“’What do you want?’ the ape asked at last.
‘Nothing,’ said Ervic.
‘You may have that!’ retorted the ape.” (Glinda of Oz, L. Frank Baum)
Section 309 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”; 132 Stat. 1296 ) posed several problems which, until recently, were left unsolved (see https://compliance.docutech.com/2019/03/08/the-uncertain-future-of-va-irrrl-refinances-of-arms/). The Department of Veterans’ Affairs (“VA”) published VA Circular 26-29-22 on August 8, 2019 (available at: https://www.benefits.va.gov/HOMELOANS/resources_circulars.asp) which, according to their own words, “consolidate[s] and clarif[ies]” how the EGRRCPA affects IRRRLs. While it does so on several critical problems, it also leaves several unclarified which, one hopes, will be resolved when the VA issues updated interest rate reduction refinance loan (“IRRRL”) regulations.
ARM-to-Fixed and ARM-to-ARM IRRRLs
A chief problem with EGRRCPA is that it enacted 38 U.S.C.A. § 3709(b) which, based on a plain reading of its provisions, left out any possibility for an IRRRL to refinance an adjustable rate mortgage, unless the interest rate on the IRRRL was lower than that of the loan being refinanced. Under Ibid., four criteria are promulgated which an IRRRL must meet in order to be eligible for a VA guarantee. Two of criteria (Subsections [b] & [b]) apply only to refinances of fixed-rate loans. The first criteria (Subsection [b], providing the borrower with a “net tangible benefit test”) is not defined or explained under statutory law. The last criteria (Subsection [b]) is that the new loan has a lower interest rate than the previous loan.
While not providing any details in the Circular, the VA indicates in Exhibit A of the Circular that IRRRL refinances of ARMs are not subject to the “NTB – Interest Rate Requirements” of 38 U.S.C.A. § 3709(b). We suspect that the rationale for this exemption is the same as that used by the VA in their rulemaking entitled: “Loan Guaranty: Revisions to VA-Guaranteed or Insured Cash-Out Home Refinance Loans” (83 FR 64459 ; hereafter referred to as “Loan Guaranty Rulemaking”) regarding Type I Cash-Out Refinances:
“VA finds that refinancing from an adjustable rate loan to a fixed rate loan will provide a financial benefit to the borrower by providing a stable interest rate over the life of the loan. Generally, borrowers obtain adjustable rate loans to aid in affording a home for a short period (i.e., three to five years). However, when circumstances change (e.g., a change in employment, an increase in benchmark interest rates, or a decision to stay in a home longer) a fixed rate may be more affordable and may provide more certainty in the loan term. Enabling borrowers to refinance to a fixed rate, even if such rate is higher than the introductory adjustable rate, can be in a veteran’s financial interest.” (83 FR 64463 )
Essentially, an IRRRL which refinances an ARM automatically meets the criteria of Supra § 3709(b)(1) by its nature and, as such, is eligible to be guaranteed by the VA.
IRRRL Payment Increases
Another problem created by the EGRRCPA is that, under new 38 U.S.C.A. § 3709(a) & (a)(3), it requires a VA loan “that is being refinanced may not be guaranteed or insured . . . unless . . . the recoupment is calculated through lower regular monthly payments (other than taxes, amounts held in escrow, and fees paid under this chapter [i.e. VA-required fees, such as the funding fee]) as a result of the refinanced loan.” This virtually prohibits the mortgage payments of an IRRRL from being higher (or, at least, substantially higher) than those of the loan being refinanced.
VA Circ. 26-19-22, however, indicates that the mortgage payments can increase. In describing the steps necessary to determine compliance with this (and other) fee recoupment requirements, the VA states the following:
“The lender, any broker or agent of the lender, and any servicer or issuer of an IRRRL, must ensure, and certify to VA, that: . . .
(b) For an IRRRL that results in the same or higher monthly PI payment, the Veteran has incurred no fees, closing costs, or expenses (other than taxes, amounts held in escrow, and fees paid under chapter 37 (e.g., VA funding fee collected under 38 U.S.C. § 3729)).” (Supra § 3.a.)
“Lenders must upload the following documentation during the Loan Guaranty Certificate (LGC) process to certify that fee recoupment has been met: . . .
(c) For an IRRRL that results in the same or higher monthly PI payment, the lender should submit to VA evidence that the Veteran has incurred no fees, closing costs, or expenses (other than taxes, amounts held in escrow, and fees paid under chapter 37).” (Supra § 3.a.)
No rationale is provided in the Circular for how this is permitted under 38 U.S.C.A. § 3709(a)(3) and there are no corresponding rationales in the “Loan Guaranty Rulemaking” which can be appealed to. Absent such, there appears to be a blatant conflict between the Circular and statutory law on this matter.
Two Different Calculations
EGRRCPA, through 38 U.S.C.A. § 3709(a), requires only one calculation to be made in connection with an IRRRL:
“. . . a loan to a veteran . . . that is being refinanced may not be guaranteed or insured under this chapter unless –
(1) the issuer of the refinanced loan provides the Secretary [of Veterans Affairs] 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;
(2) all of the fees and incurred costs are scheduled to be recouped on or before the date that is 36 months after the date of loan issuance; and
(3) the recoupment is 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.”
VA Circ. 26-19-22 does require “Comparison Statements” to be made to the borrower in which comparisons are made between the terms of their new and previous loan, along with a “Time to Recoup Closing Costs” disclosure of the decreases in payments, total closing costs, and how long it will take to recoup these costs.
However, the calculation used in this “Time to Recoup Closing Costs” disclosure is different than the one used to determine EGRRCPA recoupment compliance – thus, the VA has established two distinct recoupment calculations. This is somewhat explained in the Circular:
“VA interprets the Act as requiring that lenders make certain disclosures when originating IRRRLs. Lenders should twice present the Veteran with a comparison of the refinance loan to the loan being refinanced. The loan comparison statement will provide the Veteran with up-front information about the overall cost of the refinance, thereby helping the Veteran make an informed decision about whether to proceed with the refinance. . . .
Note: The recoupment calculation for the purposes of the comparison statement differs from the recoupment calculation required under 38 U.S.C. § 3709(a) . . . . Namely, the comparison statement will gauge how the Veteran’s payment of taxes, amounts held in escrow, and fees paid under chapter 37 affect the cost of the new refinance loan. . . .” (Ibid. § 3.d)
Essentially, lenders must conduct two recoupment calculations for IRRRLs. The first is to determine whether the loan can be guaranteed by the VA under the EGRRCPA (using the formula set forth under 38 U.S.C.A. § 3709[a] and in VA Circ. 26-19-22 § 3.a & Exhibit B). The second is to provide a disclosure to the veteran of when they can expect to recoup their loan costs (using the formula set forth in Ibid. § 3.c.[d]).
The VA does not explain in the Circular how they arrived at the conclusion that EGRRCPA requires “that lenders make certain disclosures when originating IRRRLs” or why the recoupment calculation on such disclosures should be different than that of the EGRRCPA.
We suspect that the rationale is similar to the one used in Type I Cash-Out transactions, where lenders must provide a disclosure outlining the “net tangible benefits” the borrower will be receiving with their new loan, as now set forth in 36 C.F.R. § 36.4306(a)(3)(iv). While again short on details, the VA stated in the “Loan Guaranty Rulemaking” that “requiring lenders to provide borrowers with the above information [the net tangible benefit test] on two separate occasions will enable borrowers to better understand their cash-out refinance loan transaction and, therefore, make a sound financial decision. VA believes this information will help borrowers avoid costly mistakes that may strip their home equity or make it difficult to sell or refinance their home in the future.” (83 FR 64463 )
While the VA has fixed some issues caused by the EGRRCPA, nothing is provided in the way of rationale as to how these fixes comply with the EGRRCPA. The EGRRCPA does not directly authorize the VA to guarantee ARM-to-ARM or ARM-to-fixed IRRRLs unless the interest rate decreases. It also does not permit the monthly payments to increase (unless such increases are due to increases in taxes, escrow items, and/or VA-required fees). The two different recoupment calculations, while not conflicting with the EGRRCPA, do cause additional stress on the industry which – arguably – could have been avoided by simply disclosing the one recoupment calculation provided by Congress in the EGRRCPA.
Fortunately, the VA is planning on providing a separate rulemaking which will incorporate the EGRRCPA’s requirements into administrative law, much like they did with the “Loan Guaranty Rulemaking” (see 83 FR 64460 ). Hopefully such rulemaking will provide more than “nothing” on how they are interpreting the EGRRCPA.