Paragraphs (2) and (3) present different classes of loans entirely, carrying with them different risks

Congress addressed the least risky type of loan first, meaning a refinance from a fixed interest rate to a fixed interest rate

Since the “and” between paragraph (3) and (4) could not mean that all paragraphs (1) through (4) must be applied and satisfied in every single refinance, VA had to determine the meaning. Put another way, VA had to analyze whether the discount points requirement would apply only when refinancing from a loan with a fixed rate to a loan with an adjustable rate (paragraph 3), or if it would also apply when refinancing from a fixed rate loan to a fixed rate loan (paragraph 2).

VA found no legislative history to help clarify the term’s meaning. For the reasons explained below, VA interprets the “and” to link only paragraphs (3) and (4).

A refinance loan should meet a net tangible benefit test to ensure that imprudent lenders do not take advantage of veterans and the investors who provide liquidity for VA-guaranteed loans

A common usage of the term “and” is one that indicates an order of sequence. Even if not the preferred legal understanding (see explanation above), it offers an alternative that resolves the apparent ambiguity.

Accepting this understanding of “and”, the discount points requirement described in paragraph (4) would clearly follow in sequence the condition prescribed in paragraph (3). The first step of moving from a fixed interest rate mortgage to an adjustable interest rate mortgage would parallel the example of the President signing a bill into law. The next step in the sequence, i.e., compliance with discount points requirements, would be analogous to the rulemaking in the example.

One could argue that the same rationale could apply to paragraphs (2) and (4). If a veteran obtains a loan described in paragraph (2), the next step in the sequence would be to apply paragraph (4). The problem is that paragraph (3) intervenes, and paragraphs (2) and (3) are sequential in number only.

Again, they are mutually exclusive to one another. This exclusivity seems to interrupt the consequential element necessary for continuation of the sequence. If paragraphs (2) and (3) were reconcilable, meaning they could either occur simultaneously or follow one another, one could look to paragraph (4) to complete the sequence. But the differences must be given meaning, and VA interprets that meaning as severing the relationship between paragraphs (2) and (4), limiting to paragraph (3) the relationship with paragraph (4).

VA recognizes other conclusions might be possible. However, VA’s interpretation implements the text, on its face, as a coherent and consistent framework, without having to consider whether Congress made a structural error.

The coherent and consistent framework mirrors VA’s understanding of the lending market. Additional requirements are tacked on as the risk profile increases. In VA’s understanding, Congress addressed the risky aspects of moving from one type of interest rate to another, setting an additional threshold regarding interest rates, depending on what sort of interest rate (fixed versus adjustable) a veteran chooses. The required interest rate shift (50 basis points) is drastically less than that required when refinancing from a fixed interest rate to an adjustable interest rate (200 basis points). VA understands that, although there can be benefits in moving from a fixed interest rate to an adjustable rate, such a move is inherently risky. One reason is that the crossover to a different category of mortgage makes it more difficult for the average borrower to conduct an informed cost-benefit analysis when comparing the two types of mortgages. Where moving from a fixed interest rate mortgage to another fixed rate is like comparing apples to apples, comparing a fixed interest rate mortgage and an adjustable rate mortgage is more like comparing apples to pears. They are simply different, and as a result, borrowers could have a more difficult time calculating an accurate cost-benefit analysis. Also, the adjustable rate means that the monthly payment is essentially out of the borrower’s hands, particularly in a time when interest rates are increasing. Thus, the adjustable rate carries with it more risk of payment shock (when the rate is adjusted and a higher payment amount is established) and more chance that a veteran would later opt to refinance again, increasing the risk of serial refinancing and equity stripping. VA understands the more significant interest rate reduction for an adjustable interest rate mortgage, along with the additional discount point and loan to value requirements, as Congress’s attempt to counter the potential downsides of the riskier type of loans.

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