The Veterans Affairs Department will enforce new rules designed to help protect military and veteran homeowners from predatory lenders offering VA-backed refinance options.
The rules require loans guaranteed by VA to meet certain requirements designed to ensure the beneficiary isn’t being scammed. Among them:
- A new fixed loan’s interest rate must be at least half a percentage point less than the previous loan. Adjustable-rate refinances must be at least 2 percentage points less.
- The lender must certify that all costs and fees will be recouped by the borrower within 36 months of the loan date.
- Veterans can’t refinance to another VA-backed loan for 210 days (up from 180) or the date on which the sixth monthly loan payment is made, whichever is longer.
Regulators, veteran advocates and many in industry have been concerned about a trend called “loan churning,” or “serial refinancing,” which encourages veterans to repeatedly refinance their VA home loans.
Some borrowers have been convinced to refinance their loan multiple times in a year, targeted with an onslaught of mortgage-refinance solicitations, often shortly after they’ve closed on a VA home loan. There’s no financial benefit in many cases for the borrower; fees attached to the deals benefit the lenders, but can increase the overall loan amount for veterans.
The VA rules affect any VA loan refinance application taken on or after May 25. If a loan doesn’t meet the VA requirements, it won’t be eligible for a guaranty by VA.
“We want to ensure veterans have the informed ability to take advantage of economic opportunities and make sound decisions that enable them to prosper when using their benefits,” said Acting VA Secretary Peter O’Rourke, in a VA announcement. “This is yet another tool that will help veterans meet their personal goals.”
VA doesn’t provide the loan; private lenders such as banks, credit unions and mortgage companies do. VA guarantees a portion of the loan against loss and helps private lenders provide veterans with more favorable financing terms.
The action implements a law signed in May ― the Economic Growth, Regulatory Relief, and Consumer Protection Act.