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VA plans rule change to fight loan churning


The U.S. Department of Veteran Affairs (VA) will roll out changes to the VA mortgage program that are intended to curb the predatory, rapid-fire refinancing practice known as “churning,” which has surfaced over the past two years. 

In testimony before a House subcommittee on Wednesday, Jeffrey London, who heads the VA’s loan program, said the agency has drafted a rule change that will require lenders to make early disclosures about the costs to veterans who refinance under the VA’s streamline program.

veteransHe also strongly hinted that the VA would adopt a net tangible benefit test. London didn’t reveal the details of the changes, but cited statutes that give the VA the authority to alter its program without congressional approval. He said the changes would be released as a draft final rule soon, and affect every VA lender, servicer and downstream investor. The Federal Housing Administration (FHA) has a net benefit test that ensures its borrowers get an interest rate reduction, or some other benefit, by refinancing.

“We have draft legislation that we believe is a measured approach to address the [churning] issues,” London said.  London said some disclosures made to veterans at the closing table will be moved upfront in the process.

“My goal is to have that happen this calendar year,” London said.

More than a year ago, reports emerged that several VA lenders were aggressively soliciting veterans to refinance their VA loans as a way to generate fees. The VA’s streamline program, the Interest Rate Reduction Refinance Loan (IRRRL), is designed so veterans can easily get a lower interest rate. It is a quicker and easier process than a home-purchase loan or a cash-out refinance, but some lenders have exploited the loose underwriting to do questionable refinancings.

Ginnie Mae officials and the Mortgage Bankers Association, the nation's largest mortgage trade group, have urged the VA to make changes to discourage churning.

“This churning is not an industrywide problem,” said Todd Jones, president of BBMC Mortgage. “There is a small sub-segment of lenders who have increased their marketing for IRRRLs and, in some cases, have done misleading advertising and solicitation,” Jones told Scotsman Guide News. “They are not looking at the actual net tangible benefit when they do get a  customer. They are looking to just get a deal done.”

Jones said a net benefit test, upfront disclosures and other consumer education will help stop the practice.

“It is right in the name: It is the interest rate reduction refinance loan, right?” he said. “When rates drop, it makes sense to refinance deals, but what has been taking place is that rates have been going back up. These unscrupulous lenders are finding a way to do a higher interest rate with a lower term to convince the customer that it is a good deal, when that is not necessarily the case.”  

Ginnie Mae, the government corporation that insures the bonds underpinned by VA and other government-insured loans, has already taken a number of steps to curb the practice. Ginnie won’t allow churned loans to go into its standard pools, for example.

In reviewing its data, Ginnie found that some veterans received only modest rate decreases that did not justify the fees. Some were also enticed to refinance out of fixed-rate mortgages into riskier adjustable-rate mortgages. 

Ginnie’s current acting president, Michael Bright, who testified at Wednesday’s hearing, and Ginnie’s immediate past president, Ted Tozer, have both called on the VA to adopt a net tangible benefit test similar to one in place for FHA streamline refinances.The FHA test requires that the loan payment on the refinanced portion of loan be at least 5 percent lower, unless the borrower refinances out of an adjustable-rate loan into a fixed-rate loan. 

Bright testified that the rapid-fire refinancing poses a threat to the value of its securities, which lose value when large numbers of loans are pulled out of the pools.

“We believe, and our data shows, that this practice is the result of a relatively small number of lenders, but, importantly, it has been endemic in the market, [and] it threatens the health of our security,” Bright said. “So, action to curb this behavior is imperative.”

VA public affairs officials didn’t immediately respond to requests for comment on its proposed rule changes.

In his testimony, London said that loan churning was not “a systemic problem,” and the instances declined substantially by Oct. 1, the end of the fiscal calendar year. Just “a handful” of lenders are still churning VA loans, he said.

“Yes, there have been instances of lenders not using the streamline refinance program for its intended purpose,” London said.


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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