Deciphering the VA Lender’s Handbook Chapter 17 Part 8
The VA is willing to impose sanctions such as , LDP, or even monetary penalties (for a lender) who is discovered using contracts or marketing methods that are either unfair to veteran-borrowers or unethical based on standards generally observed by reputable homebuilders and other reputable program participants. From the Handbook: “VA may impose sanctions, such as debarment, suspension, or LDP against participants who use contracts of sale, or methods or practices in the marketing of properties, which are unfair or prejudicial to veteran-purchasers. Unethical practices based upon experience and standards generally observed by reputable homebuilders and other reputable program participants are barred by VA and grounds for sanctions.”
So what are unfair marketing practices? The Handbook offers a fairly long list, but also states that unfair marketing practices are not limited to those found on this list:
- enforcement of unfair contractual provisions
- requiring purchasers to execute so-called “contracts” which legally bind the the purchasers but do not bind the seller to deliver the property when completed to the purchasers.
- advertising that a property or project is “VA guaranteed” or “VA approved or “VA inspected in such a way as to lead veterans to believe that VA guarantees the construction and workmanship.
- delaying tactics on the part of the builder to postpone completion of the property or the closing of the sale after completion in an effort to induce the veteran to agree to a modification of a firm contract such as
- the substitution of inferior materials
- the omission of appliances, or
- an increase in price
- failure of the seller or agent of the seller of proposed or newly constructed property to place deposits or downpayments received from veteran-purchasers in a special trust account, as required by 38 U.S.C. 3706
- failure to place downpayments or earnest money deposits in a trust fund or in escrow when required by law or by local practice on existing properties, or
- failure or inability of the seller to return the deposit when and if required under the contract when it is not required or not customary for these deposits to be “isolated,” and
- failure of the seller of proposed or newly constructed property to state in the sales agreement, when applicable, that the property was or will be constructed under FHA compliance inspection procedures pursuant to section 203(i) or 221(d)(2) of the National Housing Act.
As you can see, most of those things have to do with builders participating in the VA loan program. By and large, you’re going to have a hard time finding a lender that is willing to offer you a VA construction loan, which is the main way you might run into one of these unfair marketing practices. However, if you’re making a major alteration to your home, you may need or want to hire a builder to make the addition. If you are paying for the addition through a VA cash-out refinance, then that builder is subject to all of the rules and regulations that the VA has for builders in the VA loan program.
Builders aren’t the only ones that can have unfair marketing practices, however. Lenders and home sellers can as well; home sellers particularly may advertise a house in such a way as to lead veteran-borrowers to believe that the house itself is guaranteed by the VA, which is not the case. The VA only guarantees a portion of the loan amount, and the guarantee is to the lender, not the borrower. The advantage of the VA guarantee to the borrower is that it mitigates the amount of risk the lender is taking on, allowing them to offer the veteran better terms than they would otherwise qualify for. Don’t let a home seller or a builder fool you into thinking their home or construction work is “VA guaranteed” or somehow of a higher quality simply by virtue of their association with the VA loan program. The most that they can truthfully say is that they accept VA financing or that the property is eligible for VA financing. If you have any questions, reach out to us here at Low VA Rates, and we’ll answer your questions, even if you don’t get a loan through us.