VA Releases Proposed Refinance Loan Rule | Ballard Spahr LLP
The Department of Veterans Affairs (VA) recently released a proposal to update its rules for interest rate reduction refinance loans (often referred to as “IRRRL”) to comply with VA loan refinance provisions. of the Economic Growth, Regulatory Relief and Consumer Protection Act. , which was signed into law in 2018, and the Affordable Mortgage Protection for Veterans Act of 2019. Comments on the proposal must be submitted by January 3, 2023.
As the name suggests, one of the main uses of an IRRRL is to reduce the interest rate on a veteran’s existing VA loan. However, successive refinances of a veteran’s VA loan, often referred to as loan churning, may not be in the veteran’s best interest. Congress moved to add collateral to VA loan refinance requirements to address loan turnover issues. Requirements include:
- A maximum period of 36 months for the veteran to recoup the cost of refinancing.
- The requirement for the veteran to have made at least six consecutive monthly payments on the existing loan, and the new loan being made at least 210 days after the due date of the first payment on the existing loan. These requirements are called “loan seasoning”.
- A minimal reduction in the interest rate from the existing loan to the new loan.
- The need for the new loan to provide a tangible net benefit to the veteran.
The proposed rule would provide guidance on compliance with existing legislative requirements.
Maximum cost recovery period
To determine whether the maximum cost recovery period of 36 months is met, the proposal calls for dividing the sum of fees, closing costs and expenses incurred by the veteran to refinance the existing loan, whether paid in cash or financed, by the dollar reduction in the monthly principal and interest payment, with the result reflecting the number of months it will take to recover the costs of refinancing. For example, if the applicable costs are $3,600 and the monthly principal and interest payment is reduced by $100, the result would be 36 and the maximum payback period would be satisfied. Refinancing costs would not include (1) VA financing charges, (2) prepaid interest and amounts held in escrow, and (3) taxes and assessments on the property, even when they are paid outside their normal schedule, which are not incurred solely due to the refinancing transaction, such as property taxes and special assessments. If the monthly principal and interest payment on the new loan is equal to or greater than the monthly principal and interest payment on the existing loan, such as when the veteran refinances a 30-year loan to a 15-year loan, the veteran could not be charged any fees, closing costs or expenses, other than the excluded items listed in the preceding sentence.
For the purposes of the requirement of six consecutive monthly installments, the proposal provides that a monthly installment would consist of principal and interest, amounts for taxes and insurance and similar charges, late payment fees and charges, and amounts due under a scheduled repayment. In addition, each monthly payment must be made before or in the month in which the payment is due. Multiple partial payments that are at least equal to the required monthly payment will count towards the six consecutive monthly payment requirements, if all partial payments are made before or during the month in which the monthly payment is due.
For the purposes of the 210-day minimum period, the proposal provides that the note date of the new loan must be at least 210 days after the due date of the first payment on the existing loan. The due date of the first payment on the existing loan is not included in the calculation of the 210 day period, and the note date of the new loan is included in this calculation. For example, if the first payment due date for the existing loan is June 1, 2022, day 1 would be June 2, 2022 and day 210 would be December 28, 2022. The IRRRL note date could be December 28 2022, or later. The 210 day period would include all days that the existing loan is past due. However, if the existing loan is modified, the note date of the new loan must be at least 210 days after the due date of the first payment under the modification. Also, if the existing loan is assumed, the note date of the new loan must be at least 210 days after the due date of the first payment following the assumption.
Reduction of the minimum interest rate
The proposal provides that (1) if the existing loan and the new loan are fixed rate loans, the interest rate must be reduced by at least 50 basis points, and (2) if the existing loan is a rate loan and the new loan is an adjustable rate loan, the interest rate must be reduced by at least 200 basis points. Additionally, where the existing loan is a fixed rate loan and the new loan is an adjustable rate loan, discount points may be included in the loan only if (1) the lower interest rate is not not produced only from discount points (and the lender must provide proof of this to the AV), (2) the lower interest rate is produced only from discount points, up to a point of discount is included in the loan, and the resulting loan balance (including all fees, closing costs and expenses financed) does not exceed 100% of the value of the property, or (3) the interest rate lower is produced only from discount points, more than one discount point is included in the loan and the resulting loan balance (including all fees, closing costs and expenses financed) does not exceed 90% of the value of the property. Existing VA rules allow funding for up to two discount points. Existing VA rules also address when a veteran uses an IRRRL to replace an existing variable rate loan with a fixed rate loan, and those rules are not specifically addressed by the proposal.
Tangible net profit
The refinance must provide a tangible net benefit to the veteran, which the proposal describes as the new loan being “in the veteran’s financial interest.” The Net Tangible Benefit Requirement will be satisfied if (1) the requirements outlined above are met and (2) the Lender provides the Veteran with an Initial Loan Comparison Disclosure and a Final Loan Comparison Disclosure. Disclosures must include:
- The loan repayment amount of the new loan, with a comparison to the repayment amount of the existing loan.
- The type of new loan, whether it is a fixed rate loan, a traditional adjustable rate loan or a hybrid adjustable rate loan, with a comparison with the type of existing loan.
- The interest rate of the new loan, with a comparison with the current interest rate of the existing loan.
- The term of the new loan, with a comparison to the remaining term of the existing loan.
- The dollar amount of the monthly principal and interest payment on the new loan, with a comparison to the current dollar amount of the monthly principal and interest payment on the existing loan.
The lender will be required to provide the initial loan comparison disclosure on the same date that the lender provides the initial loan estimate under the TILA/RESPA Integrated Disclosure Rule (TRID). If the lender provides the veteran with a revised loan estimate, the lender would be required to provide an updated loan comparison disclosure if there are any revisions to the previous loan comparison or refinance cost recovery, or s ‘there is any other figure, non-clerical change. Finally, the Lender will be required to provide the Veteran with the Final Loan Comparison Disclosure on the date the Lender provides the Closing Disclosure to the Veteran under the TRID Rule. Following the Veteran’s receipt of the Final Loan Comparison Disclosure, the Veteran must certify to the Lender receipt of the Initial and Final Loan Comparison Disclosures by signing the Final Disclosure. For purposes of the disclosure requirements, lenders would be required to use a new standardized form, Interest Rate Reduction Refinance Loan Comparison Disclosure.