Department of Veterans Affairs clarifies policies for cash-out refinancing loans
On February 14, 2019, the Department of Veterans Affairs (VA) issued a circular clarifying its new policies regarding VA-guaranteed cash-out refinancing loans. The policies took effect on February 15, 2019, pursuant to an interim final rule which was published in the Federal Register on December 17, 2018. The rule can be viewed in its entirety here: https://www.federalregister.gov/documents/2018/12/17/2018-27263/loan-guaranty-revisions-to-va-guaranteed-or-insured-cash-out-home-refinance-loans
Key points from the circular are summarized below. Circular 26-19-5 is available in its entirety here: https://benefits.va.gov/HOMELOANS/documents/circulars/26_19_5.pdf
Circular 26-29-5 VA-Guaranteed Cash-Out Refinancing Home Loans (AQ42)
With its December rulemaking, the VA bifurcated its prior definition of a cash-out refinancing loan in order to conform to the instructions in The Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act).
Therefore, the following definitions now apply:
(1) Interest Rate Reduction Refinancing Loan (IRRRL)
refinancing of an existing VA-guaranteed home loan at a lower interest rate
(2) TYPE I Cash-Out Refinance
refinancing in which the loan amount (including VA funding fee) does not exceed payoff amount
(3) TYPE II Cash-Out Refinance
refinancing in which the loan amount exceeds the payoff amount
Although the VA finalized the above definition for IRRRLs in its December interim final rule, a separate rulemaking will be issued to address the impact of the Act on the VA’s policies for IRRRLs.
Effective February 15, 2019, any VA-guaranteed cash-out refinancing loans, including a construction-to-perm loan, regardless of whether there is a change in the principal loan amount, must adhere to the following requirements:
Loan-to-Value (LTV)
The VA will no longer guaranty refinancing loans when the LTV exceeds 100 percent. Inclusion of any funding fee that is financed, in part or whole, cannot cause the loan to exceed the reasonable value of the property (value determined by the appraiser).
Net Tangible Benefit (NTB)
NTB standards apply to all cash-out refinancing loans and consist of the NTB test, Loan Comparison disclosure, and the Home Equity disclosure.
The NTB test is met if the new loan satisfies at least one of the following criteria:
1) eliminates mortgage insurance
2) loan term is less
3) interest rate is less (note, for loans which had an adjustable rate or was modified, use the current rate to determine if this requirement is met)
4) monthly (principal and interest) payment is less
5) the Veteran’s residual income is higher as result of new loan
6) the Veteran’s interim construction loan is paid off by new loan
7) LTV is equal to or less than 90% of the reasonable value of the home
8) the Veteran’s adjustable-rate mortgage is changed to a fixed-rate mortgage
Loan Comparison Disclosure
Lenders must generate two Loan Comparison disclosures, one within 3 business days of the initial application and one at loan closing. The borrower must certify receipt of both disclosures. Additional details regarding the acceptable methods of borrower certification are listed in the circular.
The initial 3-day disclosure must be reasonably accurate. Lenders are encouraged, but not required to continually update the disclosure as additional, and more accurate, information becomes available throughout the origination process. The final Loan Comparison disclosure provided at loan closing must be accurate with respect to the new loan information.
Home Equity Disclosure
Lender must also disclose the amount of home equity being removed from the home as the result of the refinancing twice. The initial disclosure is required within 3 days from initial date of the loan application, and a second disclosure is required at loan closing. As with the Loan Comparison disclosure, borrowers must certify their receipt of the Home Equity disclosure. The disclosure must explain why removal of home equity may affect the sale or refinance of the home in the future. And, while the initial disclosure may be generated using estimated loan payoff and property value amounts, the final payoff amount and reasonable value (shown on the Notice of Value) must be utilized for the disclosure at loan closing.
A sample disclosure which includes the required information for both the Loan Comparison and the Home Equity disclosure is provided as an exhibit to the circular. Exhibit A is available here: https://www.benefits.va.gov/homeloans/documents/circulars/26_19_5_exhibita.pdf
Loan Seasoning
To be considered seasoned, and thus eligible for the VA-guarantee, a cash-out refinancing must satisfy both of the following conditions:
1) first monthly payment of the loan being refinanced was made 210 days or more prior to the closing date of the refinancing loan; and
2) six monthly payments must have been made on the loan being refinanced
An additional requirement exists if the refinancing takes place within one year of the closing of the original loan: lenders must obtain a payment history /ledger from the servicing lender documenting all payments. The additional clarification regarding this point was included in the circular released on February 15, 2019, available here: https://benefits.va.gov/homeloans/documents/circulars/26_19_5_change1.pdf
Fee Recoupment
For TYPE I cash-out refinancing loans (new loan amount does not exceed payoff of the loan being refinanced) in which a VA-guaranteed home loan is being refinanced (VA-to-VA), lenders must certify the recoupment period of fees, expenses, and closing costs (included in the loan and paid outside of closing) do not exceed 36 months from the date of the loan closing. Escrow and prepaid expenses, as wells as homeowners association fees and VA allowable fees offset by lender credits and/or premium pricing, are excluded from the recoupment calculation. Additional details regarding the recoupment calculation are listed in the circular.
Impact on loans in pipeline as of February 15, 2019
For loan application taken prior to the effective date and submitted to an automated underwriting system before or after the effective date, and for which subsequent or final submissions result in a “Refer” recommendation, the loan must now undergo a manual underwrite.
Impact loan applications taken on or after February 15, 2019
VA cash-out refinancing loans resulting from applications received on or after the effective date that do not meet the requirements outlined above may be subject to indemnification or the removal of the guaranty. In addition, failure to provide the required initial disclosures to the Veteran within 3 business days from the initial application, and at closing may result indemnification of the loan up to 5 years.
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