In 2018 VA changed their guidelines on their VA refinance programs as set forth by the U.S. Government. The changes were made in attempt to stop predatory lending. Then the VA IRRRL guidelines in 2019 were updated again as some large-name lenders were abusing the program. Now it appears VA has loosened up...just a bit. What’s caused all of these changes? I’ll explain what's transpired over the last year and update you on the VA IRRRL guidelines 2019 and how it impacts you.
VA IRRRL Guidelines Change in 2018
VA has made numerous changes to the IRRRL program in 2019 but this wasn’t the beginning. It has been an ongoing process since mid-2018. The changes were initiated due to the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (S. 2155).
This bill, (now a law) was passed by the senate on March 14, 2018. Within S. 2155 was another act meant to protect veterans from predatory lending. This act, “The Protecting Veterans From Predatory Lending Act of 2018” was specifically created to stop lenders from “loan churning” or “serial refinancing”.
Effects of Loan Churning
In 2018, several lenders were banned from issuing loans into Ginnie Mae’s security pools. The reason for the ban was reportedly, due to churning VA loans, or in other words, repeatedly refinancing veterans.
This practice affects veterans in two ways. One, it unnecessarily depletes equity and costs the veteran thousands of dollars in fees. It also negatively impact the secondary mortgage market, causing higher rates. When loans get paid off quickly, the investor doesn’t have enough time to recoup costs paid to brokers and banks for the loans. To counter this, they raise their rates offered on VA loans.
This all creates a trickledown effect on the economy but I’ll leave that for another article.
VA IRRRL Guidelines 2019 – Changes to Date
Below are all of the changes made to the VA IRRRL program beginning in May of 2018 up until this article was written:
May 23, 2018 – VA Circular 26-18-13
Net Tangible Benefit
The lender, broker or agent of the lender must provide the veteran with a net tangible benefit test (NTB).
- If refinancing from a fixed VA loan to a new fixed VA loan, the new interest rate must be .50 lower than the rate of the current VA loan.
- If refinancing from a Fixed loan to an Adjustable Rate Mortgage (ARM), the rate must be reduced by at least 2%.
All VA guaranteed loans must be seasoned before using the IRRRL program to refinance. The seasoning requirement was set at 210 days after the date of the first payment AND 6 consecutive on time payments. This rule has since changed (see below).
If discount points are being charged, an appraisal is required.
August 8, 2019 – VA Circular 29-19-22
Loan Fee Recoupment Calculation
The VA funding fee is no longer calculated into the 36 month cost recoupment. Previously the rule included the funding fee into the recoupment calculation. This left non-exempt veterans (veterans with no service connected disability rating) unable to utilize the IRRRL as the total fees were more than an exempt veteran.
Fixed to Adjustable
One of the following rules must apply on all VA loans where the veteran is refinancing from a fixed loan to an ARM:
- Discount points may be used to lower the rate in order to meet the 2% reduction rule. However, the new interest rate CANNOT be produced solely from discount points.
- Discount points less than or equal to 1% may be used SOLELY to reduce the interest rate, but only if the resulting balance of the loan after all fees and expenses maintains a loan to value (LTV) of 100% or less.
- Discount points greater than 1% may be used SOLELY to reduce the rate but LTV of the new loan cannot exceed 90%. No more than 2% discount points may be used.
The date to which the 210 seasoning starts is now the first payment date as determined by the mortgage note. It is no longer the date the first payment was made. VA continues its stance on 6 consecutive payments.
For more detailed information regarding all changes made as of August 8, refer to VA Circular 26-19-22.
Of course the changes made to the IRRRL program were for the for the betterment of the veteran. Yet it’s unfortunate that it has actually made it more difficult, until now. It appears VA is heading back in the right direction.
It is great that VA is regulating the costs on VA IRRRL’s. This makes it much more difficult for high priced lenders to charge higher VA closing costs. Now if VA can only start regulating the VA closing costs charged by lenders on regular VA refinances and more importantly new home purchases.
Until then, I’ll continue my fight to help veterans pay lower closing costs.