For years, active-duty military and veterans looking to buy or refinance a home were the targets of unfair lending schemes, ranging from pricey fees and high interest rates to unfavorable refinancing plans — a practice that was the focus of federal lending reforms in 2018.
But a report released Tuesday by Rep. Katie Porter, D-Irvine, suggests those protections may have been short-lived.
Two lending practices generally viewed as unfavorable to all consumers have been rising steadily among veteran consumers since July 2020, according to Porter’s report. One is cash-out refinancing, in which homeowners are encouraged to cash in some equity on their homes but are left owing significantly more money, often under less favorable terms. The other is loan churning, in which a homeowner is urged to refinance a mortgage soon after it is issued as a way to generate repeat closing cost income for the lender.
Porter said some of the lenders punished for such tactics a few years ago are back at it, charging “tens of thousands of dollars more for the same loan than their competitors,” adding that she’s asking for new reforms to prevent the revival of these practices.
She also called for regulators to immediately suspend two major Veterans Affairs, or VA, home loan lenders: NewDay USA and The Federal Savings Bank.
“The Administration has a duty to step in and prevent these scams from happening,” said Porter, a former law professor at UC Irvine and author of a legal textbook, “Modern Consumer Law.”
John Calk, chief executive at The Federal Savings Bank, a Chicago-based lender with an office in Irvine, said in a statement Tuesday that his leadership team hadn’t had time to review Porter’s full report and couldn’t yet comment.
NewDay USA issued a company statement that refuted several of Porter’s claims. Among other things, the Maryland-based company said its interest rates were higher than competitors because it sells cash-out refinance loans to customers with lower average credit scores, a customer group typically ignored by other lenders.
“NewDay USA’s mission is to serve our nation’s veterans and we’re proud of the work we do to help them achieve the dream of home ownership.”
Seven Congress members — led by Rep. Mike Levin, D-San Juan Capistrano — signed a letter Tuesday asking federal regulators to review Porter’s analysis.
“We all must ensure that VA lenders do not abuse this program for their own benefit and diminish veterans’ ability to afford and maintain home ownership.”
The VA home loan program, established in 1944, traditionally has provided service members, veterans and eligible dependents with affordable mortgages. Often, because the loans are backed by the VA, those mortgages haven’t required a down payment.
But while the program has helped many military families reach the middle class, Porter said it’s also become a target-rich environment for predatory lenders, since many military borrowers are young and these companies can set up offices around military bases, where few other lenders operate.
“Since large banks have chosen not to make VA loans, veterans have only a small number of lenders from which to choose,” said Jason Richardon, director of Research and Evaluation at the National Community Reinvestment Coalition, a nonprofit that tracks lending practices in traditionally underserved communities.
Though VA data shows NewDay USA was the 10th biggest VA lender in the second quarter of this year, with 7,075 total loans valued at nearly $1.6 billion, the company was No. 4 in terms of cash-out refinance loans.
NewDay USA argues that VA cash-out loans accounted for only 13% of the products it sold in 2020. And the company says its customers saved a weighted average of $617 per month by opting for a VA cash-out refinancing.
The Federal Savings Bank was No. 12 for overall loans last quarter but No. 6 for cash-out refinance loans.
Porter’s report includes an example of a 2019 mailer sent to veterans by The Federal Savings Bank labeled “expiration notice.” Porter argues that while the mailer was designed to look like an official government document, telling veterans they need to take action related to their VA loan, it actually was an ad pitching a cash-out refinancing loan.
In August 2018, cash-out refinancing loans hit a peak, accounting for 87.1% of all new VA home loan products. Such loans can come with lower monthly payments but add long-term costs to VA loans, in some cases as much as the equivalent of an extra $28,000 on a $400,000 mortgage.
There also were reported examples of lenders making loans with elevated interest rates so they could later push veterans to quickly refinance and collect additional fees.
In a 2018 report, the VA wrote: “Essentially, the lender revives the period of subprime lending under a new name,” referencing the type of financial product that in 2007 triggered the Great Recession.
Sens. Thom Tillis, R-N.C., and Elizabeth Warren, D-Mass., helped to pass 2018 reforms to curtail such practices. The Trump administration and Congress passed regulations to reduce mortgage churning and strengthen consumer protections for veteran borrowers. Among other things, the new rules established a six month “cooling” period before any new mortgage could be refinanced.
From 2018 to 2019, eight different lenders were suspended from the VA home loan program based on concerns related to churning.
NewDay USA was among those suspended at that time, though the company argued Tuesday that was included on the list because “other companies were targeting recent NewDay USA cash-out loan customers for refinancing in the months after they closed a loan with NewDay USA because their credit scores began to improve.”
New cash-out refinance loans remain below their 2019 high, but are up 50% since July 2020.
“It is likely that veterans who received these loans in 2020 accessed these assets to help them through pandemic-related financial challenges,” Levin and colleagues wrote in their letter to regulators.
“However, (Porter’s) report found that some VA lenders are saddling veterans with disadvantageous loan terms and higher-than-average costs.”
Porter’s report says that in 2020 the average up-front cost of a cash-out refinancing issued by NewDay USA was nearly twice that of competing firm, USAA, and higher than all but one major lender.
“This bad behavior must stop,” Porter wrote.
Levin and his colleagues asked the VA, the Consumer Financial Protection Bureau and Ginnie Mae to share any findings and notify them of any action they take related to issues flagged in Porter’s report.
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