Residential: What you need to know about VA refinance enforcement

Last year, The Economic Growth, Regulatory Relief, and Consumer Protection Act established new requirements for Department of Veterans Affairs (VA) refinance loans, including seasoning, net tangible benefit and recoupment. The agency is now taking action against loans that do not meet the new requirements.

“The VA has started to contact lenders regarding recent refinances that may be ineligible for guaranty,” said Stephanie Schader, Vice President at The Collingwood Group, a SitusAMC company. “The agency is moving quickly to address these loans, and it’s a good idea for VA originators to proactively evaluate their refinance portfolios and take any steps necessary to resolve noncompliance.” Lenders should re-evaluate their Loan Guaranty Service (LGY) data and supporting documentation to determine whether new requirements were satisfied.

The legislation, which was signed into law in May, took immediate effect on Interest Rate Reduction Refinance Loans (IRRRLs). New requirements for Type 1 Cash-Out Refinances, in cases where the refinanced loan does not exceed the prior principal balance, went into effect in February of this year.

“What we know is that the VA has evaluated these refinance loans since the new requirements went into effect and have identified a significant number of instances of noncompliance,” said Schader. “The VA is prohibited by law from guaranteeing loans that do not meet the statutory requirements,” she added, meaning the loans will have to be remediated to maintain their guaranty.

The VA is reportedly reaching out to lenders with impacted loans and is expected to send notification letters. “The VA has said it intends to work with affected lenders, but lenders should understand, the agency is taking the issue seriously,” said Schader. “It’s important lenders show cooperation and compliance.”

The majority of affected loans are believed to be term reduction or adjustable rate mortgage (ARM)-to-fixed IRRRLs that do not meet recoupment requirements. These loans can presumably be brought into compliance with a principal reduction in the amount of the excess costs.

However, there is no obvious remediation strategy for loans not meeting seasoning requirements. Indemnification may offer one alternative to guaranty revocation. Circular 26-19-22 indicated lenders could remediate recoupment and net tangible benefit defects on IRRRLs without advance approval, as long as there was no cost to the borrower.

“Lenders should be prepared to present the VA with a plan for remediation of all impacted loans,” said Schader, “but may wish to defer taking action until they have communicated those plans to the agency.”

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