As previously announced, Congress and the Department of Veteran’s Affairs (“VA”) have issued new rules affecting refinance loans guaranteed by the VA – particularly Interest Rate Reduction Refinancing Loans (“IRRRLs”).
One of these rules requires that “the issuer of the refinanced loan provide the borrower with a net tangible benefit test” (38 USCA § 3709[b]), where certain conditions must be met for the loan to be guaranteed by the VA. These conditions include the interest rate on the borrower’s new loan being less than that of the loan being refinanced (by a certain amount of percentage points) and, in cases where discount points are paid, whether the resulting loan balance (after any fees and expenses) meet certain LTV ratio criteria.
In order to document this test and to “provide” it to borrowers, we will be providing a new “VA IRRRL Net Tangible Benefit Form” (Cx22343) which contains dynamic language which will print depending on the type of loan and whether discount points will be charged or not (e.g. if the IRRRL has a fixed-interest rate and is refinancing a previous loan with a fixed-interest rate, the form will disclose the interest rate of both loans and inform the borrower that the new interest rate will be at least 0.5% lower than the previous interest rate).
Cx22343 will print under the following conditions:
- Base Type = VA
- Document Package Type = Initial Disclosure
- Document Package Type = Closing
- VA Interest Rate Reduction Refinancing Loan (IRRRL) = Yes
Note that Cx22343 will print in both Initials and Closings due to VA Circular 26-18-13, which states that this “test” may include “any broker or agent of the lender, and any servicer or issuer of an IRRRL” – thus indicating that the form may be provided on behalf of the lender by actors who may be involved in the loan process early.
Another rule requires “the issuer of the refinanced loan [to provide] the [VA] with a certification of the recoupment period for fees, closing costs, and any expenses (other than taxes, amounts held in escrow, and fees paid under this chapter) that would be incurred by the borrower in the refinancing of the loan” (38 USCA § 3709[a]). Features of the recoupment include that all of the fees and incurred costs for the new loan are to be recouped by 36 months “after the date of loan issuance” (Ibid. § 3709[a]) and that the recoupment be “calculated through lower regular monthly payments (other than taxes, amounts held in escrow, and fees paid under this chapter) as a result of the refinanced loan.” (Ibid.§ 3709[a])
We will, therefore, be including the following certification in Cx14501:
“I, the undersigned, hereby certify under my authorized capacity, that all fees and incurred costs, as set forth in this document, will be recouped by the borrower(s) on or before the date that is 36 months after the date of the promissory note, if the borrower(s) payments are made in good standing.”
Data Integrity Warning
Because 38 USCA § 3709(a) practically requires refinance loans guaranteed by the VA to have lower principal and interest payments than the loans being refinanced, this statutory provision conflicts with the provisions of VA Lender’s Handbook ch. 6, 1-b, 1-c, & 1-q, which permits IRRRLs to have equal or higher principal and interest payments under certain circumstances. VA Circular 26-18-13 does not amend VA Lender’s Handbook in this regard, thus leaving lenders with a conflict between statutory law and administrative rules.
Until clarification is provided by the VA, we will continue to print the language in Cx14501 which reflects an increase in the borrower’s monthly payment under the circumstances set forth in the VA Lender’s Handbook. However, because statutory law supersedes administrative rules, we will be using the generic fields and configurations for printing the months to recoup closing costs to trigger a warning in our system which will state the following:
“Warning: The P&I portion of the mortgage payments is equal to or higher than the loan being refinanced or the months to recoup closing costs is more than 36 months. 38 USCA § 3709(a) requires the P&I payment of an IRRRL to be lower than that of the loan being refinanced and all fees and incurred costs to be recouped within 36 months after closing.”
If “Use Stated Values for VA IRRRL Comparison” (FI 120367) is Yes, “VA IRRRL – Months To Recoup Based on Stated Closing Costs and Stated Monthly Payments” (FI 120371) will be used to determine if the new Warning displays. Otherwise, “VA IRRRL Loan Estimate Months to Recoup Closing Costs” (FI 119587) will be used for Initial Disclosure and Redisclosure document packages, and “VA IRRRL Closing Disclosure Months to Recoup Closing Costs” (FI 119588) for all other package types. Customized fields and configurations for the language at issue will NOT be modified in any way and NO warning will trigger based on these.
While we normally give clients time to test changes, the document changes will take effect immediately because the requirements of VA Circular 26-18-13 “go into effect immediately.” The Warning will be available as soon as possible next week. If you have any questions or concerns about these changes, please contact Client Support at 1.800.497.3584.