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On February 14, the Department of Veterans Affairs (VA) released Circular 26-19-05 (and on February 15, accompanying Change Circular 26-19-05) to clarify the VA’s interim final rule regarding VA-guaranteed cash-out refinancing loans, which was released in December 2018 and became effective on February 15. The interim final rule was previously covered by InfoBytes. Among other things, the Circular provides clarification regarding (i) the Net Tangible Benefit test; (ii) the contents of the loan comparison and home equity disclosures (including sample 3-day and final loan closing disclosures); (iii) the loan seasoning requirements, including a new obligation that, for loans refinanced within 1 year of the original closing date, lenders obtain a payment history/ledger documentating all payments, unless a credit bureau supplement clearly identifies all payments made in that timeframe; and (iv) the manner by which lenders should calculate fee recoupment.
District Court orders mortgage company to pay $260,000 in civil money penalties for deceiving veterans about refinance benefits
On December 21, the U.S. District Court for the District of Nevada ordered a non-bank mortgage company to pay $268,869 in redress to consumers and a civil penalty of $260,000 in an action brought by the CFPB for engaging in allegedly deceptive lending practices to veterans about the benefits of refinancing their mortgages. As previously covered by InfoBytes, the CFPB had alleged that, during in-home presentations, the company used flawed “apples to apples” comparisons between the consumers’ mortgages and a Department of Veterans Affairs’ Interest Rate Reduction Refinancing Loan. According to the Bureau, the presentations misrepresented the cost savings of the refinance by (i) inflating the future amount of principal owed under the existing mortgage; (ii) overestimating the future loan’s term, which underestimated the future monthly payments; and (iii) overestimating the total monthly benefit of the loan after the first month. In addition to the monetary penalties, the order prohibits the company from misrepresenting the terms or benefits of mortgage refinancing and requires the company to submit a compliance plan to the Bureau.
On December 17, the Department of Veterans Affairs (VA) published an interim final rule in the Federal Register to amend its rules on VA-guaranteed or insured cash-out refinance loans as required by Section 309 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (codified as 38 U.S.C. § 3709). (See also, VA Circular 26-18-30 and accompanying revision for a summary of the rule.) The interim final rule, which revises the current regulation, 38 CFR 36.4306, bifurcates cash-out refinance loans into two types, (i) Type I, the loan being refinanced is already guaranteed or insured by VA and the new loan amount is equal to or less than the payoff amount of the loan being refinanced; and (ii) Type II, cash-outs in which the amount of the principal for the new loan is larger than the payoff amount of the refinanced loan. Under the interim rule, for both Type I and Type II, the VA will permit a cash-out refinance provided:
- Reasonable Value. The new loan may not exceed an amount equal to 100 percent of the reasonable value of the dwelling or farm residence that secures the loan.
- Funding Fee. The funding fee may be financed in the new loan amount; however, any portion of the funding fee that would cause the new loan amount to exceed 100 percent of the reasonable value of the property must be paid in cash at the loan closing.
- Net Tangible Benefit. The loan must provide a net tangible benefit to the borrower, which can be satisfied in one of eight ways (i) the new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance; (ii) the term of the new loan is shorter; (iii) the interest rate on the new loan is lower; (iv) the payment on the new loan is lower; (v) the new loan results in an increase in the borrower’s residual monthly income; (vi) the new loan refinances an interim loan to construct, alter, or repair the home; (vii) the new loan amount is equal to or less than 90 percent of the reasonable value of the home; or (viii) the new loan refinances an adjustable rate loan to a fixed rate loan.
- Disclosure. The lender must provide the borrower, and the borrower must certify, net tangible benefit information, a loan comparison disclosure, and an estimate of the amount of home equity removed from the refinance, in a standardized format, on two separate occasions (not later than 3 business days from the date of application and again at closing).
- Other. As required by the current regulation, any borrower paid discount must be considered reasonable in accordance with § 36.4313(d)(7)(i) and the loan must also otherwise be eligible for the VA guarantee.
For Type I cash-out refinances, the VA also requires (i) all the fees and incurred costs to be scheduled to be recouped within 36 months after the date of loan issuance; (ii) a loan seasoning period of the later date of 210 days after the date of the first payment made and the date the sixth monthly payment is made on the loan; and (iii) under the net tangible benefit requirement, for a fixed interest rate to a fixed interest rate, the rate must be reduced by 50 basis points and for a fixed to adjustable interest rate, the rate must be reduced by 200 basis points.
For Type II cash-out refinances, if the loan being refinanced is a VA loan, the same loan seasoning requirement applies (the later date of 210 days after the date of the first payment made and the date the sixth monthly payment is made on the loan). There are no additional restrictions on fee recoupment or rate reductions.
The interim final rule takes effect February 15, 2019, with comments due on or before the effective date.
On December 6, the CFPB announced the filing of a complaint and proposed final judgment in the U.S. District Court for the District of Nevada against a non-bank mortgage company for allegedly deceiving veterans about the benefits of refinancing their mortgages in violation of the Consumer Financial Protection Act. According to the complaint, during in-home presentations, the company would allegedly use flawed “apples to apples” comparisons between the consumers’ mortgages and an Interest Rate Reduction Refinancing Loan (a loan, guaranteed by the Department of Veterans Affairs, which allows veterans to refinance mortgages at lower interest rates). The Bureau alleges the presentations misrepresented the future cost savings of the refinance by (i) inflating the future amount of principal owed under the existing mortgage; (ii) overestimating the future loan’s term, which underestimated the future monthly payments; and (iii) overestimating the total monthly benefit of the loan after the first month.
If ordered by the court, the judgment would require the company to pay $268,869 in redress to consumers and a civil penalty of $260,000; it would also prohibit the company from misrepresenting the terms or benefits of mortgage refinancing.
Fannie Mae issues Selling Guide updates, removes requirement to use Market Conditions Addendum for appraisals
On August 7, Fannie Mae issued Selling Guide update SEL-2018-06, which announces, among things, the removal of the requirement to use the Market Conditions Addendum (Form 1004MC) for appraisals and clarification of the policies regarding disbursement of HomeStyle Renovation funds. Specifically, effective immediately, the Selling Guide provides that lenders are no longer required to use Form 1004MC for appraisals as the agency’s Collateral Underwriter program provides market trend information for lenders and Fannie Mae to measure and manage market risks. However, appraisers remain responsible for analyzing market conditions and reporting them in the Neighborhood section of Fannie Mae’s appraisal forms. The update also clarifies that for HomeStyle Renovation funds disbursed using a wire transfer, the lender must obtain written consent to release the funds. Additionally, the update clarifies that all mechanics liens must be cleared or waived by the final disbursement of funds—a lien waiver is not required at each disbursement stage. The announcement also notes that the previously released information regarding Fannie Mae’s high loan-to-value refinance option (covered by InfoBytes here) is now available in the Selling Guide.
On May 31, the Department of Veterans Affairs (VA) issued Circular 26-18-14 to clarify requirements regarding lender certifications for VA-guaranteed loans. The circular reminds lenders originating VA loans that the lender must certify to the VA that the loans “were made in full compliance with the law and loan guaranty regulations” regardless of the type of VA-guaranteed loan being initiated. The circular highlights that the lender certification is required on the Interest Rate Reduction Refinance Loans (IRRRL). The circular is effective through July 1, 2020.
On May 30, Ginnie Mae issued All Participants Memorandum APM 18-04 announcing changes to pooling eligibility requirements for Department of Veterans Affairs (VA) loans. The changes are in response to the “Loan Seasoning for Ginnie Mae Mortgage-Backed Securities” provision of the regulatory relief bill, Economic Growth, Regulatory Relief, and Consumer Protection Act, S.2155/ P.L. 115-174. (See previous InfoBytes coverage here.) APM 18-04 requires that, in order to be eligible for Ginnie Mae securities, the date of the VA refinance loan must be on or after the later of (i) 210 days after the date of the first payment made on the loan being refinanced; and (ii) the date of the sixth monthly payment made on the loan being refinanced. The new eligibility criteria is effective with mortgage-backed securities guaranteed on or after June 1.
Ginnie Mae also announced June 1 that it has temporarily restricted VA single family-guaranteed loans pooled by three mortgage lenders. Upon conclusion of the temporary restriction, each of the three lenders must demonstrate that (i) prepayment speeds are more consistent with equivalent lenders, and (ii) improved performance is sustainable.
As previously covered by InfoBytes, the VA recently released policy guidance in response to the regulatory relief bill, which includes a similar loan seasoning requirement as Ginnie Mae.
VA issues policy guidance on VA refinance loans in response to the Economic Growth, Regulatory Relief and Consumer Protection Act
On May 25, the Department of Veterans Affairs (VA) issued Circular 26-18-13 discussing the impact of “The Protecting Veterans from Predatory Lending Act of 2018” (the Act), which was included in the recently enacted bipartisan regulatory relief bill, Economic Growth, Regulatory Relief and Consumer Protection Act, S. 2155, previously covered by InfoBytes here. The Act addresses “loan churning” of VA-guaranteed refinance loans and sets out new requirements for VA eligibility. As of May 25, a lender (broker or agent included), a servicer, or issuer of an Interest Rate Reduction Refinance Loan (IRRRL) must, among other things:
- Recoup Fees. Certify that certain fees and costs of the loan will be recouped on or before 36 months after the loan note date;
- Establish a Net Tangible Benefit. Establish that when the previous loan had a fixed interest rate (i) the new fixed interest rate is at least 0.5 percent lower or (ii) if the new loan has an adjustable rate, that the rate is at least 2 percent lower than the previous loan. In each instance, the lower rate cannot be produced solely from discount points except in certain circumstances; and
- Apply a Seasoning Period. Follow a seasoning requirement for all VA-guaranteed loans. A loan cannot be refinanced by an IRRRL or a VA cash-out refinance (if the new principle amount is less than the loan being refinanced) until (i) 210 days after the date of the first payment made on the loan and (ii) the date of the sixth monthly payment is made on the loan.
The circular is rescinded on January 1, 2020.
On May 22, Fannie Mae issued Lender Letter LL-2018-02, which updates options related to the high loan-to-value (LTV) refinance option released in September 2017 (LL-2017-05). Fannie Mae, at the direction of the Federal Housing Finance Authority and in conjunction with Freddie Mac, increased the minimum refinance LTV ratio from 95.01 percent to 97.01 percent for one-unit, principal residences. Additionally, there are no minimum credit score requirements or a maximum debt-to-income ratio for most high LTV refinances. The Lender Letter also notes that the Loan-Level Price Adjustment Matrix on Fannie Mae’s website is updated to include the high LTV refinances and provides specific loan delivery requirements.
Freddie Mac announced the same LTV ratio change in Guide Bulletin 2018-8. The bulletin also announced, among other things, a “Credit Fee in Price” cap structure, effective on January 1, 2019, for applicable refinance mortgages. According to the bulletin, the pricing cap is designed to balance affordability to the consumer and risk to the lender. The pricing cap structure is related to the LTV ratio of the refinance and occupancy type of the property. Other updates include, (i) clarification of income stability and credit inquiries; (ii) concurrent transfers of servicing; and (iii) investor reporting change initiative.
On April 5, the Department of Veterans Affairs released FAQs regarding policy guidance for VA Interest Rate Reduction Refinance Loans (IRRRL). The FAQs address a range of questions regarding the IRRRL policy guidance issued in February (previously covered by InfoBytes here), including noting that the requirement to provide the Lender Certification disclosure with initial disclosure documents has been removed. If a Lender Certification is necessary, the lender will be required to provide the document at closing. Additionally, the FAQs clarify that, while the lender will need to be able to demonstrate that the Veteran’s Statement was sent to and received by the veteran in the initial disclosure package, the VA will not require the veteran’s signature until the final statement given with the closing documents.
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