CHAPTER 18. LOAN GUARANTY DEBTS

18.01 GENERAL

a. The term "loan default debt" refers to a debt arising from liquidation of the security for a mortgage loan under the Loan Guaranty and Direct Loan programs. The amount of the debt is the loss VA incurs on a loan. Home loan default debts are maintained in the Centralized Accounts Receivable System (CARS) and are collected by the Debt Management Center (DMC). The debts are entered in the Hines ADP System by the regional office of jurisdiction.

b. VA Form 41426, Request for Assignment of File Number on Overpayment Case, is prepared on each indebtedness case where the original mortgagor is the veteran whose entitlement was used to obtain the loan and the TARGET screen 101 (BINQ) shows no record of a claims file.

c. Title 38 U.S.C. 5314 authorizes the involuntary withholding from VA benefit payments to satisfy a debt arising out of any home loan made to or assumed by an individual after proper notification and due process is given. Loan guaranty debts may also be offset from federal salary if a loan is foreclosed judicially in a process involving the debtor and proper due process has been afforded.

e. In any case where a deficiency money judgment has been obtained in a mortgage loan default case, the indebtedness will not be referred to the DC or DOJ for enforced collection as long as the judgment is in effect but may be referred after the judgment has expired. Where only a foreclosure decree is involved, an uncollectible debt may be referred to the DC or DOJ for enforced collection action if the criteria for referral are met. The Certificate of Indebtedness (C of I) will clearly indicate that either the judgment has expired or that it pertains only to foreclosure decree. In the event a supplemental VA Form 261833, Advice Regarding Veteran's Indebtedness of Obligator on Guaranteed or Insured Loans, is received indicating that a deficiency judgment has subsequently been obtained or assigned, a supplemental C of I will be forwarded to the DC or DOJ.

f. In those jurisdictions where deficiency judgments are normally obtained and assigned to VA, collection action will be pursued against those assumers who agreed to pay the loan and are legally liable for the debt, but could not be personally served within the jurisdiction of the court and could not therefore become parties to the deficiency judgment. Such debtors may be referred to the DC or DOJ if otherwise appropriate, but the referral should indicate the status of collection action against the judgment debtors.

g. Collection may be suspended when an indebtedness is directly or indirectly related to the announced closure of a military installation. The Loan Guaranty Division will indicate in all such cases whether any titleholder may be eligible for some measure of relief under section 1013 of Pub. L. 89754 which authorized the Department of Defense (DOD) to provide assistance to eligible homeowners who were stationed or employed at a military base ordered closed by the DOD after November 1, 1964. The DOD has the sole responsibility for determining eligibility.

18.02 IF VET. IS NOT NOTIFIED OF LGY DEFAULT AND FORECLOSURE

A veteran who is indebted to VA as a result of default and foreclosure on a VA guaranteed loan must, under State foreclosure law, be made a party to the foreclosure and be given actual notice of the proceedings. The following guidelines should be followed when a veteran makes a claim to either the Fiscal activity or COWC that he/she did not receive notification:

(1) The Fiscal activity will refer the case to the Loan Guaranty Officer (LGO) who will review the file to determine if notice was provided or attempted and prepare a written report.

(2) If a debt pending a waiver decision is referred to the LGO, procedures discussed in MP4, part I, paragraph 8C.02, will be followed.

(3) If the LGO reports that VA made reasonable efforts to provide notice, or if the LGO after consulting with the DC determines that State law permits the collection of the deficiency without providing the veteran with actual notice, then debt collection efforts are to proceed as normal.

(4) If VA is relying solely upon indemnity for the establishment of the debt, and the LGO's report states that VA made no attempt to notify the veteran and the DC has determined that such failure precludes recovery under State law, collection efforts are to cease against the veteran. However, if the Fiscal Officer questions the applicability of the DC's opinion in a particular case where notice was not given for a specific cause, such as the inability to locate the veteran, the case should be referred immediately to the DC for final resolution of the validity of the debt. If it is decided that the debt is legally without merit, the Fiscal activity will write off the debt (07D fiscal transaction), including those maintained in CARS. Any amounts that have been collected or offset will be refunded and the debtor will be notified that collection action will no longer be pursued by VA. Written off debts will not be reported to the IRS as taxable income to the veteran.

18.03 JUDGMENT CASES

a. VA has sole authority to decide whether or not to pursue collection action on loan default cases which have been reduced to judgment (other than judgments obtained through the DOJ or DC). Upon completion of the administrative collection procedures, all cases having favorable financial information will be referred to the DC for consideration of legal action under the judgment. Cases in which the credit information indicates that it would serve no useful purpose to refer the debt to the DC, and those which the DC returns because legal action would be fruitless or not justified, will be processed for writeoff or suspension of collection action, as appropriate. A debt will not be suspended for more than 2 years, taking care to insure that suspension is lifted at least 90 days prior to expiration of the judgment. The DC must be notified timely to renew the judgments, if appropriate.

b. When the station director in consultation with DC decides that the circumstances in an individual judgment case warrants consideration for initiating garnishment proceedings against the salary or the earnings of the debtor (this does not pertain to federal salary which can be involuntarily offset), the appropriate facts will be forwarded to the Chief Benefits Director or Chief Medical Director for consideration and final decision.

18.04 PORTFOLIO LOANS

a. The U.S. Attorney or DC handling the judicial foreclosure of a portfolio loan will inform the fiscal activity in each instance where a deficiency judgment was not obtained because the notice could not be personally served. These cases usually involve a debtor whose residence is not within the jurisdiction of the court or a debtor whose current address is unknown. The Fiscal activity will pursue administrative collection action against those obligors not included in the deficiency judgment because of inability to effect personal service by the U.S. Attorney or DC. If the debt is collected in full, the U.S. Attorney or DC should be advised promptly so that action may be discontinued against the judgment debtor. If administrative collection action is taken without successful results, the debt may be referred to the DOJ or DC for enforced collection in accordance with paragraphs 24A.02 and 24B.03. The VA Form 45285 will show that foreclosure of the property has been completed, but judgment was not obtained by the U.S. Attorney due to inability to effect personal service on the debtor. The name and address of the U.S. Attorney will be included along with a citation of the court address and docket number.

b. When the U.S. Attorney or DC has been asked to obtain a deficiency judgment against several obligors, administrative collection action is to be pursued against any obligor who could not be personally served and no judgment could therefore be obtained. The U.S. Attorney or DC should be advised promptly if collection is made so that action may be discontinued against the judgment debtor.

18.05 GUARANTY AND INDEMNITY FUND (GIF) LOAN DEBTS

a. Definition of a GIF Loan Debt: A GIF loan debt is established against an individual when the Department of Veterans Affairs (VA) pays a claim on a defaulted guaranteed or insured loans in GIF and the Loan Guaranty Division determines that fraud, misrepresentation, or bad faith were involved. Portfolio (vendee) loan debts are established based on the advice of the Loan Guaranty Service.

b. Establishing GIF Loan Debts:

(1) Guaranteed Loans: The Accounting activity is to record the debt in the appropriate general ledger account upon receipt of a VA Form 261833 (Advice Regarding Indebtedness of Obligors on Guaranteed or Insured Loans). Upon confirmation of distribution in LCS, the VA Form 261833 is sent to the Fiscal Operations activity for collection action.

(2) Portfolio (Vendee) Loans: A termination transaction is processed in the Portfolio Loan System (PLS) by the Accounting activity to record the debt in the appropriate general ledger account upon receipt of a VA Form 266822 (Advice of Termination and Indebtedness on Portfolio Loans). Upon confirmation that the termination is processed, VA Form 266822 is sent to the Operations activity for collection action.

c. Maintaining GIF Loan Debts: The Fiscal activity will maintain GIF loan debts manually on VA Form 41103a cards. Fiscal transactions 04A will not be entered in the Hines ADP System.

d. Collection Action: The Operations activity will take all appropriate collection action. Specially composed first demand letters will be sent, however, waiver rights will be deleted for nonveteran portfolio (vendee) loan debts. Appropriate second and third demand letters will be sent. Collections will be deposited in Appropriation 36X4023.

e. Interest and Administrative Costs: The current interest rate (6% for CY 1992) and administrative costs rate ($1.16 for CY 1992) will be assessed.

f. Consideration for Waiver: The Committee on Waivers and Compromises must consider requests for waiver of GIF loan debts even though fraud, misrepresentation, or bad faith were involved in the creation of these debts.

g. Promissory Notes: When a Promissory Note on a GIF loan is received from the Loan Guaranty Division, the Fiscal activity will insure that pertinent amounts and dates are specified and will diary the debt for future collection.

h. Restoration of Entitlement: When a GIF loan is defaulted and VA incurs a loss on such loan, the loss must be paid in full to restore previously used entitlement.

i. Reconciliation/Reports: GIF loan debts will be included in the monthly accounts receivable reconciliation as required by MP4, Part V, paragraph 9C.03 and will be reported on the "Miscellaneous Receivables Report, IRCN 1178TDQU," as required by paragraph 9H.06. These debts will also be reported on the Quarterly Report of Indebtedness, RCS 040455, as required by chapter 27.

18.06. JOINT LOANS

In a joint loan situation, veterans involved are considered jointly and severally liable for the entire amount of the debt under subrogation. Each veteran is liable for the same percentage of the debt which he/she contributed to the total entitlement used under indemnity. (Solicitor's Opinion #1353, dated January 17, 1953).

(1) When a VA Form 261833 has amounts listed for each veteran in Block 15B, Subrogation, and also amounts listed in Block 15C, Indemnity, the debt will be set up under subrogation, i.e., each veteran will be liable for the entire amount of the debt. The debt will be established and maintained manually by the field station. Care should be taken to insure that the total amount collected from both veterans does not exceed VA's loss plus appropriate interest and administrative costs.

(2) If the VA Form 261833 only has amounts listed in Block 15C, Indemnity, each veteran will be liable only for the amount listed after his/her name. A debt for the proper amount will be created for each veteran in the Hines ADP System and will be collected by the DMC. (Note that GIF loan debts are maintained manually.)