November 16, 2000
					           	 In Reply Refer to:373/26
                						         	  LOCAL RELEASE 26-00-25


TO:       HOLDERS AND SERVICERS OF VA-GUARANTEED MORTGAGES IN MASSACHUSETTS


SUBJ:  MASSACHUSETTS DEPARTMENT OF ENVIRONMENTAL PROTECTION (DEP)
             TITLE 5 REGULATIONS




Effective March 31, 1995, the Massachusetts Department of Environmental Protection (DEP) implemented 
revisions to its Title 5 regulation governing private waste disposal systems.  The revisions affect all Massachusetts 
properties with existing individual sewage disposal systems.  This release supersedes Local Release 26-94-41, which 
established procedures for lenders, and provides new directions for appraisers, holders and servicers in connection 
with loan liquidation.  Only paragraphs 2, 3(a) and 6 of this release are applicable to loan originations.  They do, 
however, change material contained in Local Release 26-94-41.


What are the MASSACHUSETTS DEP REQUIREMENTS:

Inspection - A property's individual sewage disposal system must be inspected, by an inspector
approved by the DEP, whenever there is a transfer of ownership.  This inspection must take place within
9 months prior to the transfer.  An exception is permitted only if weather conditions prohibit inspection
at the time it would otherwise be made.  In this case, the inspection must be completed within 6 months
after the transfer.  The inspection must be performed by an approved System Inspector.


Reporting - The results of any required inspection must be submitted to the approving authority
(generally, the local Board of Health), within 30 days after the inspection is performed.


Repair -  If the inspection reveals a failed system, necessary upgrades must be completed within
one year of the inspection unless an extension is granted by the local approving authority or the DEP.
Completion within a shorter period of time is required when the failure consitutes  an imminent health
hazard.  Upgrades must be made in full complaince with Title 5 regulations.  When compliance is not feasible,
the Board of Health may allow a less extensive upgrade.



What procedures must be followed for origination loans?



  The Certificate of Reasonable Value (or Lender Appraisal Processing Program Notice of Value) 
for each property with an existing individual sewage disposal system will be conditioned, "Lender 
to provide evidence that the septic system is acceptable to the Massachusetts Department of 
Environmental Protection."


  VA considers payment for the required inspection and any necessary system upgrade(s) to be 
a contractual matter between the buyer and the seller.


  If weather conditions prohibit the required inspection and/or any necessary system upgrade(s)
cannot be completed before loan closing, the lender must escrow funds in an amount equal to one-half 
times the maximum cost estimated by VA to upgrade the system based on a "worst case" scenario.  If an 
escrow is necessary, VA Form 26-1847, Request for Postponement of Offsite or Exterior Onsite Improvements-
Home Loan, must be completed by the veteran and lender and submitted to VA.



What procedures must be followed for termination loans?


Our District Counsel has determined that a transfer of title resulting
from a foreclosure sale or a Deed-in-Lieu of Foreclosure is subject to the revised Title 5 regulation.
Moreover, VA is required by law to determine the net value of a property which secures a GI Loan before
a foreclosure sale or voluntary conveyance takes place--this determination cannot be made in absence of
a Title 5 inspection and, in the event a failed system is found, an estimate of the cost of upgrading it
to meet DEP standards.



Inspection - Any proposed foreclosure sale or Deed-in-Lieu of Foreclosure involving a Massachusetts
property with an individual sewage disposal system will require a system inspection within 9 months prior to 
the liquidation sale date.  The loan holder is responsible for obtaining this inspection and must provide VA
with the original inspection report at least one week prior to the liquidation sale date.  In most cases, 
obtaining the inspection will be facilitated by instructing the liquidation appraiser to notify your office if
the property has an individual sewage disposal system.  Appraisers on VA's fee panel have been instructed to
cooperate in this respect.  Holders are free to contract directly with any approved inspector of their choice.
The local Board of Health maintains a list of all approved System Inspectors; a list of currently approved System 
Inspectors in the vicinity of any property in foreclosure may also be obtained from the local Board of Health.
The holder must pay for the inspection report and the report should be submitted directly to the holder.


Reporting - VA will take responsibility for submitting required inspection reports to the local 
approving authorities.


Repair Estimates - If an individual sewage disposal system fails to pass inspection, an estimate
from a contractor or engineer for upgrading or replacing the system to meet DEP standards must be obtained 
before VA can determine the net value of the property.  The loan holder is responsible for obtaining and
paying for this estimate. Holders may select and contractor or engineer to provide an estimate, however, VA
reserves the right to refuse to accept unreasonable estimates or estimates from individuals or companies who
charge fees for their estimates which are not reasonable and customary for the work involved.  Repair estimates
must be identified by the VA loan number and should be submitted to VA as soon as they are obtained.  If they 
are not received by VA more than one week before a scheduled liquidation sale, it may not be possible to 
determine the property's net value and issue a specified amount before the sale date.  In that case, the sale
must be rescheduled at the holder's expense.



What are the procedures if the borrowers are uncooperative?


In liquidation cases, every effort should be made to obtain the required
inspection and, when necessary, an estimate of the cost of upgrading or replacement of the system.  VA tries
to facilitate access to properties by sending a letter to borrowers, at the time the appraiser notifies us 
that their property has an individual sewage disposal system, advising them to expect to be contacted by the 
inspector and requesting that they cooperate in permitting access to ensure that they receive credit for the
full value of their property in connection with the termination of the loan.  If voluntary cooperation cannot
be obtained, legal action may be necessary under DEP regulations which require homeowners/occupants to allow
inspection of their system at any reasonable time by the Board of Health, the DEP, or their authorized agents 
or representatives.  Approved System Inspectors may act as agents of the Board of Health or the DEP for this
purpose.


What happens if an inspection is not obtained?


If an inspection or a related estimate of the cost to repair or 
upgrade a failed system is not obtained before a scheduled liquidation sale, whether due to the borrower's
refusal to cooperate or to weather conditions, VA cannot determine the net value of the property.  Absent a
determination of new value, the holder has no right to convey the property to VA following loan termination
and the claim payable is limited to the lesser of the maximum guaranty or the difference between the net value
of the property (once the value is finally determined) and the eligible loan indebtedness.  Delaying termination
under these circumstances will be costly to both VA and loan holders.  In order to avoid unnecessary costs in
such cases, VA will determine the net value of the property and issue a specified amount if the loan holder 
executes an agreement to indemnify VA against loss in the event the system is subsequently discovered to fail
to meet standards.  Under the Indemnity Agreement, the holder will be liable to pay VA an amount to be computed
as follows:


	For buydowns, payment	the total estimated cost to replace or upgrade the system 
				(as obtained by VA).




	For other specified		the total estimated cost to replace or upgrade the system 
	amount cases, payment		(as obtained by VA) minus the difference between the claim
				paid and VA's maximum claim liability.  If this amount is 
				zero or less, no payment is required.




	For debt plus cost 		the same as specificied amount cases, except that the claim 
	cases, payment		paid will always be zero.




If payment is required, the holder will be given VA's cost estimate and also provided a 30-day option to accept
reconveyance of the property in return for repayment of the specified amount plus VA's expenses for property 
maintenance and management.  This agreement is intended to restore the liability of VA and the holder to what 
it would have been if the inspection and related cost estimate had been obtained before liquidation.


What are estimates?


For loan origination cases in which VA must prepare an estimate because the inspection
or the related estimate cannot be obtained, the total estimated cost to replace or upgrade the system will, by 
necessity, have to be based on a "worst case" scenario.  For loan liquidations, the net value of the property in 
indemnity agreement cases will also be determined by using a "worst case" scenerio estimate, however, the age of
the loan and condition of the system at loan origination may be taken into consideration.  If a net value 
determined in this manner is less than the unguaranteed amount of the loan indebtedness as of the cutoff date, 
VA will provide a net value of $1.00 above the unguaranteed indebtedness to holders which execute an indemnity
agreement.  A final accounting under the agreement will always be based on an independent third party cost estimate, 
once such an estimate can be obtained.


What is the compensation for costs incurred?


VA recognizes that loan holders must be compensated for additional 
liquidation costs incurred in compliance with Title 5.  Prior approval is hereby given, under 38 CFR 36.4320 (f), 
for the following reasonable expenses to be included in computing the claim payable by VA.



Inspection - The cost of inspection by an Approved System Inspector, including any related milage costs,


Estimate - The reasonable cost of an estimate by a contractor or engineer for replacement or upgrade of
a failed system to meet DEP standards; and,


Other - Any reasonable costs incurred, including additional legal fees, to gain access to a property 
occupied by an uncooperative borrower or tenant.

The estimated cost of replacement or upgrade is necessary to determine the net value of the property.  Accordingly,
for claim purposes, the fee paid for this service will be treated in the same fashion as the fee paid for a liquidation
appraisal--i.e., in the event no amount is specified by VA the holder will be reimbursed for this fee in addition to 
payment of the maximum guaranty.


What happens if the loan is reinstated?


VA cannot reimburse loan holders for costs incurred in complying with provisions of Title 5
if the borrower reinstates before the loan is terminated.  Holders should rely on the opinion of counsel in determining
whether these costs can be charged to the borrowers.



If you have any questions, please contact our office at 1-800-827-0336.




Sincerely,






A. A. Snyder
Loan Guaranty Officer






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