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.
He 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
“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
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 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.
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