DIRECTOR, LOAN GUARANTY SERVICE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATION
COMMITTEE ON VETERANS' AFFAIRS
HOUSE OF REPRESENTATIVES
March 16, 2000
Mr. Chairman and members of the Subcommittee:
I am pleased to be here this morning to discuss the operation of the VA home loan program. Today I will discuss our initiatives to restructure the Loan Guaranty Program by automating processes, delegating authority, and consolidating functions into fewer locations. I will also cover current topics such as our A-76 study on whether to contract-out property management, the program’s financial audit, training, program oversight, and the impact of loan servicing efforts.
Mr. Chairman, VA guaranteed more than 485,000 loans, totalling approximately $54 billion, in this past fiscal year, the second highest loan volume since 1956. The subsidy appropriation to support this loan volume was $198.2 million. While this is a significant cost to the taxpayers, it is substantially less than the $612.5 million in fees paid by veterans to the VA. In effect, veterans pay a major portion of costs for providing this benefit.
Mr. Chairman, the Loan Guaranty Program has been going through a period of significant change. In the 1990’s staffing in the program was reduced by 35 percent. In order to continue providing quality service to veterans, as well as VA lenders and other program participants, we are making major changes to incorporate automation, delegation, and consolidation. A critical byproduct of delegation is, of course, the expanded need to focus on training and program oversight. Our vision is of a Loan Guaranty Program that, with the active participation of our private sector partners, quickly, efficiently, and cost effectively delivers the Loan Guaranty benefit to our nation’s veterans.
The use of Information Technology has become a primary focus in determining how the Loan Guaranty benefit will be delivered. We have established a very comprehensive and easy to use Loan Guaranty Website on the Internet, at www.homeloans.va.gov, that provides veterans and the general public a great deal of information. In addition to containing the answers to frequently asked questions, the site has an interactive map to enable veterans to have an e-mail question routed to the appropriate VA Regional Loan Center for direct and rapid response. The website also contains information specifically designed for program participants such as lenders, servicers and real estate sales professionals.
An initiative that we are particularly proud of that was implemented in December of 1999, will permit lenders to submit the information VA requires to obtain a guaranty certificate via electronic data interchange or EDI. Prior to this initiative, lenders were required to mail hard copy information to VA, which then had to be manually entered into our computer systems before we could mail the lender its guaranty certificate. In Fiscal Year 1999 alone, VA personnel were required to manually make approximately 24 million entries into our systems in order to process the 485,000 guaranty certificates that we issued. Once all lenders are participating in this initiative, virtually all of those entries will be done electronically with no need for human intervention. Additionally, the lender will receive the guaranty certificate electronically within 1-2 days of their submission, instead of having to wait weeks as was often previously the case.
In the area of Loan Administration, we are making active efforts to develop and implement EDI-based procedures for submitting a variety of documents such as Notice of Default, Default Status Update, Notice of Intent to Foreclose, Notice of Election to Convey property to VA, and Invoicing (Property Acquisition and Claim under Guaranty). These are processes that involve reporting of information between private sector loan servicers and VA offices that currently require the submission of over a hundred thousand hard copy documents per year. We will implement the EDI process for Default Status Updates in the third quarter of FY 2000, and the others in early FY 2001. When these electronic processes are fully operational, we will eliminate the need for a tremendous number of paper documents.
Another initiative that we are extremely proud of is the first internet based system implemented in VBA. The new VA Assignment System (VAAS) enables our lenders and other program participants to go on line from their own computers and obtain VA case numbers and appraiser assignments without any involvement by VA staff. This new system has been in place since July of 1999, and I can tell you that it has been applauded by our lenders. Currently, 90% of all appraiser assignments are being made without any need for VA staff involvement.
We have also implemented the Loan Service & Claims System (LS&C) in the past year. This system enhances our ability to provide assistance to veteran borrowers who are delinquent on their loans, to pay claims to lenders and to automate substantially other payment and accounting processes. We also are developing other enhancements to this system that provide significant assistance to our Loan Servicing Representatives in providing financial counseling to delinquent veteran borrowers.
Another new system in use is the Property Management Local Area Network (PLAN). This is a distributed application providing automated support for the acquisition, maintenance, and disposition of properties VA acquires after foreclosure. This system was implemented in 1999. It has significantly improved a VA function that sells nearly $2 billion worth of properties per year.
A system that has been in use for 2 years which we continue to enhance is our Expanded Lender Information (ELI) system -- a repository for all lender information. ELI also provides the means by which to track lender personnel who are subject to VA approval, including credit underwriters and Staff Appraisal Reviewers (SARS).
We have other new applications in development. For example, on April 3, 2000, we will begin a pilot at our St. Petersburg Regional Loan Center to test the feasibility of accepting appraisal reports electronically. Presently the hundreds of thousands of reports that are completed each year must be mailed from the appraiser to either VA or the lender. This new system will eliminate mail delays associated with hard copy submission of completed appraisals. The result will be improved service to veterans and participating lenders.
Another initiative we have in prototype development is an Automated Eligibility System. This initiative will allow lenders to access VA records and make determinations concerning a veteran’s eligibility for home loan benefits and determine the availability of sufficient entitlement for the loan amount under consideration. The current process requires veterans or lenders to submit a written application to VA. A VA employee must then review the application, make a determination and mail the eligibility certificate. We expect to have an in-house prototype operational by the end of this fiscal year, and to begin making the system available to the industry in the first quarter of FY 2001.
Still in the area of developing systems, we are seeking to upgrade the method by which we receive and account for funding fees. Funding fees are currently paid to VA via electronic funds transfers handled on VA’s behalf by the Mellon Bank Automated Clearing House (ACH). At the present time, VA is working with Treasury and the Mellon Bank ACH to develop a replacement application which will provide significantly better tracking, control, and oversight capabilities.
Mr. Chairman, I would now like to talk about another area in which VA is involved in new technology. The mortgage industry is taking advantage of emerging technologies to assist in the processing and approval of loan applications. Automated Underwriting Systems (AUS) are used as a tool to underwrite loan applications and provide rapid loan approval decisions. In addition to faster decisions, use of AUS provides improved risk management. It also avoids any intentional or unintentional bias from becoming part of the underwriting process.
Some of these systems have been developed in-house by individual lenders, while other lenders subscribe to those developed by a third party such as Fannie Mae or Freddie Mac. The systems are developed based on the evaluation of data taken from a very large number of loans and the resulting performance of those loans. These systems do not disapprove loans; they assign a risk classification. Those that are rated "Approve" or "Accept" are considered to be low-risk and are generally approved without further underwriting. Those rated "Refer" are sent to a human underwriter for further analysis before a decision is made. The theory is that by using these systems, human underwriters can devote more time to difficult cases and ultimately approve a greater number of loans than might otherwise be possible.
To ensure veterans realize the same opportunities as non-veterans regarding these systems, VA has tested several and approved their use in connection with VA guaranteed loans. In November 1997, we approved the Loan Prospector system developed by Freddie Mac. In March 1999, we approved the CLUES system, which was developed by one of our largest lenders, and in December 1999, we approved the Desktop Underwriter (DU) system developed by Fannie Mae. VA has made it clear that the final decision to disapprove a loan must be made by a human underwriter, not the automated computer system.
Mr. Chairman, just a few years ago the typical VA Home Loan transaction required that VA personnel perform most of the processing work involved. Today, most veterans are able to obtain a home loan by dealing solely with their lender. Direct VA involvement in the processing of their loan is generally no longer required. We have accomplished this by selectively delegating processing and decision making authority to our private sector partners. For example, currently over 99 percent of our loans are made by lenders on an automatic basis; that is, without prior underwriting of the loan by VA staff. Under 38 U.S.C. 3702(d), these loans can only be made by lenders who are subject to examination and supervision by an agency of the United States or any State, or who have been approved for this privilege by VA under the criteria we have established.
We have also developed, under the authority of 38 U.S.C. 3731(f), a Lender Appraisal Processing Program (LAPP). Under this program, the property appraisal is reviewed and the value is established by an employee of the lender who has been approved by VA to perform these reviews. This enables lenders to close VA loans faster by receiving and processing appraisal reports without VA involvement, other than assignment of the case number and the appraiser. This saves both mailing time and VA processing time, especially during heavy workload periods. Currently 70 percent of our loans are being processed under LAPP. We have an effort underway to increase the participation rate to 90 percent.
In the area of loan servicing we have implemented a Servicer Loss Mitigation Program (SLMP) which delegates to servicing companies, the authority to process compromise sales and deeds-in-lieu of foreclosure. These are alternatives to foreclosure that can be offered to certain veterans whose loans are in jeopardy of being foreclosed. Both involve labor intensive work processes which require significant staff time to accomplish. Under SLMP, we are able to place most of the work involved in these cases on these servicers. This frees up VA staff to focus their efforts on loans that have a reasonable prospect of being brought current.
Another example of delegating authority to process work is our 1997 initiative to contract-out the servicing of our portfolio loans. These loans are of three types: (1) Vendee Loans: direct loans made to finance the sale of foreclosed properties, (2) Refunded Loans: delinquent guaranteed loans that VA buys back from lenders, and (3) Native American Direct Loans: loans made by VA to Native American veterans to buy a home on trust land.
For many years VA serviced a portfolio of loans, most of which were originated to finance the sale of properties acquired by VA as a part of its guaranty program. The staff was spread among 46 regional offices, and the computer system supporting this activity was created almost 30 years ago, was not user friendly, and could not comply with recent changes in statutory and regulatory requirements. It was cost prohibitive to make system changes, or to consolidate servicing to achieve the economies of scale needed to make efficient use of limited personnel resources. Thus, VA decided to contract for the subservicing of its entire loan portfolio.
In January of 1997 we completed a competitive process and began, in June of that year, using a private sector servicing company to process these portfolio loans. We estimate that the savings to VBA nationwide was 154 FTEE, and this has already been realized through reassignments and retirements at the Regional Offices. A Portfolio Loan Oversight Unit has been established at the Indianapolis Regional Office to oversee the Contractor’s performance (including review of cases recommended for termination), and to offer special assistance to veterans with direct or refunded loans.
I would now like to address the restructuring and consolidation that has been taking place in the field. The loan processing and servicing functions supporting the VA Home Loan Program are being consolidated from 45 Regional Offices (ROs) in the continental U.S. and Alaska to 9 Regional Loan Centers (RLCs). Hawaii and Puerto Rico are not included in this plan due to their remote location, time zone differences, and language barriers. The consolidation is essentially complete, with the exception of the loan servicing function in Los Angeles, which is scheduled for August, 2000. Direct service provided to veterans who personally visit ROs has not been significantly affected.
· Veterans who personally visit a VA Regional Office can continue to do so. Each office continues to retain personnel knowledgeable in the home loan program who are able to offer these veterans assistance and work as a liaison with the RLC.
· Veterans needing assistance by phone are able to call the RLC using a toll-free number. They are simply connected to the RLC rather than the local RO.
· The RLCs are large enough to take advantage of new technology such as auto-dialers and reengineered work processes. They have sufficient personnel available to answer telephone inquiries and offer longer hours for phone service.
· Consolidation to RLCs improves mail and telephone contacts with industry partners. Industry representatives have contact with a smaller number of offices, and the information provided is more consistent. This is especially important for national lenders which, prior to restructuring, had to deal with up to 47 different offices which often operated with varying procedures.
· Consolidation facilitates consistent staff training of the highest quality. This tends to reduce variations in the quality of service received by lenders and servicing companies and allows VA to be more responsive to their needs.
· Consolidation makes VA consistent with the mortgage industry. Most loan servicing companies service a large number of loans from centralized servicing centers. Most lenders operate from regional underwriting centers. Service will be improved as the number of different offices involved in the process will be reduced.
In a similar way, the processing of veteran’s requests for certificates of eligibility has also been consolidated. Veterans who mail their requests for a COE will simply mail it to one of two Eligibility Centers (Winston-Salem or Los Angeles) instead of mailing it to the nearest RO. Both eligibility centers are currently processing such requests in less than 5 days.
Turnaround time for mailed requests will be quicker on average and much more reliable due to economies of scale at the central location(s). Veterans who can currently visit a VA Regional Office or out-based location to receive a COE can continue to do so; however, surveys indicate that less than 20 percent of veterans requesting a COE do it in person at a Regional Office.
Mr. Chairman, I would like to turn our attention to the Property Management Operation, which is responsible for the acquisition and sale of real estate acquired by VA under the Loan Guaranty Program. The nationwide operation employs approximately 275 full-time employees at the 45 VA Regional Offices and Loan Centers with Loan Guaranty Activities. In Fiscal Year 1998, VA acquired 24,765 properties and sold 21,859 for an 89% sales to acquisition ratio. In Fiscal Year 1999, VA acquired 24,217 properties and sold 24,758 for a 103% sales to acquisition ratio.
When VA takes custody of a foreclosed property, we use the services of Management Brokers to care for the property. Management brokers are private sector firms and/or individuals who are assigned responsibility for custody of acquired properties up to the point of disposal. These brokers secure the property once it is vacant and perform a comprehensive property inspection. The results of this inspection, including recommended repairs and a marketing analysis provide the basis for VA’s strategy for property disposition. Management brokers also supervise repairs made by private contractors as authorized by VA. Supervision and oversight of management brokers and repair contractors are in the form of field reviews by VA staff on a sample basis to ensure that work is performed as reported. In addition VA’s internal quality control system requires reviews of property disposition cases including management broker performances.
VA is in the process of conducting an A-76 Cost Comparison to determine whether it would be more efficient and cost-effective to continue to perform the commercial work of the VA Property Management (PM) operation in-house using government employees and resources, or to obtain such services through commercial sources. This study is being conducted in accordance with Executive branch policy, as expressed by Office of Management and Budget (OMB) Circular A-76, Performance of Commercial Activities. The basis for this Study is our recent determination, made in accordance with the Federal Activities Inventory Reform Act of 1998, Pub. L. No. 105-270, that much of the work of this operation is commercial in nature.
The A-76 Cost Comparison process is a contracting competition between in-house government employees and private sector contractors and it involves usual and customary FAR contracting requirements. The official start date for this Study was August 9, 1999. VA anticipates completing the Study, that is, having a decision regarding whether the commercial work should remain in-house or be contracted out, by August 2000.
VA has hired Booz-Allen & Hamilton as the consulting contractor on this initiative. Booz-Allen brings a wealth of expertise and practical experience in conducting A-76 Studies. In addition, an in-house subject matter team has been established to provide necessary program and operational expertise. This in-house subject matter team includes Property Management employees, program managers, representatives from both the American Federation of Government Employees and the National Federation of Federal Employees, and others.
Mr. Chairman, because we have delegated significant responsibilities to program participants, we must be vigilant in our oversight of their activities. There are a number of tools we use. For example, in the Construction and Valuation area, we strive to appoint only qualified appraisers and inspectors to VA fee panels. We conduct an office review of all fee appraisal reports and value notices issued by VA staff or LAPP lenders. We field review at least 10 percent of cases processed by lenders under LAPP, and at least 5 percent of all fee appraisal reports. Our focus is on new fee appraisers and those with quality-related problems. Office reviews of all inspection reports are also done, either by VA staff or by the lender, to assure that there are no unresolved problems reported by the inspector. We also field review inspection reports. We process construction complaints by veteran homebuyers against builders, and implement administrative sanctions, as necessary and appropriate, against any program participant who fails to meet program requirements.
In the loan production area, VA conducts full reviews on a 10 percent random sample of guaranteed loans. A full review involves obtaining a complete origination package and verifying that all aspects of the loan are in compliance with the published credit standards. We verify that fees and charges were appropriate, and that all appraisal requirements were satisfied. Lenders are notified when deficiencies are found.
VA also conducts post audits on a randomly selected 5 percent sample of closed loans. A post audit involves reverifying documents sent in by the lender. For example, the employment and deposit verifications are reverified to make sure there was no fraud involved.
VA conducts full reviews on newly closed defaulted loans in which 6 or less payments have been made. These loans are carefully scrutinized to determine if there were underwriting deficiencies that the lender should be alerted to.
VA also conducts additional reviews of cases from lenders who have been identified by station management as lenders who have exhibited a pattern of failing to process loans completely or accurately. VA personnel also conduct lender visits and routine lender training to ensure lenders are aware of current policy.
In the last year we have implemented a revised Quality Control System that is carried out by both employees in the field and here in Headquarters and we have re-instituted on-site surveys of field stations.
Mr. Chairman, another very important component of our oversight effort is our Loan Guaranty Service Lender Monitoring Unit. Since the establishment of the Loan Guaranty Service Monitoring Unit in 1990, we have been conducting onsite audits of lenders and servicers to determine the level of compliance with required laws, regulations, and policies governing VA’s Loan Guaranty Program.
Approximately 4500 lenders participate in our program. We have averaged 60 audits a year over the past 10 years. We use a multi-agency shared computer program, called C-PADS, in our process of selecting the lenders for audit. This computer program identifies the lenders who have a high rate of defaults. In addition, we also utilize our own database of lenders. We make every effort to ensure program integrity by identifying and selecting lenders who pose a higher risk to VA.
We have taken several different types of actions against program participants as a result of their noncompliance with the required laws, regulations and policies governing this program. As a result of actions taken by the Monitoring Unit:
I mentioned training as an important byproduct of delegation. Loan Guaranty Service maintains an active and innovative training program, both for its own employees and for its partners in the private sector (lenders, servicers, real estate professionals, etc.). Nationwide training is sponsored by Headquarters, and utilizes the Veterans Benefits Network of interactive satellite broadcasts, computer-based and Internet-based self-paced learning programs, and a number of classroom-based courses. In addition, each Regional Office and Regional Loan Center also offers training for VA employees and program participants on a local basis.
Three new videotapes have recently been produced: The American Dream for America’s Veterans explains the VA home loan program for a general audience (including veterans and real estate professionals); Special Homes for Special Veterans is provided to veterans eligible for a Specially Adapted Housing Grant to explain the grant process; and Coming Home – Native American Veteran Home Loans describes the direct loans offered to Native American veterans living on trust lands. It is designed for tribal councils as well as eligible veterans.
During the current year Loan Guaranty will offer four two-hour broadcasts specifically tailored for lenders, and one for real estate professionals. Last year these training broadcasts were received by over 6,000 lender employees. The A-76 Study of Property Management has been explained both to VA employees and private sector property management firms by means of interactive televised broadcasts, which enabled all to ask questions as needed.
Mr. Chairman I would like to devote the final few moments to some current issues.
First, let me discuss the impact of VA’s loan servicing efforts. It has been VA's long standing policy to encourage mortgage holders to extend forbearance to borrowers who find themselves in temporary financial difficulties. In loan default cases, the mortgage holder is responsible for contacting the borrower, determining the reason for the default, and making arrangements for repayment of the delinquency. If this cannot be accomplished by the time three installments are due and payable, under existing regulations the default must be reported to VA, together with the holder's explanation of the reason for the default and a summary of its servicing efforts. Upon receipt of such notice, VA takes an active role in working to protect the interests of the veteran-borrower and the Government by initiating an outreach effort to personally contact the borrower and perform supplemental servicing.
VA closely reviews the holder's servicing of the account and follows up by attempting to contact the borrower by letter or telephone. Once contact has been established and based upon the facts in the case, VA personnel may offer financial counseling and/or may intercede with the holder on behalf of the veteran in order to obtain forbearance or arrange a reasonable repayment schedule in appropriate cases.
When our efforts to secure additional forbearance are unsuccessful, VA has discretionary authority to "refund," i.e., to purchase a loan from the mortgage holder. The law providing this authority to VA does not vest borrowers with any right to have their loans refunded or to apply for refunding. Nevertheless, VA considers whether refunding is in the best interests of the veteran and the Government in every case before foreclosure. When VA refunds a loan, it may be reamortized to eliminate a delinquency and the interest rate may be reduced up to 3 percent below the prevailing rate for new VA portfolio loans in order to lower the monthly installment payments. VA intervention through refunding is exercised in situations where the borrower has the ability to maintain the mortgage obligation or clearly will have that ability in the near future, but the holder has determined it would not be in its best interest to continue to extend forbearance.
When a borrower has no realistic prospects for maintaining even reduced mortgage payments, VA will encourage a private sale of the home to avoid foreclosure. We realize such a sale can be difficult to arrange if the property is worth less than the total amount owing on the loan, as is often the case in certain areas around the nation which have depressed housing markets. In such a situation, VA may be able to offer assistance by using a procedure which enables us to compromise a loan guaranty claim. This procedure can be considered if the difference between the loan indebtedness and the purchase price is less than the amount of VA's maximum guaranty. If a veteran finds a buyer who will purchase the property for its fair market value, and the proceeds of the sale are applied to the existing indebtedness, a compromise agreement would enable VA to pay a claim for the difference between the sale price and the loan indebtedness.
When a borrower is unable to cure the default, refunding is not appropriate, and a private sale cannot be arranged, VA considers approving the acceptance of a deed in lieu of foreclosure. If acceptance of the deed will be in the best interests of both the borrower and VA, then VA will approve it. If a deed in lieu of foreclosure is not feasible, the holder will generally proceed with foreclosure.
VA’s program is well-established and its success is being carefully measured. For each case where VA intervenes with a loan holder and arranges a repayment plan or other alternative which successfully avoids foreclosure, the Government avoids paying a claim under guaranty, which for Fiscal Year 1999 averaged over $19,700. VA intervened in approximately 5,994 cases which achieved loan reinstatements during FY 1999 for a savings to the Government of $118 million. VA employs about 300 Loan Service Representatives nationwide at a cost of approximately $15 million, so the net savings are $103 million.
In order to measure our success in assisting delinquent veteran borrowers, we have developed a measure known as the Foreclosure Avoidance Through Servicing Ratio (FATS). This measure calculates the impact of VA’s successful interventions, deeds-in-lieu of foreclosure, compromise claims and refunded loans on the overall level of foreclosures. Simply put, it measures the extent to which foreclosures would have been greater if VA had not assisted veterans in accomplishing one of these alternatives. In FY 1999, the FATS ratio was approximately 37 percent. In other words, without VA involvement there would have been 37 percent more foreclosures.
At the end of FY 1999, VA had 122,288 loans in a seriously delinquent status (in danger of foreclosure) out of 3,171,862 loans outstanding. This translates to a current default rate of 3.86 percent. From fiscal year 1971 through fiscal year 1999, VA guaranteed 8,307,818 loans of which 648,844 were foreclosed. For that period the foreclosure rate was 7.8 percent.
Finally, Mr. Chairman, let me address the Housing Credit Assistance Plan. The VA Inspector General (VAOIG) and GAO audited the agency’s financial statements for FY 1997, and issued a "qualified opinion" listing 5 reportable conditions, 3 of which were related to the Loan Guaranty program. These were the in areas of program financial reporting, the direct loan portfolio, and accounts related to guaranteed sales of vendee loans. VBA established a task force of Loan Guaranty, VBA Office of Resource Management, and VA Finance personnel, facilitated by the Associate Deputy Secretary for Financial Policy, to review these conditions and develop a plan of action to correct them. The plan has been developed and carried out and the OIG is again conducting its audit. We believe that our considerable efforts in the last year and a half will result in a favorable audit opinion for FY 1999.
Mr. Chairman, this ends my statement. I will be pleased to answer any questions you or the other members may have.