MBA Offers Recommendations to VA on Loan ‘Churning’

The Mortgage Bankers Association, in a Feb. 15 letter to the Veterans Administration, offered recommendations intended to strengthen an interim rule aimed at deterring loan “churning” against servicemembers and addressing serious implementation issues and operational challenges MBA believes VA needs to address surrounding new borrower disclosures.

The interim final rule, issued in December, (https://www.federalregister.gov/documents/2018/12/17/2018-27263/loan-guaranty-revisions-to-va-guaranteed-or-insured-cash-out-home-refinance-loans), governs VA cash-out refinances The new requirements apply to all non-streamlined VA refinances and took effect Feb. 15, though VA said it will consider public comments prior to finalizing the rule.

Many of MBA’s recommendations focus on discouraging serial refinancing of VA loans (or loan churning), including the need for net tangible benefit thresholds to close potential loopholes; a prohibition on the ability to finance fees that would put the borrower in an underwater position; an extension of the minimum loan seasoning period; and stronger market monitoring for improper solicitations.

MBA President and CEO Robert Broeksmit, CMB, said the MBA recommendations go beyond what VA is proposing in addressing churning.

“In recent years, there has been a very concerning increase in the prevalence of churning in the market for VA-guaranteed or -insured loans,” Broeksmit said. “Many borrowers have been persuaded–often as a result of misleading or deceptive advertising-to refinance their VA loans repeatedly, receiving small decreases in their monthly payments while excessive fees are added onto their loan balances. This process strips borrower equity with each successive transaction, and the additional fees can eventually push the borrower into an ‘underwater’ position in which he or she owes more than the value of the home. In some cases, the borrower may not even realize he or she is in such a position until attempting to sell the home.”

Beyond the harm done to individual VA borrowers, Broeksmit said, churning also leads to higher costs for all borrowers using mortgage programs operated by VA, the Federal Housing Administration and the Rural Housing Service. “Because churning causes abnormally fast prepayments of existing mortgages that serve as collateral for securities guaranteed by Ginnie Mae, investors in these securities do not earn their expected yields. This dynamic reduces investor demand for Ginnie Mae securities and lowers the prices investors are willing to pay, which leads to higher required yields on the securities and, in turn, higher mortgage interest rates for VA, FHA, and RHS borrowers.”

A summary of MBA recommendations include:

—Net Tangible Benefit. For applicable criteria set forth in the interim final rule, provide specific thresholds that must be met in order to satisfy the net tangible benefit test

—Loan Fees and LTV Ratio Limits. Clarify that no fees of any kind may be financed into the principal balance of the loan if the resulting LTV ratio would be above 100 percent.

—Loan Seasoning. Begin the seasoning period for Type II cash-out refinances on the note date of the existing loan rather than the date of the first payment made by the borrower; pursue legislative efforts to change the start date of the seasoning period for streamlined refinances and Type I cash-out refinances to the note date of the existing loan; and increase the required seasoning period on Type II cash-out refinances from six months to 12 months.

—Borrower Disclosures. Replace the line item regarding the total amount the borrower will have paid on the existing and new loans with a simple sum of the fees that the borrower is paying to engage in the refinance transaction; create standard language for lenders to use to meet the requirement that they explain how borrowing against home equity may affect the borrower; and postpone compliance with any requirement that lenders disclose information that is not already included in a standard loan application until the interim final rule is made final.

—Misleading or Deceptive Solicitations. Monitor the market for improper solicitations and engage in further efforts to raise awareness among consumers.

—Implementation Questions that Need to be Addressed. Provide clarity on outstanding questions related to lender compliance.

MBA also identified numerous implementation concerns with the VA proposal. In particular, MBA said the new borrower disclosures required for cash-out refinances would compel lenders to provide loan estimates not typically available through the information collected in a standard application. The 60-day implementation period for these disclosures has not allowed the necessary time for lenders and service providers to develop, automate, and test changes to their systems. MBA therefore strongly urged VA to postpone enforcement of these problematic portions of the interim final rule until after comments are considered and the rule is finalized.

“MBA stands fully committed to continuing our work with VA, as well as Ginnie Mae, the U.S. Congress, and all stakeholders, to bring churning to an end,” the letter said. “As part of our mission, MBA maintains the objective of ‘promot[ing] fair and ethical lending practices.’ Churning represents the very antithesis of this objective. We believe the recommendations described above will improve VA’s capacity to deter churning and thereby better protect servicemembers, veterans and surviving spouses. We urge VA to adopt these changes to the interim final rule as quickly as possible.”