Deciphering the VA Lender’s Handbook Chapter 17 Part 6
This article comes with a disclaimer which also applies to the previous two articles: these situations do not happen very often. It is almost a guarantee that you won’t have to worry about your lender being in this sort of situation, especially if you’re working with a lender that does primarily VA loans or focuses on serving veterans. That being said, this article is good information if you happen to be the one-in-a-million borrower that is working with a lender in this situation. In this article, we’ll be talking about debarment and suspension of a lender from the VA loan program, and how that affects the borrower both before the loan application process has begun and after.
The Handbook has the following to say about debarment: “Debarment is a sanction that in most cases excludes the program participant (lender) from any participation in the procurement programs of any Federal agency, including VA’s loan guaranty program.” Sometimes, the debarment may only exclude the lender from certain types of transactions. For the most part, debarment will and a lender on the government’s list of excluded parties that are not allowed to participate in government programs. Debarment is usually only applied for a period that is appropriate to the seriousness of the cause. This usually means 3 years.
A suspension is basically the same thing as debarment, except for that it’s temporary. A suspension is to debarment what probation is to jail. Suspension is a temporary debarment that may or may not become longer-term depending on the results of an investigation or legal proceedings. Debarment can follow suspension if the results of the proceedings warrant it. Suspensions will not usually exceed 18 months, but it all depends on how long the investigation or legal proceedings take. For a lender that is suspended or debarred, they are no longer allowed to do any VA loans in any location, and will also be prohibited from participating in other government programs (likely FHA loans). For you as the borrower, if you haven’t started your loan with this lender yet, it just means that they are now off the market. If you have started your loan with them, chances are you’ll need to cut your losses and find a different lender.
Generally, debarment and suspension are reserved for entities that are intentionally doing unethical or illegal things, rather than for those who are simply incompetent. The VA is allowed to debar or suspend a lender for
- conviction of, or civil judgment for, fraud, embezzlement, theft, forgery, falsification or destruction of records, commission of an offense evidencing the serious lack of integrity
- violation of the terms of a public agreement or transaction so serious as to affect the integrity of an agency program
- knowingly doing business with a debarred, suspended, ineligible, or voluntarily excluded person, or
- failure to pay debts owed to the Federal Government.
Now, it may be an important distinction to make that a debarment can be made against an entire lender (organization), but it can also be made only against certain individuals. Obviously lenders do their best to hire the right people and try to pay a reasonable amount of attention to the people they hire, but there will always be individuals who are willing to make unethical or illegal choices to accomplish their goals. The VA understands that the lender can’t be held responsible for the unethical or illegal choices of one or two of their employees, and so may not debar an entire lender, but rather a single loan officer or Staff Appraisal Reviewer if appropriate. The same may apply to a part of the organization (perhaps one branch).
So how does this affect you as the borrower? Well, we mentioned it above, but if a lender is debarred before you start working with them then there’s just one less lender on the market for you to choose from. If you’re in the process of getting your VA loan approved with the lender when the debarment or suspension occurs, you will probably need to start the process over again with a new lender. Call your local VA office to find out if you are entitled to a refund of any fees or charges you have paid up to that point.