Attempts to curb VA mortgage refinance churning underway

Written By: Joel Palmer, Op-Ed Writer

An effort to curb the practice of churning VA home loans took a major step this month.

U.S. Senators Elizabeth Warren, D-Massachusetts, and Thom Tillis, R-North Carolina, recently introduced the Protecting Veterans from Predatory Lending Act of 2018.

The legislation, which has widespread support from both parties, plus mortgage industry groups and veterans organizations, addresses the issue of churning within VA lending. Since last fall, these advocates have warned of a growing problem of certain VA lenders enticing veterans to unnecessarily refinance their mortgages. In many cases, the refinancing puts the borrower in a worse financial situation than their original mortgage.

According to Ginnie Mae, the average cost to refinance a VA loan is $6,000 in fees. With an average payment savings of $90 a month, it takes the average veteran more than five years to break even on these refinances.

According to Inside Mortgage Finance stats cited in a recent Politico report, VA loans accounted for about 10 percent of new mortgages during the first nine months of 2017. This amounted to a 10-fold increase in market share from a decade ago.

About 40,000 of the 1 million VA loan originated nationwide between April 2016 and August 2017 subjected borrowers to “abusive lending practices,” according to statement from Senator Tillis.

As of November 1, 2016, the Consumer Financial Protection Bureau had received over 12,500 mortgage complaints from servicemembers, veterans, and their dependents. Approximately 14 percent of those complaints concerned refinancing.

Testifying at a House subcommittee earlier this month, Mortgage Bankers Association Chairman David Motley said churning is not a widespread problem among the mortgage lender community, "but rather an activity that is confined to a small subset of lenders."

"Recently, a small number of lenders have undertaken aggressive--and potentially misleading--advertising campaigns to generate increased IRRRL volumes and fees,” he said.

The Protecting Veterans from Predatory Lending Act would establish new requirements for VA loans:

Lenders would be able to submit refinance loans for VA insurance if they certify that the borrower would recoup all fees through lower monthly payments within three years.

A lender may only receive VA insurance for a refinance loan if it has a fixed rate that is 50 basis points lower than the previous fixed-rate loan, or 200 basis points if the new loan is an adjustable rate mortgage.

A lender would only be able to receive VA insurance or obtain a Ginnie Mae guarantee for a refinance loan if the new loan is obtained more than six months after the initial mortgage.

In addition to the loan requirements for lenders, the legislation would require Ginnie Mae to report to Congress regarding the liquidity of the Ginnie Mae security. According to a summary of the bill, churning can undermine the value of the Ginnie Mae security, resulting in higher costs to veterans receiving VA mortgages. The report would examine whether the bill’s new requirements are having the desired effect of increasing the value and liquidity of the Ginnie security.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

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