Deciphering the VA Lender’s Handbook Chapter 17 Part 7
So far in Chapter 17 we’ve focused on sanctions the VA may impose on lenders, but in this article we’re going to focus on a sanction that the VA is not allowed to put on lenders. True to the form of the last three articles, we’re going to talk about what a limited denial of participation is, who it can be applied to, and how it might affect you as the borrower if a party you are working with is sanctioned with a limited denial of participation. So, a Limited Denial of Participation (LDP) is a sanction imposed by a local VA office (as opposed to the VA headquarters) limiting a program participant’s activities within that local VA office’s jurisdiction. An LDP can limit a participant from any VA loan activities in the area or just certain types of VA loan activities in the area. LDPs might but the only sanction brought onto the participant, or they may be imposed to solve an immediate problem and allow time for the VA to investigate further and impose more sanctions as necessary.
The Handbook is clear that lenders, employees of lenders, and manufactured home manufacturers are exempt from LDPs and cannot have them imposed on them. This makes sense since there are already so many other types of sanctions that lenders are not shielded from. So if all those parties can’t have LDP sanctions on them, who can? Well, most often it’s going to be a builder or an appraiser, but any program participant other than those three can be sanctioned with an LDP. An LDP can be imposed based on any of “a multitude of causes outlined in VA regulations 38 CFR 44.705”, but most of the causes fall under one of these:
- irregularities in a participant’s or contractor’s performance in the VA loan guaranty program
- failure to satisfy contractual obligations or to proceed in accordance with contract specifications
- construction deficiencies deemed by VA to be the participant’s responsibility, and
- failure to proceed in accordance with VA requirements or to comply with VA regulations.
All of those above reasons are justification for the original LDP by the initial office of jurisdiction, but other VA offices may also impose an LDP as a “reciprocal action” for no other reason than because another office imposed an LDP. Additionally, a reciprocal LDP can be imposed based on an LDP issued by an office of a different federal agency like HUD or the USDA. LDPs are not a good thing for whoever they’re being imposed on; the sanctioned participant is not permitted to participate in any VA loan activities in any of the jurisdictions in which they have an LDP imposed on them. Participants can appeal the original LDP but not reciprocals. This is to avoid duplicate investigations and because reciprocal LDPs are based on the existence of the original LDP, so if the original LDP is lifted, the reciprocal ones will be as well.
LDPs can only be imposed for a specified period of up to 12 months, or, in the case of a builder with “unresolved deficiencies”, the LDP may be for an indefinite period until the deficiencies are corrected. For the most part, builders and appraisers being imposed with an LDP won’t affect you unless you’re in the process of working with one of them when the LDP is imposed. Since nary a VA lender is willing to offer a VA construction loan, you probably won’t be working with a builder on building a house with a VA loan, but you may be working with a builder on making a major addition or improvement to your house with VA cash-out refinance, which amounts to the same thing. Also, you’ll be working with a VA appraiser on any VA loan except for a streamline. If the builder or appraiser has an LDP imposed on them mid-process, it can be fairly annoying for you because you’ll either have to find another builder or schedule another appraisal with a different appraiser. If the LDP is imposed after your loan is already closed, chances are it won’t affect you unless it is the work the builder or appraiser did on your loan that precipitated the LDP, and even then it’s not likely to affect you much.