DEPARTMENT OF VETERANS AFFAIRS

8320-01

38 CFR Part 36
RIN 2900-AS08
Loan Guaranty: Adjustable Rate Mortgages, Hybrid Adjustable Rate
Mortgages, and Temporary Buydown Agreements
AGENCY: Department of Veterans Affairs.
ACTION: Proposed rule.

SUMMARY: The Department of Veterans Affairs (VA) proposes to amend its
rules on interest rates for adjustable rate mortgage (ARM) loans and hybrid
adjustable rate mortgage (h-ARM) loans. The proposed rule would ensure VA’s
existing interest rate regulation reflects current statutory requirements regarding
these loans, in a way that makes the loans a more viable, safe product for
Veterans. The proposed rule would also solidify requirements for temporary
buydown agreements to help Veterans temporarily reduce their interest rates
and, in effect, lower their monthly mortgage payments for a specific period of
time.

DATES: Comments must be received on or before [insert date 60 days after date
of publication in the FEDERAL REGISTER].

ADDRESSES: Comments must be submitted through www.regulations.gov.
Except as provided below, comments received before the close of the comment
period will be available at www.regulations.gov for public viewing, inspection, or
copying, including any personally identifiable or confidential business information
that is included in a comment. We post the comments received before the close

of the comment period on www.regulations.gov as soon as possible after they
have been received. VA will not post on Regulations.gov public comments that
make threats to individuals or institutions or suggest that the commenter will take
actions to harm an individual. VA encourages individuals not to submit
duplicative comments; however, we will post comments from multiple unique
commenters even if the content is identical or nearly identical to other comments.
Any public comment received after the comment period’s closing date is
considered late and will not be considered in the final rulemaking. In accordance
with the Providing Accountability Through Transparency Act of 2023, a plain
language summary (not more than 100 words in length) of this proposed rule is
available at www.regulations.gov, under RIN 2900-AS08(P).

FOR FURTHER INFORMATION CONTACT: Stephanie Li, Assistant Director for
Regulations, Legislation, Engagement and Training, and Terry Rouch, Assistant
Director for Loan Policy and Valuation, Loan Guaranty Service (26), Veterans
Benefits Administration, Department of Veterans Affairs, 810 Vermont Avenue,
NW, Washington, DC 20420, (202) 632-8862. (This is not a toll-free telephone
number.)

SUPPLEMENTARY INFORMATION:
I. Background and Legal Authority
VA’s home loan guaranty program assists eligible Veterans1 to purchase,
construct, improve, or refinance a home. Since the benefit was initially introduced

The term “Veteran” is more expansive for the home loan program than for some other VA
benefits. In addition to Veterans defined at 38 U.S.C. 101, the term includes active duty service
members, members of the National Guard and Selected Reserve, surviving spouses, and
spouses of those individuals who are determined missing in action or prisoners of war. See 38
U.S.C. 101, 3701, and 3702. For more information, please visit VA’s website at
https://www.va.gov/housing-assistance/home-loans/eligibility/.
in 1944,2 Congress has enacted laws expanding the types of loans VA may
guarantee. Additionally, sections 3703(c), 3710, and 3720 further provide the
Secretary broad discretion in regulating the terms and conditions of loans,
establishing underwriting standards, and consenting to modified loan terms such
as interest rates. 38 U.S.C. 3703, 3710, and 3720. Lastly, under 38 U.S.C. 501,
“[t]he Secretary has authority to prescribe all rules and regulations which are
necessary or appropriate to carry out the laws administered by the Department.”
Based on these authorities, VA proposes to amend 38 CFR part 36 as discussed
below.
A. Adjustable Rate Mortgages and Hybrid Adjustable Rate Mortgages
Two types of loans VA may guarantee are ARM loans pursuant to 38
U.S.C. 3707 and h-ARM loans pursuant to 38 U.S.C. 3707A. Initially, Congress
allowed VA to guarantee ARM and h-ARM loans under temporary programs, but
VA’s authority was eventually made permanent.3
B. Temporary Buydown Agreements
A temporary buydown agreement is commonly included in a mortgage
contract and involves using up-front funds deposited into an escrow account to
temporarily reduce the interest rate, effectively lowering the monthly mortgage
payment for a specific period lasting anywhere from one to three years. These

Servicemen’s Readjustment Act of 1944, Pub. L. 78-346, 58 Stat. 284.
In 1992, Congress authorized VA to guarantee ARM loans beginning in fiscal year (FY) 1993.
Veterans Home Loan Program Amendments of 1992, Pub. L. 102-547, sec. 3(a)(1), 106 Stat.
3633, 3634. This authority, which expired at the end of FY 1995, was later extended through FY
2008, then through FY 2012, and then, in 2012, made permanent. Veterans Benefits
Improvement Act of 2004, Pub. L. 108-454, sec. 404, 118 Stat. 3598, 3616; Veterans' Benefits
Improvement Act of 2008, Pub. L. 110-389, sec. 505, 122 Stat. 4145, 4176; Honoring America's
Veterans and Caring for Camp Lejeune Families Act of 2012, Pub. L. 112-154, sec. 208, 126
Stat. 1165, 1179. Legislation authorizing VA to guarantee h-ARM loans was first enacted in 2002.
Veterans Benefits Act of 2002, Pub. L. 107-330, title III, sec. 303(a), 116 Stat. 2820, 2825. The
statutory authority, codified at 38 U.S.C. 3707A, expired at the end of FY 2005 but was later
extended through FY 2008, and then through FY 2012. Veterans Benefits Improvement Act of
2004, Pub. L. 108-454, sec. 405, 118 Stat. 3616-3617; Veterans' Benefits Improvement Act of
2008, Pub. L. 110-389, sec. 505, 122 Stat. 4176. In 2012, Congress made permanent VA’s
authority to guarantee h-ARM loans. Pub. L. 112-154, sec. 209, 126 Stat. 1179.
agreements are often used as a marketing tool for lenders, sellers, and builders,
as they provide the Veteran with a lower payment at the beginning of their loan.
The up-front funds deposited into an escrow account may be funded by the
seller, lender, builder, or Veteran.
VA has in recent years permitted the use of temporary buydown
agreements4 and proposes to amend 38 CFR part 36 as discussed below to
codify the terms and conditions VA finds acceptable.
II. Discussion of Proposed Changes
VA is proposing changes to regulations in 38 CFR part 36 that would
define ARM loans, h-ARM loans, and temporary buydown agreements, as well
as outline requirements for guarantee. Through this proposed rulemaking, VA is
looking to provide clarity in the regulations to improve Veterans’ and lenders’
understanding of VA requirements for guarantee of these loan products.
A. Definitions and Clarifying or Conforming Amendments
1. Defining ARM loans and h-ARM loans
In 38 CFR 36.4301, VA proposes to define an “adjustable rate mortgage
loan” as “[a] loan for the purpose of acquiring, constructing, or refinancing a
single-family dwelling unit with an interest rate that may change on an annual
basis” and “hybrid adjustable rate mortgage loan” as “[a] loan for the purpose of
acquiring, constructing, or refinancing a single-family dwelling unit with an
interest rate that is fixed for a period of time, after which the interest rate may

When temporary buy-down agreements were still considered novel, VA was concerned that a
Veteran’s payment of the up-front escrows could be considered a “cash-advance fee,” in violation
of the regulation at 38 CFR 36.4313. VA published administrative guidance explaining the
position. See Circular 26-18-4, “Policy Reminder for Lender’s Payment or Credit of Veterans
Costs in VA Home Loans” (Feb. 23, 2018),
https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_18_4.pdf. Upon better
understanding of the buydown arrangements, however, and upon learning that the position could
prejudice Veterans’ position in the marketplace, VA allowed the Circular to expire (Jan. 1, 2020)
without renewal.
change on an annual basis.” While “adjustable rate mortgage loan” and “hybrid
adjustable rate mortgage loan” are commonly used terms in the housing finance
industry, VA notes that many lending programs consider a h-ARM loan to be a
subset or type of ARM loan.5 For purposes of VA-guaranteed loans, each loan
type is distinct and subject to separate statutory requirements.6 Thus, VA
proposes to add definitions for these terms to avoid confusion among Veterans
and lenders.
2. Conforming amendments related to proposed ARM loan and h-ARM loan
definitions
VA’s current regulations do not differentiate between ARM and h-ARM
loans and refer only to “an adjustable rate mortgage.” Because VA is proposing
to provide specific definitions for each term in § 36.4301, VA is also proposing
amendments in 38 CFR 36.4306(a)(3)(i)(H), 36.4306(b)(4), 36.4307(a)(3),
36.4312(a), and 36.4340(b)(2)(iv). The purpose of these proposed changes is to
ensure that any regulation applicable to both ARM and h-ARM loans identifies
them both in the rule text. Since the requirements apply to both ARM and h-ARM
loans, in § 36.4306(a)(3)(i)(H), VA is proposing to add “loan or a hybrid
adjustable rate mortgage loan” after “adjustable rate mortgage,” and in
§ 36.4306(b)(4), VA is proposing to add “or hybrid adjustable rate” after
“adjustable rate.” For the same reason, in § 36.4307(a)(3), VA is proposing to
add “loan or a VA-guaranteed hybrid adjustable rate mortgage loan” after
“adjustable rate mortgage,” and in § 36.4312(a), VA is proposing to add “loan or
hybrid adjustable rate mortgage loan” after “adjustable rate mortgage.” Lastly, in

Daniel Liberto, Adjustable-Rate Mortgage (ARM): What It Is and Different Types, Investopedia
(Apr. 11, 2023), https://www.investopedia.com/terms/a/arm.asp.
6 See 38 U.S.C. 3707 and 3707A.
§ 36.4340(b)(2)(iv), VA is proposing to add “or hybrid adjustable rate” after
“adjustable rate.”
3. Paragraph headings
To enhance the readability of § 36.4312, VA proposes adding paragraph
headings. Specifically, for paragraph (a), VA proposes to add the paragraph
heading “General.” For paragraphs (b), (c), and (d), VA proposes to add the
paragraph headings “Discount points,” “Excess interest charges,” and
“Adjustable rate mortgage loans and hybrid adjustable rate mortgage loans,”
respectively.
4. Authority citations
Finally, VA proposes to remove the paragraph-specific authority citations
in paragraphs (a), (b), and (c), and amend the authority citation at the end of
§ 36.4312.
B. Requirements for ARM Loans and h-ARM Loans
Current 38 CFR 36.4312(d) outlines certain guarantee requirements for
adjustable rate mortgage loans, effective October 1, 2003. However, such
requirements do not distinguish between ARM loans and h-ARM loans. VA
proposes to clarify in the introductory text to paragraph (d) that the requirements
outlined thereafter apply to both loan types by deleting the current text and
inserting “Adjustable rate mortgage loans and hybrid adjustable rate mortgage
loans that comply with the requirements of this paragraph (d) are eligible for
guaranty.”

1. Section 36.4312(d)(1) Interest rate index
Both 38 U.S.C. 3707(b)(1) and 3707A(c)(1) require VA to specify interest
rate adjustment provisions that “correspond to a specified national interest rate
index approved by the Secretary, information on which is readily accessible to
mortgagors from generally available published sources.” VA’s current regulation
at § 36.4312(d)(1) specifies that changes in the interest rate correspond to
changes in the weekly average yield on 1 year (52 weeks) Treasury bills adjusted
to a constant maturity.
While VA is not proposing any changes to the current interest rate index
used by lenders for ARM loans and h-ARM loans, VA is proposing to amend
existing paragraph (d)(1) for length and readability. VA believes that the industry
name of the interest rate index and its publication source should be sufficient for
lenders and other program participants to identify the interest rate index and to
refer to appropriate online resources on the Internet to find out additional
particulars if necessary.
2. Section 36.4312(d)(2) Frequency of interest rate changes
Current § 36.4312(d)(2) outlines requirements regarding the frequency of
interest rate changes, stating that such adjustments must occur annually except
for the first adjustment, which may occur no sooner than 36 months from the date
of the first mortgage payment. A retrospective review of VA’s regulatory changes
for this section reveals that this section was amended, effective May 2, 2005, to
implement guarantee requirements for h-ARM loans.7 The amendments mirrored
the then-existing regulatory requirements for ARM loans except for the
requirement that the first adjustment occur no sooner than 36 months from the
date of the first mortgage payment, as opposed to annually for ARM loans.

See 70 FR 22596 (May 2, 2005); 68 FR 58293 (Oct. 9, 2003).

Notably, Congress reauthorized VA’s guarantee for ARM loans in 2004, including
the requirement that interest rate changes occur on an annual basis, between the
publication of the proposed and final rule for h-ARM loan requirements.8 The
elimination of the requirements for ARM loans appeared to be inadvertent, as VA
continued to guarantee such loans following the regulatory requirements in place
prior to May 2, 2005.
VA proposes to correct this error and spell out the frequency of interest
rate change requirements for both ARM loans and h-ARM loans in paragraph
(d)(2). Specifically, VA proposes to divide paragraph (d)(2) into four paragraphs,
incorporating existing language applicable to both ARM loans and h-ARM loans
and adding the interest rate change requirements for ARM loans. Paragraph
(d)(2)(i) would state that any interest rate adjustments for ARM loans must occur
on an annual basis starting from the date of the Veteran’s first scheduled monthly
mortgage payment due date.9 Paragraph (d)(2)(ii) would state that the first
interest rate adjustment for h-ARM loans must not occur sooner than 36 months
from the date of the Veteran’s first scheduled monthly mortgage payment due
date.10 Thereafter, for h-ARM loans, any interest rate adjustments would occur
on an annual basis.11 For example, if a Veteran closed on an ARM loan on June
15, and the first payment due date on the loan was scheduled for August 1, any
future adjustment in the interest rate would occur on August 1. In the case of a hARM loan with a three-year fixed interest rate, the first adjustment in the interest
rate would occur on August 1 three years after the first mortgage payment due
date; any subsequent adjustments would occur annually on August 1.

See Veterans Benefits Improvement Act of 2004, Pub. L. 108-454, sec. 404-405, 118 Stat.
3616-3617.
9 See 38 U.S.C. 3707(b)(2).
10 See 38 U.S.C. 3707A(b)(1).
11 See 38 U.S.C. 3707A(c)(2).
Paragraph (d)(2)(iii) would contain existing language from § 36.4312(d)(2)
with minor adjustments for consistency with other amendments. Specifically, it
would state that “[t]he adjusted rate will become effective the first day of the
month following the rate adjustment date. The first monthly mortgage payment at
the new rate will be due on the first day of the following month.”
Finally, paragraph (d)(2)(iv) would contain existing language from
§ 36.4312(d)(2), with minor changes to clarify the lender’s required actions in
setting the new interest rate. VA notes that the language in proposed paragraph
(d)(2)(iv) was amended in 2015 as part of VA’s final rule on adjustable rate
mortgage notification requirements and look-back period.12 VA’s amendments in
2015 were to align VA’s look-back requirements with the Truth in Lending Act
(TILA), as revised by the Consumer Financial Protection Bureau (CFPB) in the
2013 TILA servicing rule.13
3. Section 36.4312(d)(3) Method of rate changes
VA proposes to amend the text under paragraph (d)(3) to replace
“adjustments to the borrower’s monthly payments” with “adjustments to the
[V]eteran’s scheduled monthly payment amount.” VA believes the clarification
that an interest rate change shall only be implemented through an adjustment in
the scheduled monthly payment amount would help avoid confusion for
stakeholders. As currently written, “adjustments to the borrower’s monthly
payments” could be interpreted as allowing a lender to implement the interest
rate change by adjusting other attributes of the borrower’s monthly payment – for
example, by changing the number of monthly payments to two.
4. Section 36.4312(d)(4) Initial rate and magnitude of changes

12
See 80 FR 48254 (Aug. 12, 2015).
Id.; 78 FR 10902 (Feb. 14, 2013).

VA is proposing changes to paragraph (d)(4) for clarity and to align
§ 36.4312 with current requirements for ARM and h-ARM loans. To improve the
readability of this paragraph, VA proposes to amend the introductory text in
paragraph (d)(4) to state that “[t]he lender and the [V]eteran must agree upon the
initial interest rate. Future adjustments in the interest rate must be based upon
changes in the interest rate index, subject to the following conditions and
limitations:”.
VA proposes to remove the term “annual” and replace with “future.” VA is
proposing this amendment because while “annual” interest rate adjustments
occur in ARM loans, for h-ARM loans, the adjustments are “annual,” but only
after the initial fixed interest rate period of at least three years. Therefore, VA
determined use of the term “future” was more appropriate for this introductory
text. VA also proposes to replace “adjustments in the interest rate shall
correspond to annual changes in the interest rate index” with “adjustments in the
interest rate must be based upon changes in the interest rate index” because this
is a more accurate description of future adjustments. Specifically, lenders must
derive and calculate future adjustments in the interest rate using the applicable
interest rate index at the time of the adjustment.14
In addition to the above changes to the introductory text, VA proposes the
following amendments to paragraph (d)(4). First, VA proposes revisions to
paragraph (d)(4)(i) to state that, for adjustable rate mortgage loans, no single
annual adjustment to the interest rate would 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.15 Index rate changes in excess of 1

14
See 38 U.S.C. 3707(b)(1) and 3707A(c)(1).
See 38 U.S.C. 3707(b)(3).

percentage point would not be carried over for inclusion in an adjustment in a
subsequent year.16 Adjustments to the interest rate over the entire term of the
loan would be limited to a maximum increase of 5 percentage points from the
initial interest rate.17
VA also proposes to redesignate current paragraph (d)(4)(ii) as (d)(4)(iv)
and insert new paragraphs (d)(4)(ii) and (d)(4)(iii). In proposed new paragraph
(d)(4)(ii), VA would outline that for h-ARM loans that have an initial interest rate
fixed for less than 5 years: no single annual adjustment to the interest rate would
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; index
rate changes in excess of 1 percentage point would not be carried over for
inclusion in an adjustment in a subsequent year; and adjustments to the interest
rate over the entire term of the loan would be limited to a maximum increase of 5
percentage points from the initial interest rate.18
In proposed new paragraph (d)(4)(iii), VA would outline that for h-ARM
loans that have an initial interest rate fixed for 5 or more years: no single annual
adjustment to the interest rate will 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; index rate changes in excess of 2
percentage points will not be carried over for inclusion in an adjustment in a
subsequent year; and adjustment to the interest rate over the entire term of the
loan is limited to a maximum increase of 6 percentage points from the initial

Id.
See 38 U.S.C. 3707(b)(4).
18 See 38 U.S.C. 3707A(b)(2)-(3), (c).
16
interest rate.19 Finally, in redesignated paragraph (d)(4)(iv), VA proposes minor
clarifying edits for improved comprehension.
5. Section 36.4312(d)(5) Interest rate for underwriting purposes
VA proposes to redesignate current paragraphs (d)(5) and (d)(6) to
paragraphs (d)(6) and (d)(7), respectively, and add a new paragraph (d)(5) to
outline requirements pertaining to underwriting ARM loans and h-ARM loans.
While VA prescribes underwriting guidelines for guaranteed loans at 38 CFR
36.4340, specific guidance is needed to ensure that lenders understand how to
evaluate a Veteran’s ability to repay a loan where the monthly mortgage payment
may be subject to future increases associated with an increase in the interest
rate.20 In proposing specific underwriting guidelines for ARM and h-ARM loans,
VA considered factors such as lenders’ use of constant maturity treasury (CMT)
rates in establishing initial interest rates for ARM and h-ARM loans; the potential
that a Veteran’s mortgage payment could increase at a rate greater than
anticipated increases in the Veteran’s income, especially for ARM loans; and the
underwriting standards applicable to adjustable rate mortgages within the
Federal Housing Administration’s (FHA’s) Section 251 Adjustable Rate Mortgage
program.21
Accordingly, in proposed new paragraph (5), VA would outline that ARM
loans subject to underwriting must be evaluated at an interest rate not lower than
1 percentage point above the initial interest rate.22 VA proposes this requirement
because the interest rate for an ARM loan could potentially increase by as much
as 1 percentage point after only 12 months. Therefore, requiring the lender to

Id.
See 38 U.S.C. 3707(c) and 3707A(d).
21 Id. See also 24 CFR 203.49; Single Family Housing Policy Handbook (Handbook 4000.1),
II.A.8.f.vii., Oct. 31, 2023,
https://www.hud.gov/sites/dfiles/OCHCO/documents/4000.1hsghhdbk1223.pdf.
22 See 38 U.S.C. 3707(c).
19
consider the Veteran’s ability to repay using the higher interest rate ensures that
the Veteran would be able to adjust to the increased monthly mortgage payment.
VA notes that this underwriting requirement is a floor, not a ceiling. Thus, lenders
may, when underwriting ARM loans, evaluate the borrower using an even higher
initial interest rate depending on other applicable credit and risk factors.
For h-ARM loans subject to underwriting, VA is proposing in new
paragraph (d)(5) that they be evaluated at an interest rate not lower than the
initial interest rate. Given the delayed interest rate adjustments, as well as the
annual and maximum interest rate adjustments for h-ARM loans, VA believes
there is less immediate concern for a Veteran’s ability to repay the guaranteed
loan at a higher interest rate. Therefore, VA is not proposing to require lenders to
underwrite h-ARM loans at an interest rate that is above the initial interest rate.
As with ARM loans, VA is not requiring lenders to underwrite h-ARM loans at the
initial rate but is instead setting an interest rate floor for evaluating the Veteran
under 38 CFR 36.4340. If desired, lenders may, when underwriting h-ARM loans,
evaluate the borrower using an initial interest rate that is higher depending on
other applicable credit and risk factors.
6. Section 36.4312(d)(6) Pre-loan disclosure
In redesignated paragraph (d)(6), VA proposes amendments to align the
pre-loan disclosure requirements with the CFPB’s pre-loan disclosure
requirements (“Loan Estimate”).23 While developing this proposed rule, VA
realized that all but one of its current pre-loan disclosure requirements under
current paragraph (d)(5) are covered by the disclosure requirements of the loan
estimate. Under the CFPB regulations at 12 CFR 1026.37, lenders are required
to provide a loan estimate to borrowers of ARM and h-ARM loans. However, the

12 CFR 1026.37.

requirement for the lender to obtain a signature from the borrower acknowledging
the receipt of the loan estimate is optional.24 And so, in redesignated paragraph
(6), VA is proposing to include an additional requirement for the lenders to obtain
the Veteran’s signature acknowledging the receipt of the disclosure and to retain
the signed disclosure in the loan file. VA is proposing the additional requirement
for the lender to retain the signed disclosure in the loan file to ensure that such
disclosures are available for VA’s compliance and audit purposes.25 In sum, VA
is proposing to revise its current pre-loan disclosure requirements to state that
the lender must provide the Veteran with disclosures in accordance with the
timing, content, and format required by the regulations implementing the Truth in
Lending Act (15 U.S.C. 1601 et seq.) at 12 CFR 1026.37(b)(6)(ii) and (j). The
lender must make a copy of this disclosure, signed by the Veteran
acknowledging the receipt of the disclosure, a part of the lender’s permanent
record on the loan.
7. Section 36.4312(d)(7) Post-closing disclosures
To further clarify the timing and purpose of its post-loan closing disclosure
requirements in proposed redesignated paragraph (d)(7), VA proposes to change
the paragraph’s heading from “Disclosures” to “Post-closing disclosures.” VA also
proposes to replace the term “borrower” with “veteran” and revise the last
sentence for consistency with other paragraphs in this section.
C. Requirements for Temporary Buydown Agreements
VA is proposing to add a new paragraph (e) under § 36.4312 that would
outline requirements for temporary buydown agreements. In the proposed
introductory text in paragraph (e), VA would state that temporary buydown

24
12 CFR 1026.37(n).
See 38 CFR 36.4333(c).

agreements that comply with the requirements of this paragraph (e) may be
established to temporarily reduce loan payments for up to the first 36 monthly
payments of the loan. VA’s proposed maximum period of 36 monthly payments is
consistent with current industry standards for these types of agreements.
Typically, temporary buydowns are established for one-, two-, or three-year
periods. 26 While the buydown agreement can be structured in various ways, the
most common structures are a 3-2-1 and 2-1 buydown agreement.27 In a 3-2-1
buydown, the loan interest rate is reduced by 3 percent in the first year, 2 percent
in the second year, and 1 percent in the third year.28 Starting in year four, the
loan interest rate agreed upon in the mortgage note would be charged for the
remainder of the mortgage term.
1. Section 36.4312(e)(1) General terms and conditions
In proposed paragraph (e)(1)(A), VA would prohibit lenders from using
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. In
proposed paragraph (e)(1)(B), VA would clarify that any temporary buydown
funds provided by the Veteran must not be included in the loan amount. In other
words, the Veteran cannot borrow the monies used to fund the buydown account.
2. Section 36.4312(e)(2) Documenting the agreement
In proposed paragraph (e)(2), VA would require lenders to provide
Veterans with a clear, written explanation of the temporary buydown agreement,
including a description of the number of monthly payments for which the

Julia Kagan, Buydown: Definition, Types, Examples, and Pros & Cons, Investopedia (May 26,
2023), available at https://www.investopedia.com/terms/b/buydown.asp.
27 Id.
28 Julia Kagan, 3-2-1 Buydown Mortgage: Meaning, Pros and Cons, FAQs, Investopedia (Apr. 26,
2023), available at https://www.investopedia.com/terms/1/3-2-1_buydown.asp.
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. VA would also require a copy of the buydown
agreement, signed by the Veteran, to be made a part of the lender’s permanent
record on the loan. This proposed requirement would ensure the Veteran
receives and acknowledges the terms and conditions of the temporary buydown
agreement. It would also make certain such agreements are available for VA
compliance and audit purposes.29 VA is proposing that the lender must make a
copy of the buydown agreement, signed by the Veteran, a part of the lender’s
permanent record on the loan.
3. Section 36.4312(e)(3) Acceptable loan types
In proposed paragraph (e)(3), VA would state that temporary buydown
agreements would only be permitted for fixed rate mortgage loans. This
proposed limitation is consistent with other federal housing agency policy for
these types of agreements.30
4. Section 36.4312(e)(4) Interest rate for underwriting purposes
VA recognizes that the purpose of a temporary buydown agreement is to
help Veterans with their monthly payments in the initial years of the loan. To that
extent, it is understood and expected that once the term of the temporary
buydown is over, the Veteran will be able to make the monthly mortgage
payments based on the interest rate of the loan. Therefore, in proposed
paragraph (e)(4), VA would require lenders to underwrite loans with temporary
buydown agreements using the interest rate stated on the mortgage note. VA

See 38 CFR 36.4333.
See Department of Housing and Urban Development (HUD) Handbook 4000.1, Federal
Housing Administration (FHA) Single Family Housing Policy Handbook, 4000.1(II)(A)(8)(f)(vi), 463
(Jan. 18, 2023), https://www.hud.gov/sites/dfiles/OCHCO/documents/4000.1hsgh-011823.pdf.
29
would also provide that temporary buydown agreements may be treated as a
compensating factor when underwriting a loan pursuant to § 36.4340, 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
may be used to offset a short-term debt.
5. Section 36.4312(e)(5) Escrow account
VA believes that it is extremely important that the temporary buydown
funds used to supplement and effectively reduce the Veteran’s monthly mortgage
payment during the agreement period are securely held by the holder in a
separate escrow account and used solely for the intended purpose of paying part
of the borrower’s monthly mortgage payment. Therefore, VA is proposing, in
proposed paragraph (e)(5), the requirement that holders secure temporary
buydown funds in a separate escrow account and that such funds be used only
to pay the monthly buydown payments in accordance with the temporary
buydown agreement.
In developing this rule, VA contemplated whether such an escrow account
should be held by the holder or by a third-party escrow agent. To avoid potential
delays in timely processing of monthly buydown payments, VA decided to
propose that the holders hold the escrow accounts. However, VA is interested in
receiving comments on whether such an escrow account should be held by a
third-party escrow agent, and if so, why.
In addition to the above, in proposed paragraph (e)(5), VA would outline
how the temporary buydown funds would be treated in the event of a loan
termination or assumption during the agreement period. Specifically, VA
proposes that in situations where the loan is terminated during the agreement
period, for example due to a foreclosure or prepayment, the funds must be

credited against any outstanding indebtedness. If a new borrower assumes the
loan during the agreement period, VA proposes that any remaining temporary
buydown funds be used as initially intended. Therefore, proposed paragraph
(e)(5) would provide that if the loan is assumed during the agreement period, the
holder must continue to pay out the monthly buydown payments on behalf of the
new borrower in accordance with the temporary buydown agreement.
6. Section 36.4312(e)(6) Frequency and magnitude of buydown payment
changes
Consistent with current industry practice,31 proposed paragraph (e)(6)
would provide that any reduction in the amount of the monthly buydown payment
must be reflected in the temporary buydown agreement and must occur only on
an annual basis following the date of the first monthly mortgage payment due
date. Additionally, proposed paragraph (e)(6) would state that no reduction will
result in an increase of the Veteran’s monthly payment that corresponds to an
increase of more than 1 percentage point in the interest rate of the loan.
D. Information Collection Approvals
VA also proposes to amend the Office of Management and Budget (OMB)
control numbers listed at the end of 38 CFR 36.4312. Specifically, VA proposes
to delete the current number listed, which references the information collection
requirement under CFPB’s regulations pertaining to ARM and h-ARM loans.
Consistent with VA’s discussion in the below Paperwork Reduction Act section,
VA proposes to list the OMB control numbers assigned to those VA information
collections approved by OMB. The first, OMB control number 2900-0515, is an
already approved collection pertaining to lenders’ and holders’ recordkeeping

Julia Kagan, Buydown: Definition, Types, Examples, and Pros & Cons, Investopedia (May 26,
2023), available at https://www.investopedia.com/terms/b/buydown.asp.

requirements. The second is a new information collection explained below in
further detail; as such, no control number has yet been assigned by OMB.

Executive Orders 12866, 13563 and 14094
Executive Order 12866 (Regulatory Planning and Review) directs
agencies to assess the costs and benefits of available regulatory alternatives
and, when regulation is necessary, to select regulatory approaches that
maximize net benefits (including potential economic, environmental, public health
and safety effects, and other advantages; distributive impacts; and equity).
Executive Order 13563 (Improving Regulation and Regulatory Review)
emphasizes the importance of quantifying both costs and benefits, reducing
costs, harmonizing rules, and promoting flexibility. Executive Order 14094
(Executive Order on Modernizing Regulatory Review) supplements and reaffirms
the principles, structures, and definitions governing contemporary regulatory
review established in Executive Order 12866 of September 30, 1993 (Regulatory
Planning and Review), and Executive Order 13563 of January 18, 2011
(Improving Regulation and Regulatory Review). The Office of Information and
Regulatory Affairs has determined that this rulemaking is a significant regulatory
action under Executive Order 12866, as amended by Executive Order 14094.
The Regulatory Impact Analysis associated with this rulemaking can be found as
a supporting document at www.regulations.gov.

Regulatory Flexibility Act
The Secretary hereby certifies that this proposed rule would not have a
significant economic impact on a substantial number of small entities as they are
defined in the Regulatory Flexibility Act (5 U.S.C. 601-612). This proposed rule

would only impose a rule familiarization cost to lenders, estimated at $10.04 per
lender, regardless of size. As previously noted, VA has relied on its statutory
authority to guarantee ARM and h-ARM loans and loans with temporary buydown
agreements. As such, VA does not anticipate the amendments would result in
changes to lenders’ processes. Therefore, pursuant to 5 U.S.C. 605(b), the initial
and final regulatory flexibility analysis requirements of 5 U.S.C. 603 and 604 do
not apply.

Unfunded Mandates
The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C. 1532,
that agencies prepare an assessment of anticipated costs and benefits before
issuing any rule that may result in the expenditure by State, local, and tribal
governments, in the aggregate, or by the private sector, of $100 million or more
(adjusted annually for inflation) in any one year. This proposed rule would have
no such effect on State, local, and tribal governments, or on the private sector.

Paperwork Reduction Act
This proposed rule contains provisions constituting collection of
information under the provisions of the Paperwork Reduction Act of 1995 (44
U.S.C. 3501-3521) that do not require revision. Specifically, the collection of
information pertaining to recordkeeping requirements under 38 CFR 36.4312 are
currently approved by the Office of Management and Budget (OMB) and have
been assigned OMB control number 2900-0515.
This proposed rule also includes provisions constituting a new collection of
information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521)

that require approval by OMB. Accordingly, under 44 U.S.C. 3507(d), VA has
submitted a copy of this rulemaking action to OMB for review and approval.
OMB assigns control numbers to collection of information it approves. VA
may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid OMB control number.
If OMB does not approve the collection of information as requested, VA will
immediately remove the provisions containing the collection of information or
take such other action as is directed by OMB.
Comments on the new collection of information contained in this
rulemaking should be submitted through www.regulations.gov. Comments should
be sent within 60 days of publication of this rulemaking. The collection of
information associated with this rulemaking can be viewed at:
www.reginfo.gov/public/do/PRAMain.
OMB is required to make a decision concerning the collection of
information contained in this rulemaking between 30 and 60 days after
publication of this rulemaking in the Federal Register. Therefore, a comment to
OMB is best assured of having its full effect if OMB receives it within 30 days of
publication. This does not affect the deadline for the public to comment on the
provisions of this rulemaking.
The Department considers comments by the public on new collection of
information in•

Evaluating whether the new collections of information are necessary for the
proper performance of the functions of the Department, including whether
the information will have practical utility;

•

Evaluating the accuracy of the Department’s estimate of the burden of the
new collection of information, including the validity of the methodology and
assumptions used;

•

Enhancing the quality, usefulness, and clarity of the information to be
collected; and

•

Minimizing the burden of the collection of information on those who are to
respond, including through the use of appropriate automated, electronic,
mechanical, or other technological collection techniques or other forms of
information technology, e.g., permitting electronic submission of responses.
The new collection of information associated with this rulemaking

contained in 38 CFR 36.4312 is described immediately following this
paragraph, under its respective title.
Title: Interest Rates 38 CFR 36.4312
OMB Control No: 2900-XXXX (New/TBD)
CFR Provision: 38 CFR 36.4312
•

Summary of collection of information: The new collection of information in
proposed provision 38 CFR 36.4312 pertains to VA’s proposed
requirements for lenders to obtain the Veteran’s signature on pre-loan
disclosures for ARM and h-ARM loans. While developing this proposed
rule, VA realized that all but one of its current pre-loan disclosure
requirements are covered by the disclosure requirements of the loan
estimate. Under the CFPB regulations at 12 CFR 1026.37, lenders are
required to provide a loan estimate to borrowers of ARM and h-ARM
loans. However, the requirement for the lender to obtain a signature from
the borrower acknowledging the receipt of the loan estimate is optional.32

12 CFR 1026.37(n).

VA is proposing to include an additional requirement for the lenders to
obtain the Veteran’s signature acknowledging the receipt of the disclosure
and to retain the signed disclosure in the loan file. The proposed changes
to 38 CFR 36.4312 would also require lenders to prepare temporary
buydown agreements with certain required elements, as proposed in VA’s
rule, and obtain the Veteran’s signature on such agreements.
•

Description of need for information and proposed use of information: The
rule would require lenders to provide Veterans with a clear, written
explanation of ARM and h-ARM loan terms and temporary buydown
agreements. VA is requiring the signature on the pre-disclosure
statement to help ensure that Veteran borrowers are adequately
informed of pre-loan disclosures in the loan closing process (as covered
under the Truth in Lending Act (15 U.S.C. 1601 et seq.) at 12 CFR
1026.37(b)(ii) and (j)). These agreements will be available for VA’s
compliance and audit purposes.

•

Description of likely respondents: Veterans obtaining ARM or h-ARM
loans or loans with temporary buydown agreements and lenders offering
such loans.

•

Estimated number of respondents:
Temporary Buydown Agreements – 500 loans per year
ARM and h-ARM loans - 4,888 loans each year

•

Estimated frequency of responses: One time per loan.

•

Estimated average burden per response:
Temporary Buydown Agreements – 10 minutes per lender to prepare
temporary buydown agreement; 5 minutes per Veteran to understand and
sign agreement

ARM and h-ARM loans – 5 minutes per veteran to understand and sign
pre-disclosure form
•

Estimated total annual reporting and recordkeeping burden: By multiplying
the annual number of respondents and the burden per response, VA
estimates a total burden of 450 hours per year for Veterans and 84 hours
per year for lenders.

•

Estimated cost to respondents per year: VA estimates the total information
collection burden cost to be $17,578 per year (84 hours x $40.62 + 450
hours x $31.48 per hour).
* To estimate the total information collection burden cost for Veterans, VA

used the U.S. Bureau of Labor Statistics (BLS) mean hourly wage for hourly
wage for “all occupations” of $31.48 per hour.33 The mean hourly wage of lenders
is $40.62 based on BLS wage code – “13-2072 Loan Officers.”34

U.S. BLS, Occupational Employment and Wage Statistics, May 2023 National Occupational Employment
and Wage Estimates United States, available at https://www.bls.gov/oes/current/oes_nat.htm#13-0000.
34 U.S. BLS, Occupational Employment and Wage Statistics, Occupational Employment and Wages, May
2023, available at https://www.bls.gov/oes/current/oes132072.htm.
List of Subjects in 38 CFR Part 36
Condominiums, Housing, Individuals with disabilities, Loan programs—
housing and community development, Loan programs—Veterans, Manufactured
homes, Mortgage insurance, Reporting and recordkeeping requirements,
Veterans.

Signing Authority:
Denis McDonough, Secretary of Veterans Affairs, approved and signed this
document on June 13, 2024, and authorized the undersigned to sign and submit
the document to the Office of the Federal Register for publication electronically
as an official document of the Department of Veterans Affairs.

Jeffrey M. Martin,
Assistant Director,
Office of Regulation Policy & Management,
Office of General Counsel,
Department of Veterans Affairs.

For the reasons stated in the preamble, the Department of Veterans
Affairs proposes to amend 38 CFR part 36 as set forth below:

PART 36 – LOAN GUARANTY
1. The authority citation for part 36 continues to read as follows:
Authority: 38 U.S.C. 501 and 3720.
Subpart B – Guaranty or Insurance of Loans to Veterans With Electronic
Reporting
2. Amend § 36.4301 by adding definitions of Adjustable rate mortgage
loan and Hybrid adjustable rate mortgage loan in alphabetical order to read as
follows:
§ 36.4301 Definitions.
*****
Adjustable rate mortgage loan. A loan for the purpose of acquiring,
constructing, or refinancing a single-family dwelling unit with an interest rate that
may change on an annual basis.
*****
Hybrid adjustable rate mortgage loan. A loan for the purpose of acquiring,
constructing, or refinancing a single-family dwelling unit with an interest rate that
is fixed for a period of time, after which the interest rate may change on an
annual basis.
*****
§ 36.4306 [Amended]
3. Amend § 36.4306 by:
a. In paragraph (a)(3)(i)(H), adding “loan or a hybrid adjustable rate
mortgage loan” after “adjustable rate mortgage”; and

b. In paragraph (b)(4), adding “or hybrid adjustable rate” after “adjustable
rate”.
§ 36.4307 [Amended]
4. Amend § 36.4307(a)(3) by adding “loan or a VA-guaranteed hybrid
adjustable rate mortgage loan” after “adjustable rate mortgage”.
5. Amend § 36.4312 by:
a. Revising the last sentence in paragraph (a);
b. Adding paragraph headings to paragraphs (a), (b), and (c);
c. Removing the authority citations immediately following paragraphs (a),
(b), and (c);
d. Revising paragraph (d);
e. Adding paragraph (e);
f. Revising the OMB citation at the end of the section; and
g. Revising the authority citation at the end of the section.
The revisions and additions read as follows:
§ 36.4312 Interest rates.
(a) General.* * * This paragraph does not apply in the case of an
adjustable rate mortgage loan or hybrid adjustable rate mortgage loan being
refinanced under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) with a fixed rate
loan.
(b) Discount points.* * *
(c) Excess interest charges.* * *
(d) Adjustable rate mortgage loans and hybrid adjustable rate mortgage
loans. Adjustable rate mortgage loans and hybrid adjustable rate mortgage loans
must comply with the requirements of this paragraph (d) to be eligible for
guaranty.

(1) Interest rate index. Changes in the interest rate charged on an
adjustable rate mortgage must correspond to changes in the weekly average
yield on 1 year (52 weeks) Treasury bills adjusted to a constant maturity. The
weekly average 1 year constant maturity Treasury bill yields are published by the
Federal Reserve Board of the Federal Reserve System.
(2) Frequency of interest rate changes. (i) For adjustable rate mortgage
loans, any interest rate adjustments must occur on an annual basis starting from
the date of the veteran’s first scheduled monthly mortgage payment due date.
(ii) For hybrid adjustable rate mortgage 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. Thereafter, any interest rate adjustments
must occur on an annual basis.
(iii) The adjusted rate will become effective the first day of the month
following the rate adjustment date. The first monthly mortgage payment at the
new rate will be due on the first day of the following month.
(iv) To set the new interest rate, the lender will determine the change
between the initial (i.e., base) index figure and the current index figure. The
lender must use as the initial index figure the most recent figure available before
the date of the note. For loans where the date of the note is before January 10,
2015, the lender must use as the current index figure the most recent index
figure available 30 days before the date of each interest rate adjustment. For
loans where the date of the note is on or after January 10, 2015, the lender must
use as the current index figure the most recent index figure available 45 days
before the date of each interest rate adjustment.

(3) Method of rate changes. Interest rate changes may only be
implemented through adjustments to the veteran’s scheduled monthly payment
amount.
(4) Initial rate and magnitude of changes. The lender and the veteran must
agree upon the initial interest rate. Future adjustments in the interest rate must
be based upon changes in the interest rate index, subject to the following
conditions and limitations:
(i) For adjustable rate mortgage loans, no single annual adjustment to the
interest rate will 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. Index rate changes in excess of 1 percentage point will not be
carried over for inclusion in an adjustment in a subsequent year. Adjustments to
the interest rate over the entire term of the loan is limited to a maximum increase
of 5 percentage points from the initial interest rate.
(ii) For hybrid adjustable rate mortgage loans that have an initial interest
rate fixed for less than 5 years, no single annual adjustment to the interest rate
will 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. Index
rate changes in excess of 1 percentage point will not be carried over for inclusion
in an adjustment in a subsequent year. Adjustments to the interest rate over the
entire term of the loan is limited to a maximum increase of 5 percentage points
from the initial interest rate.
(iii) For hybrid adjustable rate mortgage loans that have an initial interest
rate fixed for 5 or more years, no single annual adjustment to the interest rate will
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. Index

rate changes in excess of 2 percentage points will not be carried over for
inclusion in an adjustment in a subsequent year. Adjustments to the interest rate
over the entire term of the loan is limited to a maximum increase of 6 percentage
points from the initial interest rate.
(iv) At each interest rate adjustment date, changes in the interest rate
index, whether increases or decreases, must be translated into the adjusted
mortgage interest rate, rounded to the nearest one-eighth of one percent, up or
down. For example, if the margin is 2 percent and the new index figure is 6.06
percent, the adjusted mortgage interest rate will be 8 percent. If the margin is 2
percent and the new index figure is 6.07 percent, the adjusted mortgage interest
rate will be 8 1/8 percent.
(5) Interest rate for underwriting purposes. In cases where a lender must
evaluate a veteran’s loan application pursuant to the underwriting standards at
§ 36.4340, for adjustable rate mortgage loans, lenders must use an interest rate
not lower than 1 percentage point above the initial interest rate. For hybrid
adjustable rate mortgage loans, lenders must use an interest rate not lower than
the initial interest rate. When underwriting adjustable rate mortgage loans and
hybrid adjustable rate mortgage loans, lenders may adjust the initial interest rate
higher for other applicable credit and risk factors.
(6) Pre-loan disclosure. The lender must provide the veteran with
disclosures in accordance with the timing, content, and format required by the
regulations implementing the Truth in Lending Act (15 U.S.C. 1601 et seq.) at 12
CFR 1026.37(b)(6)(ii) and (j). The lender must make a copy of this disclosure,
signed by the veteran acknowledging the receipt of the disclosure, a part of the
lender’s permanent record on the loan.

(7) Post-closing disclosures. The lender must provide the veteran with
disclosures in accordance with the timing, content, and format required by the
regulations implementing the Truth in Lending Act (15 U.S.C. 1601 et seq.) at 12
CFR 1026.20(c) and (d). The lender must make a copy of these disclosures a
part of the lender’s permanent record on the loan.
(e) Temporary buydowns. Temporary buydown agreements that comply
with the requirements of this paragraph (e) may be established to temporarily
reduce loan payments for up to the first 36 monthly payments of the loan.
(1) General terms and conditions. (A) Lenders are prohibited from using
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.
(B) Any temporary buydown funds provided by the veteran must not be
included in the loan amount.
(2) Documenting the agreement. Lenders must provide veterans with a
clear, written explanation of the temporary buydown agreement, including 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. The lender must make a copy of the buydown agreement,
signed by the veteran, a part of the lender’s permanent record on the loan.
(3) Acceptable loan types. Temporary buydown agreements are only
permitted for fixed rate mortgage loans.
(4) Interest rate for underwriting purposes. Lenders must underwrite the
loan at the interest rate stated on the mortgage note. Temporary buydown
agreements may be treated as a compensating factor when underwriting a loan

pursuant to § 36.4340, 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 may be used to offset a short-term debt.
(5) Escrow account. Holders must secure temporary buydown funds in a
separate escrow account. Such funds must be used only to pay the monthly
buydown payments in accordance with the temporary buydown agreement. If the
loan is terminated during the agreement period, for example due to a foreclosure
or prepayment, the funds must be credited against any outstanding
indebtedness. If the loan is assumed during the agreement period, the holder
must continue to pay out the monthly buydown payments on behalf of the new
borrower in accordance with the temporary buydown agreement.
(6) Frequency and magnitude of buydown payment changes. Any
reduction in the amount of the monthly buydown payment must be reflected in
the temporary buydown agreement and will occur only on an annual basis
following the date of the first monthly mortgage payment due date. No reduction
will result in an increase of the veteran’s monthly payment that corresponds to an
increase of more than 1 percentage point in the interest rate of the loan.
(The Office of Management and Budget has approved the information collection
requirements in this section under control number 2900-0515 and XXXX-XXXX)
(Authority: 38 U.S.C. 3703(c), 3707, 3707A, 3710(g), and 3720)
§ 36.4340 [Amended]
6. Amend § 36.4340(b)(2)(iv) by adding “or hybrid adjustable rate” after
“adjustable rate”.
[FR Doc. 2024-13389 Filed: 6/20/2024 8:45 am; Publication Date: 6/21/2024]