Lender Action When Veteran Exemption Status Is Unknown

Yes, lenders can utilize the VA Funding Fee Payment System (FFPS) to make corrections regarding a Veteran’s status. If a fee was paid because the status was unknown at closing, and the Veteran is subsequently proven exempt, the lender can access the FFPS to adjust the record. This system allows lenders to process the necessary changes that may result in a refund being due. Using the FFPS ensures that the payment record matches the Veteran’s official status and facilitates the appropriate return of funds, either to the Veteran (if paid in cash) or to the loan balance.

If the lender collected and financed the funding fee because the status was unknown, and the Veteran is later found to be exempt, the refund process is handled as a principal reduction. The lender cannot issue a cash refund to the Veteran for fees that were borrowed. Instead, the lender must apply the overpayment amount directly against the outstanding loan balance. The lender is then responsible for submitting evidence to the VA that this refund was properly applied to the principal, ensuring the Veteran’s debt is reduced by the amount of the unnecessary fee.

If a lender incorrectly assumes a Veteran is exempt and fails to collect the funding fee, the lender is financially liable for ensuring the fee is paid to the VA. The VA funding fee is a mandatory requirement for the loan guaranty to be valid for non-exempt borrowers. Lenders are expected to strictly adhere to verification protocols. If the status is unknown and the lender waives the fee erroneously, they may have to pay the fee themselves or attempt to collect it from the Veteran after closing, which can create significant administrative and relationship difficulties.

When the Certificate of Eligibility (COE) displays “Contact RLC” instead of “Exempt” or “Non-Exempt,” the lender cannot make a determination on their own. This status means the automated system lacks sufficient data to verify the exemption. The lender must immediately contact the Regional Loan Center, typically by submitting VA Form 26-8937. If the RLC cannot provide a determination before the scheduled closing date, the lender is obligated to collect the funding fee. The lender should never assume exemption in these “Contact RLC” scenarios to avoid potential liability for the unpaid fee.

VA Form 26-8937, “Verification of VA Benefits,” is a critical tool for lenders when the Certificate of Eligibility (COE) does not clearly state the Veteran’s exempt status. If the COE indicates “Contact RLC” or if the Veteran has a complex status (such as a surviving spouse or a retiree), the lender must submit this form to the appropriate VA Regional Loan Center. The VA will review their records, complete the form indicating whether the borrower is exempt or non-exempt, and return it to the lender. This completed form serves as the official verification required to waive the funding fee at closing.

A lender should not unilaterally determine exemption based on a pre-discharge exam without official confirmation. While Veterans rated eligible for compensation via a pre-discharge exam are exempt, the lender must ensure this rating is official. If a lender believes a service member is exempt based on a pre-discharge review but lacks clear documentation, they should contact the VA Regional Loan Center (RLC) for assistance in confirming the status. If the RLC cannot confirm the rating or issuance of a memorandum rating prior to closing, the lender must collect the funding fee to comply with VA policies regarding unverified status.

In cases where a Veteran receives military retirement pay but claims they are eligible for disability compensation (and thus a fee exemption), the lender must exercise due diligence to verify this status. The lender cannot rely solely on the Veteran’s statement. Verification requires obtaining a copy of the original VA notification of disability rating and documentation of the Veteran’s service retirement income. If these documents confirm that the Veteran would be entitled to compensation if they were not receiving retirement pay, the exemption applies. If this documentation is unavailable or unclear, the lender must collect the fee and verify status through the VA Regional Loan Center.

No, the existence of a pending disability compensation claim does not authorize a lender to waive the funding fee. If a Veteran has a claim pending with the VA that has not yet been adjudicated at the time of loan closing, the lender must remit the funding fee as if the borrower were non-exempt. Lenders cannot anticipate the outcome of a claim or assume a retroactive effective date. The lender should advise the Veteran to contact the VA Regional Loan Center after the loan closes to petition for a refund if the claim is subsequently approved with a retroactive effective date.

When a lender collects the funding fee because the exempt status is unverified, but the Veteran contends they should be exempt, the lender must explicitly note this claim in the closing package. The lender should indicate in the documentation submitted to the VA that the Veteran is claiming exempt status despite the fee payment. This notation alerts the Department of Veterans Affairs to review the file for a potential status change or retroactive determination. By flagging the file, the lender facilitates a smoother refund process should the VA later confirm the Veteran’s eligibility for a waiver.

If a Veteran’s exempt status cannot be definitively verified prior to the loan closing, the lender is required to proceed as if the borrower is not exempt. This means the lender must calculate and collect the applicable VA funding fee at the closing table. VA regulations stipulate that lenders cannot use their discretion to waive the fee without official verification, such as a Certificate of Eligibility indicating exemption or a completed VA Form 26-8937. The lender must remit the fee to the VA to ensure the loan guaranty is valid, with the understanding that a refund can be issued later if the Veteran is proven exempt.