- The buydown arrangement could be in effect for up to the first 36 monthly payments on the loan.
- Changes in the monthly payment could occur only on an annual basis.
- Each change in the monthly payment could not increase the payment by more than the equivalent of a one percentage point increase in the interest rate.
The temporary buydown funds would need to be held in a separate escrow account, and the funds in the account could be used only to pay the monthly buydown payments in accordance with the temporary buydown agreement. If the loan terminates during the temporary buydown period, the remaining funds would need to be credited to the outstanding indebtedness. If the loan is assumed during the buydown period, the buydown funds would need to be paid out of the account on behalf of the new borrower in accordance with the temporary buydown agreement.
Lenders would be required to underwrite the loan at the interest rate stated on the mortgage note. However, a temporary buydown agreement could be treated as a compensating factor if there are indications that the veteran’s income used to support the loan application will increase to cover the yearly increases in loan payments or that the buydown plan is being used to offset a short-term debt.
Lenders would be required to provide veterans with a clear, written explanation of the temporary buydown agreement. The explanation would need to include a description of the number of monthly payments for which the assistance will run, the total payment assistance amount, and the monthly payment schedule reflecting the amount of each monthly buydown payment and the veteran’s monthly payment.
[View source.]
