MBA Letter Urges VA to Delay Enforcement of New Cash-Out Refi Interim Rule

The Mortgage Bankers Association, in comments to the Department of Veterans Affairs, identified a “significant operational challenge” with new VA disclosures regarding cash-out refinancings and asked that the VA delay enforcement related to these new requirements.

The Jan. 24 letter comes in response to an interim VA final rule designed to implement new protections regarding cash-out refinancings–a hot topic VA has confronted over the past year because of alleged “churning” allegations involving lenders offering to refinance veterans’ VA loans. The new protections would go into effect Feb. 15.

In the letter, MBA President and CEO Robert Broeksmit, CMB, said while MBA recognizes the urgent need to address the problem of serial mortgage refinancing, or “churning,” of VA-guaranteed or -insured loans, he urged VA to reconsider a requirement under the interim rule that would impose required borrower disclosures not readily available to MBA member lenders offering such refinance loans.

“MBA strongly supports the requirement that borrowers be given a clear description of how the terms of their refinance loan will differ from those of their existing loan–including the costs associated with the refinance transaction,” Broeksmit said. “MBA is very concerned, however, that the interim final rule appears to require information in this disclosure which in many cases will be unavailable to the lender offering the refinance loan.”

In particular, MBA noted the disclosure must include “the total the borrower will have paid after making all payments of principal, interest, and mortgage or guaranty insurance (if applicable), as scheduled, for both the new loan and the loan being refinanced.”

“If the lender offering the refinance loan is not the institution that originated or services the existing loan, it will not have access to the information needed to provide an accurate figure to the borrower,” Broeksmit pointed out. “For example, without the original promissory note and other relevant materials, the lender will not always be able to determine the amortization schedule of the existing loan, which will adversely affect the accuracy of the estimate of the total remaining payments. Similarly, an institution that does not service the existing loan would not have knowledge of any principal curtailments that would affect the duration of mortgage insurance payments or any forbearance that was offered in response to a natural disaster.”

More broadly, Broeksmit added, “the information typically provided by the borrower in a loan application is simply not sufficient for lenders to comply with the new rule.”

The letter said the operational challenges associated with this requirement are compounded by the very short implementation timeline provided in the interim final rule.
“In order to provide borrowers with this disclosure no later than three business days following the loan application, it is critical that lenders be able to rely on automated processes to produce the necessary information,” Broeksmit wrote. “The 60-day implementation period does not provide nearly enough time to allow for such automation and the requisite quality control.”

Broeksmit said in MBA’s ongoing communications with lenders offering VA loans, “we have been informed by a number of institutions that they are very likely to discontinue offering VA cash-out refinance products until and unless they are able to comply with the interim final rule. Costly and inefficient workarounds or manual solutions will not be sufficient to resolve the legal and regulatory risks associated with non-compliance or inaccurate disclosures. The interim final rule was promulgated to better protect servicemembers, veterans and surviving spouses who make use of VA home loans. A reduction in product offerings or the provision of inaccurate information will have the opposite effect.”

Accordingly, the letter strongly urges VA not mandate immediate compliance with any requirement that lenders disclose information that is not already included in a standard loan application (such as the total payments associated with the existing loan) prior to finalization of the rule.

“While other elements of the interim final rule may also present operational challenges for lenders given the 60-day implementation period, MBA recognizes the need to institute critical consumer protections as quickly as possible. The disclosure of total payments on the existing loan, however, does not rise to this level of importance for the borrower, nor can it reasonably be provided by lenders in the timeframe envisioned by VA,” the letter said.

MBA will provide more comprehensive comments on the interim final rule shortly.