VA Partial Claim Non-Judicial Foreclosure: A Servicer's Compliance Playbook for Circular 26-26-2

VA Circular 26-26-2 fundamentally changes how servicers handle foreclosures when the Department of Veterans Affairs holds a partial claim interest in a property. Issued August 11, 2026, this guidance finally resolves the costly dilemma that emerged from the Show Me State litigation—and it could save your operation significant time and money.

The core change: Servicers can now use non-judicial foreclosure to discharge properties from VA partial claim interests in states that permit it. No more mandatory judicial foreclosure just because VA holds a subordinate lien.

What VA Circular 26-26-2 Actually Does

The Circular implements Congress's authorization under 38 U.S.C. § 3737(e)(2). This statute explicitly permits non-judicial foreclosure sales to discharge VA partial claim interests—overriding the previous interpretation that required judicial process.

Before this guidance, title insurers and servicers struggled with the fallout from Show Me State Premium Homes, LLC v. McDonnell (8th Cir. 2023). That case applied 28 U.S.C. § 2410 in a way that suggested only judicial foreclosure could clear a VA partial claim interest from title.

The problem? Judicial foreclosure can cost up to 12 times more than non-judicial alternatives and drag on for months or even years longer.

Congress clarified through section 3737 that a VA partial claim interest does not preempt state foreclosure law. If your state allows non-judicial foreclosure for home loans, you can use it—even when VA holds a partial claim.

Which Partial Claims Are Covered

The Circular applies to three categories of VA partial claim interests:

• COVID-19 Veterans Assistance Partial Claim Payments (COVID-VAPCP) — Made under subpart F, part 36, title 38, C.F.R., these helped Veterans who suffered COVID-19 financial hardship stay in their homes
• Partial purchases from COVID-19 Refund Modifications — Where VA purchased a partial interest as part of a refund modification workout
• Future Partial Claims — Under the new section 3737 Partial Claim Program launched in summer 2026

For servicers managing COVID-VAPCP portfolios, this guidance directly impacts your foreclosure strategy. You no longer need to pursue judicial foreclosure solely because these subordinate liens exist.

The Key Conditions for Non-Judicial Foreclosure

Congress didn't give servicers blanket permission. Three conditions must be met:

1. State law must permit non-judicial foreclosure of home loans.

The discharge mechanism only works where state law allows it. If your state requires judicial foreclosure for mortgage liens, the Circular's provision doesn't apply. You'll still need judicial process to clear the VA partial claim interest.

2. The servicer must conduct the foreclosure in accordance with state law.

This means following every procedural requirement—notice periods, publication requirements, sale procedures, and any borrower protections your state mandates. No shortcuts just because VA holds the subordinate lien.

3. Excess proceeds must be distributed according to state law.

If the sale generates surplus funds after satisfying the senior lien, distribution must follow the state's priority scheme. VA doesn't need special treatment—it takes its place in the distribution waterfall.

When these conditions are satisfied, the property automatically discharges from VA's partial claim interest as a matter of law. VA doesn't need to execute a separate release of lien.

Handling In-Flight Foreclosures

Many servicers have judicial foreclosures already in progress. The Circular addresses this scenario directly.

Judicial foreclosures initiated before August 11, 2026, may continue. You're not required to restart the process.

But switching may make sense. If converting to a non-judicial foreclosure would reduce time and costs without jeopardizing your interest in the guaranteed loan, you can re-initiate under non-judicial process.

There's a catch: foreclosure attorney fees are capped at the VA-allowed amount for judicial foreclosure in your state. You can't claim higher non-judicial fees if they exceed what VA would have allowed for judicial process.

Reimbursement for Judicial Foreclosure Costs

If you switch from judicial to non-judicial mid-stream, VA allows reimbursement for judicial fees and costs already incurred. To claim this:

1. Submit an appeal through the Appealed Paid Claim section in VALERI (VA Loan Electronic Reporting Interface)
2. Explain that you're requesting reimbursement for an in-flight foreclosure under section 5 of Circular 26-26-2
3. Document the judicial fees and costs incurred before the switch

This reimbursement mechanism ensures servicers aren't penalized for pursuing what was, at the time, the only legally certain path to clear title.

What You Should Stop Doing

After August 11, 2026, do not initiate judicial foreclosure solely because VA holds a partial claim interest.

This bears repeating. In states where non-judicial foreclosure is available, you should use it. Proceeding with judicial foreclosure anyway—when not otherwise required—could raise questions about your compliance with VA cost-reasonableness standards and your duty to mitigate losses.

Early payment default servicing decisions may come under scrutiny. Document your rationale if you believe judicial foreclosure is still warranted for reasons beyond the VA partial claim.

Important Borrower Liability Note

The discharge of the property from VA's lien doesn't eliminate the borrower's personal liability for the partial claim debt.

Section 3737 expressly preserves the borrower's obligation to repay the partial claim amount. The non-judicial foreclosure clears the lien from title—but VA may still pursue collection of the outstanding partial claim balance from the borrower personally.

Servicers should ensure foreclosure communications accurately reflect this reality. Misleading borrowers about their ongoing liability for partial claim debt could create UDAAP exposure.

Servicer Compliance Checklist

Use this checklist to operationalize Circular 26-26-2:

Before Initiating Foreclosure:

• Confirm whether the loan has an associated VA partial claim (COVID-VAPCP, COVID-19 Refund Modification, or section 3737 program)
• Verify that your state permits non-judicial foreclosure for home loans
• Review your state's non-judicial foreclosure requirements—notice, timing, publication, sale procedures
• Check for any borrower protections that might apply beyond standard VA requirements

For Properties in Non-Judicial Foreclosure States:

• Proceed with non-judicial foreclosure following state law requirements
• Document compliance with every procedural step
• Ensure excess proceeds distribution follows state law priorities
• Do not request a separate lien release from VA—the discharge is automatic

For In-Flight Judicial Foreclosures:

• Assess whether switching to non-judicial would reduce time and cost
• If switching: calculate the net benefit considering the judicial fee cap
• Submit VALERI appeal for judicial fee reimbursement with required explanation
• Document your decision-making process

Regardless of Foreclosure Type:

• Ensure borrower communications accurately reflect ongoing personal liability for partial claim debt
• Maintain records demonstrating compliance with state law procedures
• Track VA's guidance updates—as with any Circular, it remains valid until rescinded

Practical Implications for Servicing Operations

This guidance creates both opportunity and obligation.

The opportunity: Cost savings. If you've been pursuing judicial foreclosure for VA partial claim properties, you can now use the faster, cheaper non-judicial process where available. For servicers managing large defaulted portfolios, this represents meaningful expense reduction.

The obligation: Update your foreclosure decisioning protocols. Loan-level review should now include a specific check for VA partial claim interests and appropriate foreclosure-path selection.

Reglith can help track these requirements automatically. When VA issues new Circulars or updates existing guidance, having automated regulatory monitoring ensures you're never caught off-guard by procedural changes that affect your foreclosure strategy.

State-by-State Considerations

The Circular's impact varies dramatically by jurisdiction:

Non-judicial foreclosure states (the majority)—Full benefit. You can use standard non-judicial process for VA partial claim properties.

Judicial-only foreclosure states—No change. You'll still need judicial foreclosure to clear VA's partial claim interest.

Hybrid states with specific requirements—Pay close attention. Some states allow non-judicial foreclosure but impose different procedures or timelines based on lien type or loan characteristics.

The key is knowing your state's framework before you make foreclosure-path decisions. State licensing requirements and foreclosure procedures intersect here—ensure your compliance team has current, accurate information for each state where you operate.

Questions and Clarifications

VA directs all questions about this Circular to be submitted via ServiceNow. Your compliance team should:

• Document any questions that arise during implementation
• Submit through ServiceNow for official clarification
• Maintain records of VA's responses

This creates an audit trail demonstrating your good-faith efforts to comply with the guidance.

Key Takeaways

• Non-judicial foreclosure now clears VA partial claims in states that permit it—COVID-VAPCP, COVID-19 Refund Modifications, and future section 3737 partial claims are all covered
• State law compliance is paramount—the foreclosure and excess proceeds distribution must follow state requirements exactly
• In-flight judicial foreclosures can continue—or switch to non-judicial if it reduces cost and time, but attorney fees are capped at the judicial amount
• Borrowers remain personally liable for partial claim debt even after the property lien is discharged
• Document your decision-making—especially if you proceed with judicial foreclosure despite non-judicial availability, or if you switch mid-process
• Submit questions via ServiceNow—VA's official channel for Circular clarifications