New Regulations in VA Loans Promotes Clear Processes, Enhances Veteran Education About Home Financing and Refinancing
By David Porter
David Porter is a Senior Mortgage Loan Officer with Churchill Mortgage, Brentwood, Tenn. Churchill Mortgage provides conventional, FHA, VA and USDA residential mortgages across 46 states. For more information about Churchill Mortgage, visit www.churchillmortgage.com.
After the financial crisis in 2008, many veterans looked for new options in financing and refinancing for their homes. Veteran Affairs loans can cost much less for veterans and active military personnel – one of the more widely discussed advantages of veteran loan programs.
Though, they were often persuaded to refinance several times in one year, following closely after the borrower closed on the loan. Frequently, the borrower did not even realize they may not actually gain any financial benefit from refinancing and instead accrued fees on top of their refinance that ended up costing more and ultimately only benefited the lender.
Because Ginnie Mae backed these loans and to protect veterans, Ginnie Mae and the VA began drafting new lender regulations last year that would require lenders to educate veterans with more information, allowing for better decision-making in deciding on the benefit of the cost of an Interest Rate Reduction Refinancing Loan.
With these new regulations, lenders would be required to provide veterans with refinancing charges and rates compared to the tangible benefits from the loan. These strict rules and regulations surrounding refinancing, education and rates protect lenders, veterans and the market while keeping the process as clear as possible.
The Need for New Regulations
Specific changes were made over the past year to discourage lenders from taking advantage of fees earned from veterans through refinancing charges on IRRRLs. In fact, government officials are even taking some lenders out of the equation, trying to stop loan churning or serial refinancing which can sometimes end up hurting veterans rather than helping them. In the height of new VA rules and regulations surrounding their home loan programs, veterans now need to be equipped with better decision-making information than ever before.
Additionally, the Military Times reported, “the Veterans Affairs Department will enforce new rules designed to help protect military and veteran homeowners from predatory lenders offering VA-backed refinance options.” (https://www.militarytimes.com/home-hq/2018/06/15/heres-how-new-va-lender-rules-will-help-protect-troops-and-veterans/). And, these new VA lender changes going into effect next year have the opportunity to help protect borrowers by requiring loans to meet new VA requirements.
The Changes
Loans guaranteed by the VA must meet these new requirements, which are designed to protect and benefit veterans. The law signed in May – the Economic Growth, Regulatory Relief and Consumer Protection Act – directly correlates to these actions that have been implemented by lenders. The VA lays out these requirements in the Policy Guidance Update (https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_18_13.pdf):
1.) Lenders must inform beneficiaries of the rules and changes related to participating in the VA’s home loan financing program.
2.) Enacts a new Senate law, protecting Veterans from loan churning which can negatively impact veterans and disrupt the secondary mortgage market which results in veterans paying higher interest rates and investors receiving lower returns in the secondary market.
3.) Any refinancing a VA loan undergoes on or after May 25 will have to abide by the VA rules. A loan risks its eligibility for a guarantee by the VA if the loan does not strictly follow the VA’s requirements for loans.
4.) At minimum, the interest rate of a new fixed loan is required to be half a percentage point less than the loan preceding it. For refinancing options with an adjustable rate, the requirement is at least 2 percentage points less.
5.) The borrow must redeem costs and fees before 36 months after the date the loan was refinanced, and the lender must have certification verifying this commitment.
6.) Veterans are not able to refinance to an additional loan that is backed by the VA for 210 days – previously 180 – or depending on which is longer, when the sixth monthly loan repayment is made.
The Future
While the new 210-day rule has extended the closing timeline from six months to eight months and increases the amount of paperwork for both lenders and veterans, it locks in veterans’ rates for 90 days and ensures they are more informed throughout the entire process. There have been major changes in IRRRLs as a result of the uptick in the VA rate reduction program, and right now, veterans should take advantage of locking in those rates.
Overall, the changes have been positive, focused on reducing the runoff in the secondary market and ensuring veterans have access to financial resources to help them make the best overall decisions in home loan financing and refinancing. The changes implemented by the VA in response to the runoff in the secondary market and “loan churning” have led lenders to adjust the way they communicate opportunities to veterans and active military members, creating a more borrower-focused customer experience and increased education.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)
