Good afternoon.

Madam Chair, it appears that in general, the loan guaranty program is working well and I congratulate VA for its management of the program.  But today I would like to address a broader issue that I will illustrate with an issue related to the loan guaranty program.

That issue is senior VA management’s attempt to muzzle VA staff.  At a recent staff meeting, VBA staff were told they are not allowed to speak to Congressional staff without working through the Office of Congressional and Legislative Affairs.  Rightly or wrongly, VA staff informed our staffs that they could not speak directly to them and to submit even routine questions through OCLA.  That policy is being interpreted as applying even to the most routine questions like how many people have signed up for the GI Bill.

This new policy, which I can only describe as short-sighted and harmful to veterans, prevents our staffs from conducting even routine day-to-day business with not only VA, but also with our constituents.  Previous administrations on both sides of the aisle have tried this to some extent and it always fails because Congress and VA both need open two-way communications.  Continuing that long-standing cooperative way of doing business, even when it is less than comfortable for VA, fosters a level of mutual trust that in the long run, is good for veterans’ programs.

In my opinion, questions from staff that ask things like details on administrative procedure or participation or average times, etc. are a legitimate oversight function and VA employees should not be ordered not to respond directly to such requests.  On the other hand for example, my staff has asked VA both directly and through OCLA for VA’s position on a “risk retention” provision in the Senate financial services.  That is a request that requires the Department to make a statement of policy and OCLA should be involved.  By the way, we have not gotten a reply on that matter and I hope VA explains its position today because we have been informed that such a provision may negatively impact VA-guaranteed loans in terms of higher fees or interest rates.

Finally, I ask unanimous consent to enter comments provided by Mr. Adam Sachs on the risk retention provision in S 3217 and the Merkley amendment to that bill in the record.  Mr. Sachs is a former member of the VA Committee Democratic staff and is now in private practice and raises several issues with the provision and amendment.

Madame Chair, it is imperative that our staffs be able to speak directly to VA employees who run these very important programs and I look forward to a reversal of the policy.  I yield back.

Adam P. Sachs
Partner, Husch Blackwell Sanders
Kansas City, MO 64112

Here is a response to your request for assistance with respect to aspects of the amendment to the Senate Bill offered by Mr. Merkley and others (that were forwarded to us last Friday afternoon). First, it describes the amendment’s “ability to repay” language and its apparent impact, as drafted, on VA guaranteed IRRRL (and more generally on other VA guaranteed loans similarly “priced”). Second, it provides draft amendment language expressly to exempt VA IRRRL (and other VA guaranteed loans) from this amendment.

The Merkley amendment, in Section 1075 (Minimum Standards for Residential Mortgage Loans), in Section (b)(1) thereof, generally imposes upon creditors originating residential mortgage loans a requirement that they determine, “based on verified and documented information,” that the consumer has the “reasonable ability to repay the loan.” Section b(3) specifies the detailed underwriting requirements the creditor must follow in making this determination.

Section (b)(5) creates a helpful “Presumption of Ability to Repay” for certain underwritten loans, but then Section (b)(6) (Exceptions to Presumption) takes away that helpful Presumption if, among other things, the total points and fees related to the underwritten loan (calculated as described under TILA) exceeds “3 percent of the total loan amount.” (More details about the effect the Merkley amendment points and fees “test” are provided, below.) Section b(7) then permits the Board further to revise the Presumption, and the Exceptions to Presumption, and establishes certain additional statutory exemptions from this ability to repayment determination requirement for certain types of loans.

So, the Merkley amendment, at its core, requires the creditor to underwrite the ability of the consumer to repay the loan. Presumptions as to that ability to repay may “come or go” depending upon certain factors described in the amendment and to be described to by the Board, but the underwriting requirement is a “constant.”

Contrast that with the VA guaranteed Interest Rate Reduction Refinancing Loan (VA IRRRL), to which the Merkley amendment ability to repay language would be fully applicable as it is currently drafted.

VA IRRRL are made for the purpose of refinancing an existing Department of Veterans Affairs) (VA) loan, at a lower interest rate and always to the benefit of the veteran. A VA IRRRL does not permit cash out to the veteran; it is the refinanced loan, itself, that must and does provide the benefit, in the manner described in the statute authorizing the IRRRL program (38 U.S.C. 3710(a)(8)) and the regulations and other requirements of the VA (38 C.F.R. 36.4807; VA Lender’s Handbook, Chapter 6, Section 4-a).

The most important aspect of a VA IRRRL, however, for purposes of the “ability to repay” language of the Merkley amendment, is that, in a VA IRRRL, under VA requirements, generally “no underwriting is required.” See VA Lender’s Handbook. That is generally because the VA IRRRL may only be made if the veteran will benefit from it.

Accordingly, the premise of the Merkley amendment ability to repay determination requirement—that an underwritten loan may or may not enjoy a Presumption as to the ability to repay it—has no applicability to a VA IRRRL that is not and need not be underwritten in the first place. Thus, an entitlement provided by Congress through the Veteran's Committee will be eliminated through the Merkley amendment.

For that reason, it is appropriate that the exceptions in the Merkley amendment that already exists for certain types of loans (bridge loans and reverse mortgages) be expanded to include VA IRRRL as well, as follows:

Insert in Section 1075(b)(7) (Exemption) a new subsection (D) that reads:

(D) VA GUARANTEED INTEREST RATE REDUCTION LOANS.—This subsection does not apply to an interest rate reduction refinancing loan guaranteed by Department of Veterans Affairs.

With respect to the points and fees test of the Merkley amendment, that provision does not “fix” this anomaly. Even if a loan had under 3 percent total points and fees (and thus could enjoy the benefits of the Presumption), such a loan still would have to be underwritten under the Merkley amendment.

Moreover, VA IRRRL would not, as currently offered, meet the 3 percent total points and fees test, and nor may certain other VA guaranteed loans. That is because veterans obtaining VA guaranteed loans generally may be charged VA-approved reasonable and customary itemized fees and charges, plus a VA-approved 1 percent origination fee, plus reasonable discount points, plus a 0.5 percent VA funding (mortgage guaranty) fee. As a result, for a VA guaranteed loan, 1.5 percent (the sum of the VA-permitted 1 percent origination fee and the 0.5 percent VA funding fee) of the 3 percent total points and fees test of the Merkley amendment are “used up” or “consumed” before VA-permitted itemized fees and discount points are even considered.

And, with respect to VA IRRRL, in particular, as the VA expressly permits up to 2 percent in discount points to be financed or included in the VA IRRRL loan amount, the total of such VA-permitted points and fees (again even before any VA-permitted itemized fees are even considered) will almost always be above the Merkley amendment 3 percent total points and fees test, since that total would equal 3.5 percent (1 percent origination fee + 0.5 percent VA funding + 2 percent permitted financeable discount points).

In short, then, the Merkley amendment ability to repay language should have no applicability to VA IRRRL, which VA guaranteed loans already must be for the benefit of the veteran as required by the VA and which are not and need not be underwritten. Language to make VA IRRRL exempt from the ability to repay determination language of the Merkley amendment is provided above. Indeed, if the Merkley amendment, as drafted, if not changed to so exempt VA IRRRL, it would not appear that VA IRRRL would or could be offered at all.

In addition, any VA guaranteed loan with at least 1.5 percent in VA-permitted discount points also would meet the 3 percent total points and fees test of the Merkley amendment (given the 1.5 percent in origination fees and 0.5 percent in funding fees associated with such loans), even before considering VA-permitted itemized fees. Accordingly, an overall exemption in Section 1075(b)(7), for all mortgage loans guaranteed by the Secretary of Veterans Affairs (and not just for VA IRRRL), from the ability to repay determination language of the Merkley amendment, also would appear to be appropriate.