In the last article, we talked about what the VA guaranty means to the lender, both the benefits and the responsibilities that come with it. The VA guaranty provides a great incentive for lenders to offer VA loans, but the guaranty is conditional upon the lender’s compliance with all of the VA rules, laws, policies, and regulations in regards to the VA loan program. In order for their claims to be reimbursed by the VA, the lender must be fully compliant with all VA laws and regulations. Any willful fraud or misrepresentation may result in total loss of the VA guaranty. In this article, we’re going to talk about what happens after the guaranty has been issued (closing of the loan).
After closing, the lender will work to obtain a Loan Guaranty Certificate (LGC) that shows both the percentage of the loan amount that’s being guaranteed and the dollar amount that it equals. LGCs are generated using data from several different sources. The primary one is the VA Funding Fee Payment System (VA FFPS). In the event that the lender discovers an error in some of the data, like the date of closing being off, or something similar, before the LGC has been generated, the lender makes the change in the VA FFPS. The borrower generally will not even be aware of this happening – it all happens on the lender’s end. In the event that the lender discovers an error after the LGC has been generated, the lender must work with their VA Regional Loan Center to make changes. Generally, an LGC with minor errors that do not affect the identification of the loan is still valid.
In the event that the lender loses the LGC or it is damaged, a duplicate LGC can be easily obtained by accessing the system and reprinting it. For the most part, borrowers do not even need to be aware of this process unless the lender has also lost some documentation that the borrower has in his or her possession. If the loan is transferred, there is no need to notify the VA after it has been closed on. For VA loan assumptions, the VA must approve them prior to the assumption unless the loan was originally closed before March 1, 1988. Some lenders may be permitted to approve the assumption on the VA’s behalf. These lenders will know who they are.
When a loan is fully paid off, or paid-in-full, the holder of the VA loan is required to report the date that the loan was paid-in-full via an electronic system called the VA Loan Electronic Reporting Interface (VALERI). Lenders report paid-in-full loans to the VA “…upon full satisfaction of the loan by payment or otherwise.” For those wondering, the difference between a lender and a loan holder is simply that the lender is the one who provides the funds for the loan, while the loan holder is the person who can legally seek and require repayment of the loan. Often, the lending entity and loan holder are the same entity, but loans can be transferred to a different loan holder after being closed on. Loans are often transferred to a different entity in the case of a default or foreclosure.
Previously, when a loan was paid in full, the lender was required to mail the LGC to the VA, but this is no longer the case. Since the LGC is generated electronically, and all reporting is done through VALERI, the physical copy or copies of the LGC that the lender retains do not need to be returned to the VA.
Lenders are required to maintain copies of all of the origination documents and records on any VA-guaranteed loans for at least 2 years from the date of closing. This is the case even if the loan was sold – the original lender must maintain the records for at least two years. These records include the following:
• the loan application (including any preliminary application),
• verifications of employment and deposit,
• all credit reports (including preliminary credit reports),
• copies of each sales contract and addendum,
• letters of explanation for adverse credit items, discrepancies and the like,
• direct references from creditors,
• correspondence with employers,
• appraisal and compliance inspection reports,
• reports on termite and other inspections of the property,
• builder change orders, and
• all closing papers and documents.
Lenders may be subject to VA audits and reviews and must make these records available to the auditors.