VA partial claim draft arrives with detail sought on limits

The Department of Veterans Affairs put a long-awaited policy for a new, temporary borrower assistance option out for comment this week.

Mortgage market participants welcomed the drafting table release of the VA partial claim proposal. That proposal stems from a bill sponsored by Rep. Derek Van Orden, R. Wis., which passed and went through some subsequent budget-related tweaks last year.

"The ability to offer a partial claim is a particularly important option for allowing borrowers to keep payments stable in a higher-interest-rate environment," the Mortgage Bankers Association said, in response to the release of the draft.

It was still in the process of formulating more specific commentary on the proposal at deadline.

The move confirms a promise made by Patrick Zondervan, executive director, loan guaranty service, at the MBA's servicing conference last month. Zondervan had pledged to release a policy that would enable the new partial claim to move forward shortly after the event.

The implementation draft has a March 11 deadline for comment, according to the American Bankers Association and the VA. The ABA did not immediately reply to a request for comment on whether it had a specific position or comment on the proposal.

Context and early feedback

The new VA partial claim aims to cure delinquency and addresses interest rate challenges for qualifying borrowers through the purchase of borrower debt up to 25% of the mortgage's unpaid principal balance as a second lien with no interest. 

A borrower must pay when the first-lien is satisfied due to a refinance, home sale or other development. The relief will sunset after five years.

In line with broader themes in borrower assistance, the new VA partial claim is aimed at providing some continuity in relief, but it also aims to limit the assistance over time given the fact that pandemic has receded and the federal budget has constraints.

It's the context around those limits that the industry may seek more detail around in order to address market realities that aren't immediately acknowledged in the current draft, according to Donna Schmidt, managing director, DLS Servicing.

"We are grateful for the use of the drafting table since we picked up a number of concerns and potential conflicting representations," Schmidt said in an email.

"As a vendor who works with over 50 different servicers, the interpretations of what has been presented will be wildly different and requires VA to clarify to ensure universal implementation," she added.

Schmidt said based on initial review, a sample of some areas where clarifications that would be helpful are as follows:

• A directive to evaluate owners for disposition options if a "hardship" is not resolved: Clarify the extent to which this applies to monetary challenges as opposed to nonmonetary ones where a retention option should be preserved.

• Address conflicts where the VA states that the only options available for loans less than three months delinquent are forbearance or repayment, but then states that if an option is completed before a loan is 61 days delinquent, it must be reported as imminent default or property problem. 

• Open up a requirement for borrowers who resolved their reason for default to be able to reinstate past due amounts in a lump sum within 90 days. "This will affect a very small number of borrower candidates. Such as those expecting an insurance death benefit, disability claim settlement, etc.," Schmidt said.

She suggested other situations where borrowers may repay short-term but not within those bounds, should be considered. These situations could include unemployment, temporary disability, an accident or other short-term health issue.