B. The Structure of Section 3709(b) and (d) and How It Affects Type I and Type II Cash-Outs

Subsection (b) requires that a refinance loan provide a net tangible benefit to a veteran

As explained, section 3709 bifurcates cash-out refinance loans into two types. Type I Cash-Outs are subject to 38 U.S.C. 3709(a) through (c). Type II Cash-Outs are subject to subsection (d).

Subsection (a) imposes requirements related to recoupment of fees and expenses when refinancing a VA-guaranteed or insured loan into a Type I Cash-Out. In this rule, VA is simply restating the statutory criteria Congress prescribed in 38 U.S.C. 3709(a). Likewise, VA is simply restating in this rule the statutory criteria found in subsection (c), which imposes a seasoning period before a VA-guaranteed or insured loan may be refinanced into a Type I Cash-Out. To the extent any changes are made, they are solely for ease of reading and should not imply a substantive effect. VA is required to follow the statute.

To that end, the lender must provide a veteran with a net tangible benefit test to ensure that the refinance is in the financial interests of the veteran. Congress required the test, but did not define its parameters. To clarify statutory ambiguity, VA is, therefore, providing the parameters, as described later in this preamble.

VA considered various interpretations in dealing with section 3709(b). As discussed above, one question was whether the section applies only to IRRRLs, excluding Type I Cash-Outs altogether. This would be untenable, however, as the plain text of the introductory paragraph states unambiguously that it applies broadly to VA-guaranteed or insured refinances of VA-guaranteed loans-IRRRLs and cash-outs-except for those Type II Cash-Outs expressly excepted. The reading also would not make sense in application, as it would create a loophole for Type I Cash-Outs, making it easy for unscrupulous lenders to exploit veterans by inflating interest rates and discount points, without regard to net tangible benefits or the recoupment of fees and expenses. Such a loophole is inconsistent with the statute, as such lenders could render the whole of (a) through (c) meaningless.

Subsections (a) through (c) provide specific criteria before a Type I Cash-Out may be guaranteed or insured

VA also considered whether the net tangible benefit test described in (b)(1) was introductory to the criteria set forth in (b)(2) through (4). In other words, VA analyzed whether the required interest rate reductions, restricted discount points, and capped loan-to-value ceilings of paragraphs (2) through (4) comprise, in total, the net tangible benefit test mentioned in paragraph (1). This reading also was untenable, however, due to the way Congress structured the plain text of subsection (b). Subsection (b) contains four paragraphs, not three. Had Congress intended for paragraphs (2) through (4) to comprise the payday loans IA net tangible benefit test, Congress would have made the net tangible benefit test part of the introductory text as an overarching requirement, leading into the list of various elements necessary for passing the test. Yet the equal paragraph structure of the law clearly sets the net tangible benefit test as one criterion of equal weight among others necessary to be met for guaranty or insurance.

VA further considered the placement of the conjunction “and” between paragraphs (3) and (4). Generally, when Congress enacts a statute that lists multiple standards, utilizing serial commas and conjoining such discrete standards with the word “and” at the end, each discrete provision must be applied to the subject of the statute. U.S. House of Representatives Office of the Legislative Counsel, House Legislative Counsel’s Manual on Drafting Style, No. HLC 104-1, sec. 351 at 58 (1995). The problem with accepting this principle across the board is that “and” is often ambiguous. It can be used jointly or severally. See R. Dickerson, The Fundamentals of Legal Drafting, 76-85 (1965). When courts deviate from the generally accepted principle, the outcome is largely dependent on facts and context. See, e.g., Shaw v. Nat’l Union Fire Ins. Co., 605 F.3d 1250 (11th Cir. 2010), which catalogs several cases where “and” proved difficult to understand.