Veterans in Hawaii may once again qualify for VA home loans on property served by rainwater catchment systems now that the federal and state governments appear close to untying a bureaucratic knot.

The U.S. Department of Veterans Affairs stopped guaranteeing the financing for VA loans on homes with catchment systems in late 2011 because of a state Department of Health policy that did not recognize the water as safe for drinking or food preparation.

Despite protests from veterans and Realtors — and the intervention of U.S. Rep. Tulsi Gabbard, D-Hawaii, and state Rep. Bob McDermott (R, Ewa Beach-Iroquois Point) — the dispute has dragged on for two years.

Earlier this month, the Health Department issued a new policy that clarifies that while rainwater catchment systems are not regulated by the state, homeowners can take action to make the water safe for domestic use, including periodic testing.

The VA, which had urged the state to adopt a testing protocol to declare the water safe, has recommended a few changes to the state’s policy but has indicated that the department would once again guarantee the loans.

"The new policy acknowledges that rainwater catchment systems can be safe for domestic uses, and it outlines regular and periodic actions homeowners can take to provide greater assurances of the water’s safety," the VA said in a statement circulated about the dispute. "DOH’s new policy offers the necessary assurance that water catchment systems can provide safe, potable water for dwelling purposes."

Roughly 40,000 to 60,000 Hawaii residents are on rainwater catchment systems, with the greatest concentration in the Puna, Kau and Hamakua districts of Hawaii County.

The VA loan program is designed to help active-duty service members and veterans become homeowners by guaranteeing loans that often require no down payment or private mortgage insurance.

According to the VA, more than 66,000 loans have been guaranteed in Hawaii since the program’s inception, including about 21,000 during the past decade. It is not known exactly how many of the loans were for homes with rain­water catchment systems.

VA and Health Department officials have essentially blamed each other for the dispute.

Gary Gill, the department’s deputy director for environmental health administration, had said in August 2012 that the VA had approved thousands of loans on properties in Hawaii with catchment systems without incident. He asked the VA to agree to a waiver for Hawaii.

But the VA maintained that because the Health Department had publicly declared that catchment systems are not regulated and are not sources of safe, potable water, the VA could no longer back the loans.

The VA’s minimum property requirements for appraisal in Hawaii include having a continuous supply of safe and potable water.

Gill said last week that the state’s modified policy urges homeowners to conduct screening tests on catchment systems at laboratories certified or approved by the Health Department. The requirements are not as rigorous as the state demands for regulated drinking water, but the department contends the tests can help assure that the water is safe for domestic use.

"We’ve done what they have asked us to do every step of the way so that they can restore giving loans to catchment systems," Gill said.

Gill said he has heard nothing formal from the VA, but is hopeful.

"It looks like we’re about to make a final breakthrough, but, again, I haven’t seen anything official from the VA, so it’s some amount of wishful thinking," he said.

McDermott said he spoke last week with Tracey Betts, the director of the VA’s Ho­nolulu regional office, and was assured that the VA was prepared to again guarantee loans on homes with catchment systems.

Betts and the VA did not respond to requests for comment beyond the statement issued on the dispute. In the statement, the VA asked the state to remove a reference to the VA from its policy and publish the testing procedures and requirements.

"Assuming DOH does as requested, VA will consider a property with a rainwater catchment system as suitable for dwelling purposes, if such a system is customary in the area and the only feasible water supply," the VA wrote.

"Going forward, VA will amend its policy with regard to fees and charges so that a veteran and the seller can negotiate who will pay the testing fee and so that the veteran will have the option of rolling the testing fee into the loan when otherwise allowable by statute.

"Further, VA will require lenders to provide information about the risks inherent with a rainwater catchment system and to have the veteran acknowledge receipt of that information."

McDermott, a Marine Corps veteran who has blasted the Abercrombie administration over the issue, said the state should have modified the policy much sooner.

"They don’t want to admit any guilt or any culpability," he said, describing the dispute as "bureaucratic bull —."

Gill and McDermott said the help from Gabbard’s office was important in getting the Health Department and VA closer together. Gabbard serves in the Hawaii Army National Guard and has made veterans’ issues a priority, and also represents Hawaii island, where many of the rainwater catchment systems for homes are located.

"Many of Hawaii’s veterans have faced tremendous obstacles to purchasing a home with their VA benefits simply because they use water catchment systems. Many times the only homes available for veterans to buy are homes with water catchment systems," Gabbard said in a statement. "Taking away this benefit from our veterans who have served our country is unacceptable. Over the past year, I have worked hard to bring the major stakeholders, including the Hawaii Department of Health and the U.S. Department of Veterans Affairs, back to the negotiating table to find a workable solution to this stalemate.

"The negotiations have been very productive, but until a final resolution is reached, I will continue to do all that I can to ensure our veterans can access the benefits they have earned and deserve."