In this series, we will be comprehensively covering everything that is discussed in the VA lender’s handbook, but we’ll be doing it in plain-speak so anyone can understand it. For anyone looking for an in-depth understanding of the VA loan program, this series is for you. Be prepared, this is going to be a very long series of articles, with 18 chapters to cover and likely 2-3 posts per chapter, there’s a lot of material to cover. Be patient, though, and know that knowledge is power, and you want as much knowledge as you can get your hands on when you’re considering a mortgage, especially through the VA loan program. The VA loan program offers such a great deal of benefit that it’s worth maximizing your knowledge so you can maximize your benefit.
The first chapter of the VA Lender’s Handbook is entitled, “The Lender”. This chapter primarily explains to lenders the steps they need to go through in order to become VA-approved. It discusses the paperwork that must be filled out and submitted to the VA and the business practices that a lender must incorporate in order to be considered for approval. This is very valuable information for a VA borrower to know because it will raise your confidence in any lender that is VA-approved and you’ll have a window of understanding into the lender’s perspective on the VA loan program. Only lenders who truly want to offer VA loans bother to go through the process to become VA-approved.
First, a VA lender is defined as: “Any person or entity (private sector or government) that originates, holds, services, funds, buys, sells or otherwise transfers a loan guaranteed by VA.” The handbook then differentiates between two different types of lenders: supervised and nonsupervised. A supervised lender is one who is subject to examination and supervision by either the federal or a state government. The examinations generally happen periodically and have to meet the VA requirements for supervision in order for a lender to be considered “supervised”. Supervised lenders include federal savings banks, national banks, farm credit system institutions, state banks, insurance companies, credit unions, and private banks. In other words, most lenders are considered supervised. In fact, under “nonsupervised lender”, the Handbook simply says any lender that’s not a supervised lender.
There is one more type of lender, called a nonsupervised automatic lender. This type of lender has applied for and been granted authority from the VA to approve VA loans on an automatic basis, without the usual manual process of approval for each loan that normally takes place.
In the context of the loan process, the word ‘agent’ refers to the person (or sometimes an ‘entity’) that does any work on behalf of a sponsoring lender. This can be confusing for the borrower because they’re also dealing with real estate agents. Knowing which agent is being referenced depends on context, but now that you know that it could be referring to the representative of the lender, you’ll be able to understand which ‘agent’ is being referenced. The sponsoring lender is one who uses an agent to conduct any work related to originating or closing a VA loan. You’ll usually deal with an agent and a sponsoring lender unless you’re working with a small, private lender that works directly with his/her clients.
The handbook then lists all of the loans that require prior approval from the VA before they can be closed, even if the lender has automatic authority. Those loan types are the following:
- Joint loans.
- Loans to veterans in receipt of VA nonservice-connected pension.
- Loans to veterans rated incompetent by VA.
- Interest Rate Reduction Refinancing Loans (IRRRLs) made to refinance delinquentVA loans.
- Manufactured home loans (except when the manufactured home is permanently affixed to the lot and considered real estate under state law) unless the lender has been separately approved for this purpose.
- Cooperative loans.
- Unsecured loans or loans secured by less than a first lien.
- Supplemental loans.
For a lender without automatic approval authority, every single VA loan they wish to close on must first be submitted for approval by the VA. Lenders with automatic authority are permitted to submit any loan for approval if there are issues with the loan that the lender cannot resolve on its own. For the lender to submit these loans, the application needs to be accompanied by the underwriter’s analysis and an explanation of why the loan is being submitted for prior approval. The Handbook clearly states that lenders are not to use this provision to shift the burden of loan rejection to the VA.
Deciphering the VA Lender’s Handbook Chapter 1 Part 2
Continuing on from Part 1, we’re going to cover what exactly is meant by “automatic authority”. Automatic authority means that the lender in question has the authority to approve most VA loan applications without first submitting the application to the VA for approval. Automatic authority is granted to all supervised lenders, primarily because they are closely monitored to make sure that they are complying with all requirements and guidelines for their business practices. A nonsupervised lender must go through an application process in order to be granted automatic authority, and any lender, regardless of whether they actually have automatic authority, can close on an IRRRL without prior approval from the VA as long as the loan that’s being refinanced is not delinquent. The Handbook encourages lenders with automatic authority to use it as much as possible.
The reasons for this are simple; the process goes much faster for the borrower if the application doesn’t have to be sent to the VA for approval first, it lowers the cost of the VA loan program for the VA if they don’t have to employ as many people to do prior approvals, and it helps prevent any information and subjectivity from getting lost in the paperwork. There are further differences between supervised lenders and nonsupervised automatic lenders, which the Handbook goes into, so we will as well. The following chart is taken directly out of the Handbook and clearly shows the differences between the two lender types.
|Authority||Supervised Lender||Nonsupervised Automatic Lender|
|To close loans on the automatic basis||No VA approval needed.||Must submit application and be authorized by VA to close loans on an automatic basis|
|To use certain underwriters||No VA approval needed. Any of the lender’s underwriters may underwrite loans processed on the automatic basis.||Must submit application and obtain VA approval for each person to underwrite VA loans processed on the automatic basis.|
|To close loans in particular states||No VA approval needed. Lender may close loans in any state.||No VA approval needed. Lender may close loans in any state.|
|To use agents to process VA loans||Must submit request and obtain VA recognition of each agent with whom the lender has an ongoing relationship.||Must submit request and obtain VA recognition of each agent with whom the lender has an ongoing relationship.|
Directly beneath the chart, the Lender’s handbook once again mentions the exception of the IRRRL to the automatic authority rule. IRRRL’s can be automatically approved without prior VA approval by any lender as long as the IRRRL is not refinancing a delinquent loan.
At this point, the Handbook is finished providing definitions for this chapter. It now starts outlining the process that lender’s must go through before beginning to offer VA loans. No matter what type of lender is applying (supervised, nonsupervised, etc.), if they are first-time VA lenders, they must send a list of documents to the VA office that has jurisdiction over the lender’s main office. The documents that the lender must provide in the application include a document with specimen signatures (a signature written for the purpose of comparing it to future signatures to detect forgeries) of any and all “officers, underwriters, or other personnel authorized to sign documents related to VA-guaranteed loan activities”.
The lender must also provide VA Form 26-8812, which is the VA Equal Opportunity Lender Certification, and a letter that clearly identifies the lender’s business address, the names of the lender’s owners, any personnel working for the lender that has ever had a run-in with the VA or HUD, including being debarred or any other adverse action, and a list of all the branch offices of the lender that will be involved in VA loans. In addition to these required documents, the VA may also order a credit report on the lender and even interview principal officers from the lender. These things are up to the VA to determine whether they are necessary to supplement the information provided in the required application process.
After submitting the initial paperwork, there may be some follow-up required by the VA before approval is granted. Once approval is granted, there are things that the lender must still do before beginning to offer VA loans.
Deciphering the VA Lender’s Handbook Chapter 1 Part 3
After the lender has submitted their paperwork to the VA to be considered to become a VA-approved lender, the VA office that has jurisdiction over the area in which the lender’s main office resides will provide pertinent information to the lender. The things that the VA will provide will include a VA Poster 26-77-2, which sounds odd, but is a poster that classifies the lender as an Equal Opportunity Lender, which is a requirement for VA approval. The local VA office will also offer training on VA loan processing and a VA ID number that the lender can use for any and all VA lending transactions and documents to identify themselves to the VA. The newly-approved lender should also download a copy of the Lender’s Handbook, and they are given a link to the online version.
Deciphering the VA Lender’s Handbook Chapter 1 Part 4
Picking up from the last article, there are many lenders that are not supervised by one of the entities required in order to consider officially “supervised”. However, being classified as a supervised lender is advantageous for many reasons, so the VA Lender’s Handbook offers instructions on how a lender can be specifically recognized as a supervised lender. These instructions pertain to any lender that wants to be considered supervised but is not overseen by any of the required federal agencies. In order to be considered, the lender has to fit into one of two categories: either they need to be a wholly-owned subsidiary or affiliate of a VA-recognized supervised lender (independently owned franchise), or the lender is supervised by a state or federal agency other than the ones that warrant automatic classification of “supervised”.
For a lender to apply for “supervised” status, they will need to submit a variety of information to their regional VA office. They must first describe the “nature and extent” of the examinations and supervision that they are subject to from the agency that supervises them. They must also include a letter or statement from the agency (whether it be federal or state) that states clearly that the lender in question is periodically examined and supervised by their agency. The Handbook clearly mentions that a general outline of the agency’s regulatory requirements for lenders is not sufficient, nor is a lender voluntarily submitting to an examination, nor is a lender’s receipt of a license from the state.
For lenders who are relying on their affiliation with a VA-recognized supervised lender for their recognition, they will need to provide official documentation that outlines the “…structure, capitalization, and ownership” of the franchise and organization as a whole, as well as clarification of the legal and financial relationship between the individual franchise and the main office of the supervised lender. This is valuable information for borrower’s to be aware of because they can know that either the VA is personally evaluating the loan application to approve the arrangement, or the lender has gone through fairly onerous steps to gain permission from the VA to approve them themselves. This is one way that the VA ensures safety and protection for those taking advantage of the VA loan program.
Once a lender is supervised, and for as long as it is considered supervised, they must provide documentation for any ongoing agency relationships to the VA. The Handbook specifies “ongoing” as the use of a specific agent more than four times per year. For any of these agents, the lender must provide two things to the VA no later than January 31st of each year. First, the lender must provide a list of the VA-recognized agency relationships it wishes to renew, along with the annual renewal fee for each and every agent that is acting on behalf of the lender on an ongoing basis and has been recognized by the VA as the lender’s agent as of September 30th. The VA may also request additional information alongside the list of agents being renewed and the renewal fee. The Handbook is clear in putting the burden on the lenders to remember to send in the list and the renewal fees, rather than assuring them that the VA will issue annual reminders to do so.
We’ve covered a lot here. Now we’re going to cover how a nonsupervised lender applies for the automatic authority with the VA. A nonsupervised lender that intends to remain nonsupervised but would like automatic authority to approve loans without having to submit to the VA for prior approval needs to fill out VA Form 26-8736, called the Application for Authority to Close Loans on an Automatic Basis-Nonsupervised Lenders, and send it to their regional VA office. The lender must also submit the documentation specified below, any fees, and any updates to the information provided in the original application.
The Procedures and Criteria for Qualification section are quite long but is organized in tables, so I’ve simply pasted them below:
|(Note: For purposes of determining whether the experience criteria are met, IRRRLs do not count as VA loans originated since no underwriting is involved.)
For all lenders:
CompletedVA Form 26-8736
Additional documentation for lenders qualifying based on experience as agent
– the number of VA loans submitted by the agent each year, and
that the loans have been documented and submitted in compliance with VA requirements and procedures.
A senior officer of the lender must nominate at least one full-time qualified employee to act as an underwriter who has either:
All VA-approved underwriters must be familiar with VA’s credit underwriting standards and this Lender’s Handbook.
|For all underwriters
VA Form 26-8736a,Nonsupervised Lender’s Nomination and Recommendation of Credit Underwriter, completed by a senior officer if the underwriter is not located in the lender’s corporate office, a senior officer’s certification that the underwriter reports to and is supervised by an individual who is not a branch manager or other person with production responsibilities.
Additional documentation for underwriters qualifying based on 3 years’ experience
Underwriter’s resume, outlining the underwriter’s specific experience with VA loans.
(Note: For purposes of determining whether the experience criteria are met, IRRRLs do not count as processing, pre-underwriting or underwriting.)
Additional documentation for underwriters qualifying based on ARU designation
Evidence that he or she is a current ARU as designated by the MBA.
See “Underwriter Approval” in section 6 of this chapter for mandatory training requirements for newly approved underwriters and underwriters who have not underwritten VA loans in the past 24 months.
|Minimum Working Capital Or Net Worth
The lender must maintain either:
working capital is the excess of current assets over current liabilities. (Current assets are defined as cash or other liquid assets convertible into cash within 1 year. Current liabilities are debts that must be paid within one year), or
Reference: See section 14 of this chapter for VA’s calculation requirements.
|For all lenders
Lender’s most recent annual financial statements audited and certified by a CPA if the date of the financial statements precedes the application date by more than six months, attach a copy of the latest internal financial statement.
Additional requirement if qualifying based on working capital
Additional requirement if qualifying based on net worth. Adjusted net worth must be calculated by a CPA in accordance with the requirements in section 14 of this chapter.
|Lines Of Credit
The lender must have one or more unrestricted lines of credit totaling at least $1 million.
Unrestricted means funds are available upon demand to close loans and are not dependent on prior investor approval.
|Letter(s) from the company(ies) verifying the amount(s) and unrestricted nature of the warehouse lines of credit.|
If the lender customarily sells loans it originates, it must have a minimum of two permanent investors .
|Names, addresses and telephone numbers of two or more permanent investors.|
|Quality Control Plan
The lender must implement a written quality control plan which ensures compliance with VA requirements and meets the criteria outlined in section 15 of this chapter.
|Copy of quality control plan which meets the criteria outlined in section 15 of this chapter|
The lender must designate one qualified employee and an alternate to be the primary liaison with VA.
The liaison officers should be thoroughly familiar with the lender’s operation and be able to respond to any query from VA concerning a particular VA loan or the firm’s automatic authority.
|VA Form 26-8736 contains a space in which to indicate liaison selections.|
|Sanctions For Prior Acts
There must be no factors indicating the lender would not exercise the necessary care and diligence.
|A statement of facts is required in any case where:
the lender had a servicing contract with an investor terminated for cause.
Next, the local VA office will put the lender on the appropriate mailing lists so that they can receive any future VA publications, which include modifications to the Lender’s Handbook, updates on policy changes, and any special notifications that cover unique or temporary circumstances, such as a natural disaster in a certain area. Areas that are not affected by the disaster will likely not receive any instructions regarding it. From this point on, the regional VA office that has provided the new lender with these things will become the primary point of contact between the lender and the VA. Any questions, concerns, training requests, or any other requests or issues should be brought up with the regional office first. This is important for the borrower to understand because there are often delays when the regional office doesn’t know the answer to the question the lender is asking. This is not the lender’s fault. Borrowers can get frustrated with any delays to getting their VA loan, but they should know that the lender is required to first go through the regional VA office before going higher up.
The VA allows that as soon as the lender is familiar enough with the VA loan program to begin making VA loans without violating any of the laws, regulations, and procedures, they may begin to do so. At this point, the process becomes different for supervised and nonsupervised lenders. For a nonsupervised lender, they will need to submit every single loan they wish to close on to the VA for prior approval first. If they wish to have automatic authority, they will need to go through the application process. For supervised lenders, they can immediately begin making and closing on VA loans without prior approval unless it is one of the loan types mentioned in Chapter 1 Part 1 of this series.
The list is as follows:
- The Board of Governors of the Federal Reserve System
- The Federal Deposit Insurance Corporation
- The Comptroller of the Currency
- The Office of Thrift Supervision
- The National Credit Union Administration
- The Farm Credit Administration
If a lender is supervised by any of those agencies, then they need not submit the majority of VA loans to the VA for prior approval. The lender indicates which (if any) of the agencies they are supervised by in the initial application process. While there may be some additional documentation required, it is handled on a case by case basis.
Interestingly, the VA recognizes the supervision of the states of Illinois or New Jersey also as sufficient supervision. However, the supervision of these states only applies to offices and loans inside those states. For a lender that is supervised by either of these states, they are asked for certain information during the initial application process. Illinois lenders need a copy of their state license from the Office of Banks and Real Estate. New Jersey lenders need to provide a copy of their license from the New Jersey Department of Banking and Insurance. The Handbook does not list any other states that can count as supervisory entities.
Deciphering the VA Lender’s Handbook Chapter 1 Part 5
So far we’ve covered pretty comprehensively the differences between supervised lenders and nonsupervised lenders, and also the criteria for a nonsupervised lender to get approved for automatic authority to approve VA loans without having to go through the VA first. As a borrower, you should ask any prospective lenders whether they are supervised or nonsupervised and if they are nonsupervised, whether they have the automatic authority or not. Firstly, the person you’re talking to should be able to answer those questions, and their answer will be an indicator of how serious the lender is about the VA loan program. A lender who just offers VA loans to broaden their reach may not go through the effort to receive automatic authority from the VA, and consequently, there may be other things they don’t bother to go through the effort to do – learn the complex ins and outs of the VA loan program, for example. This is obviously not a perfect test; there are great, knowledgeable lenders out there that simply do not do enough VA loan business to make it worth getting qualified for automatic authority, but it can be a good indicator of the caliber of lender that you’re working with.
There are a few more important details regarding nonsupervised lenders applying for automatic authority that the Handbook covers, and, therefore, will be covered here. Consider this your ‘insider information’ that will give you the edge when you’re applying for a VA loan. Firstly, a lender that has been granted automatic authority can use that authority anywhere in the country; they are not limited to the state in which their main office resides. The lender will be notified of the VA decision whether to grant the automatic authority after the regional VA office that has jurisdiction over the main office of the lender has reviewed the application materials, notes any concerns, and makes a decision regarding the lender’s application. The lender is then notified via mail on the decision. The Handbook also reiterates that lenders approved for automatic authority are expected to use it as much as they possibly can, and that any loans submitted for prior approval that aren’t required to be must be accompanied by a written explanation from the underwriter as to why it’s being submitted.
After getting approved, the lender begins a probationary period of one year. The lender is closely monitored by the regional VA office during this time, and are carefully checked to ensure quality underwriting, complete loan applications, and full compliance with all VA requirements and procedures. During this probationary period, the VA can withdraw automatic authority at any time if they see poor underwriting or “consistently careless processing”. At the end of the initial year of probation, the VA will send the lender another letter that does one of three things. The letter may terminate the probationary period and the lender will be in the green to continue offering VA loans with automatic authority, it may extend the probationary period to give the lender time to bring itself up to par with VA requirements, or it may revoke the automatic authority and the lender will be back to submitting everything to the VA for prior approval.
A nonsupervised lender has some regulations that they must comply with in order to stay in good standing with the VA and maintain their automatic authority. Firstly, they are not allowed to close loans on behalf of other lenders who do not have automatic authority. They are also not allowed to close on loans for a builder or any other entity that the lender has a financial interest in without first getting approval from the VA. The lender must also keep the VA updated on any significant changes to the organization. The primary concerns here are mergers and acquisitions. These cases of merging and acquisitions are all variable in nature and have a lot of details associated with specific situations, but the important thing for a borrower to know is that the VA requires that they are notified of these events, and that the lender is only permitted to continue to close on VA loans with automatic authority if the lender and the underwriter involved are the ones that have been approved to do so.