The U.S. government sent notices to nine lenders this week, warning them that they would be penalized for pressuring veterans into costly home loan refinancing.
The lenders were told they will be kicked out of Ginnie Mae’s mortgage program unless they prove they can correct their actions.
The notices are part of an effort between Ginnie Mae, formally known as the Government National Mortgage Association, and the Department of Veterans Affairs to stop predatory lenders from targeting veterans who use the VA home loan guarantee program.
The occurrence of rapidly and unnecessarily refinancing loans, known as “loan churning,” creates costly fees for veterans, lengthens their debt repayment and threatens the overall VA program, said Ginnie Mae Executive Vice President Michael Bright.
“We need to take these lenders who appear to be operating in a way that doesn’t make sense and put them into this penalty box,” he said.
Ginnie Mae amended its guidelines at the end of January, stating it would be investigating lenders whose actions appear to be out-of-step with other lenders without a logical reason. Regulators said the bad actors accounted for only a handful of outliers.
Removing those outliers is likely to have the effect of lowering borrowing rates for veterans and others who use Ginnie Mae-backed securities by as much as .5 percent, according to Ginnie Mae.
Ginnie Mae did not name the targeted lenders. Bloomberg Politics, citing a source familiar with the matter, reported NewDay Financial, Nations Lending Corp., Freedom Mortgage Corp., LoanDepot.com LLC and Flagstar Bank were among those notified.
“We expect issuers receiving these notices to respond quickly, produce a corrective action plan and come into compliance with our program,” Bright said.
Because of loan-churning, companies that provide capital for the VA program are increasingly weary of lenders taking advantage of veterans who use it, Bright said. Penalizing lenders for churning is likely to improve their confidence.
“People who are backing this program are mad at how these loans are performing,” Bright said. “When we actually do this, my hope is those people who were skeptical see that Ginnie Mae really means it, and that they come back to the program.”
The action could be just the first step in removing predatory lenders that target the VA program, which offers veterans a low-cost mortgage option.
Jeffrey London, director of the VA loan guaranty service, told lawmakers last month that the VA will soon propose rule changes to the program. The regulations could include a requirement for a lender’s refinancing proposal to meet a certain tangible net benefit for veterans, as the Federal Housing Administration already compels lenders to prove before refinancing loans that it insures.
But the process to implement new regulations could be lengthy. The VA must adhere to the federal rulemaking process, which includes a public comment period. London didn’t tell lawmakers an expected timeline and said only the VA would propose new regulations sometime in 2018.
Sens. Elizabeth Warren, D-Mass., and Thom Tillis, R-N.C., introduced legislation in January requiring lenders to demonstrate a benefit to veterans when refinancing their mortgage.
While reviewing VA data in recent months, Ginnie Mae found a fixed-rate refinance of a VA home loan cost veterans an average $6,000 in fees. Their average savings were $90 each month, meaning it would take veterans more than five years to break even on refinancing.
“The American Legion stands with Ginnie Mae and Senators Warren and Tillis as they work to protect veterans from predatory home lending and ensure veterans have an affordable pathway to home ownership,” Denise Rohan, national commander of the American Legion, said in a written statement. “Our veterans didn’t serve their country around the globe in order to be taken advantage of by unscrupulous lenders at home.”
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