Accordingly, VA is interpreting section 309’s net tangible benefit test as one that must be passed. VA believes that, by selecting the word “test”, Congress has imposed a requirement to establish the fitness of the loan, as opposed to a requirement only to disclose the characteristics of the loan for the veteran’s understanding.
In this rule, VA is defining the parameters of the net tangible benefit test for Type I Cash-Outs. VA is also establishing a net tangible benefit test for Type II Cash-Outs to comply with section 3709(d). The net tangible benefit test for both types of cash-outs overlaps in some ways, but also differs in a few major respects. The full explanation is provided later in this preamble. VA will address the net tangible benefit test for IRRRLs in a future rulemaking.
A. Section (a)
For ease of reading, VA is revising § (a) to discuss the criteria that will apply to both types of cash-out refinance loans. In § (a), VA will provide that a refinancing loan made pursuant to 38 U.S.C. 3710(a)(5) qualifies for guaranty in an amount as computed under 38 U.S.C. 3703, provided five conditions are met.
1. Reasonable Value
VA will require that the amount of the new loan must not exceed an amount equal to 100 percent of the reasonable value, as determined by the Secretary, of the dwelling or farm residence which will secure the loan.