[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
HOME LOAN CHURNING PRACTICES AND HOW VETERAN HOMEBUYERS ARE BEING
AFFECTED
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
of the
COMMITTEE ON VETERANS' AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
WEDNESDAY, JANUARY 10, 2018
__________
Serial No. 115-43
__________
Printed for the use of the Committee on Veterans' Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
________
U.S. GOVERNMENT PUBLISHING OFFICE
35-371 WASHINGTON: 2019
COMMITTEE ON VETERANS' AFFAIRS
DAVID P. ROE, Tennessee, Chairman
GUS M. BILIRAKIS, Florida, Vice- TIM WALZ, Minnesota, Ranking
Chairman Member
MIKE COFFMAN, Colorado MARK TAKANO, California
BRAD R. WENSTRUP, Ohio JULIA BROWNLEY, California
AMATA COLEMAN RADEWAGEN, American ANN M. KUSTER, New Hampshire
Samoa BETO O'ROURKE, Texas
MIKE BOST, Illinois KATHLEEN RICE, New York
BRUCE POLIQUIN, Maine J. LUIS CORREA, California
NEAL DUNN, Florida KILILI SABLAN, Northern Mariana
JODEY ARRINGTON, Texas Islands
JOHN RUTHERFORD, Florida ELIZABETH ESTY, Connecticut
CLAY HIGGINS, Louisiana SCOTT PETERS, California
JACK BERGMAN, Michigan
JIM BANKS, Indiana
JENNIFFER GONZALEZ-COLON, Puerto
Rico
Jon Towers, Staff Director
Ray Kelley, Democratic Staff Director
SUBCOMMITTEE ON ECONOMIC OPPORTUNITY
JODEY ARRINGTON, Texas, Chairman
GUS BILIRAKIS, Florida BETO O'ROURKE, Texas, Ranking
BRAD WENSTRUP, Ohio Member
JOHN RUTHERFORD, Florida MARK TAKANO, California
JIM BANKS, Indiana LUIS CORREA, California
KATHLEEN RICE, New York
Pursuant to clause 2(e)(4) of rule XI of the Rules of the House, public
hearing records of the Committee on Veterans' Affairs are also
published in electronic form. The printed hearing record remains the
official version. Because electronic submissions are used to prepare
both printed and electronic versions of the hearing record, the process
of converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
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Wednesday, January 10, 2018
Page
Home Loan Churning Practices And How Veteran Homebuyers Are Being
Affected....................................................... 1
OPENING STATEMENTS
Honorable Jodey Arrington, Chairman.............................. 1
Honorable Beto O'Rourke, Ranking Member.......................... 2
WITNESSES
Mr. Jeffrey London, Director, Loan Guaranty Service, Veterans
Benefits Administration, U.S. Department of Veterans Affairs... 3
Prepared Statement........................................... 26
Accompanied by:
Mr. John Bell, Deputy Director, Loan Guaranty Service,
Veterans Benefits Administration, U.S. Department of
Veterans Affairs
Mr. Michael R. Bright, Executive Vice President and Chief
Operating Officer, Government National Mortgage Association.... 5
Prepared Statement........................................... 29
Mr. J. David Motley, CMB, President, Colonial Savings, F.A., On
behalf of the Mortgage Bankers Association..................... 7
Prepared Statement........................................... 33
Mr. Brock Cooper, General Counsel, Veterans United Home Loans.... 8
Prepared Statement........................................... 36
QUESTIONS & ANSWERS FOR THE RECORD
Ginnie Mae....................................................... 39
HOME LOAN CHURNING PRACTICES AND HOW VETERAN HOMEBUYERS ARE BEING
AFFECTED
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Wednesday, January 10, 2018
Committee on Veterans' Affairs,
U. S. House of Representatives,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 10:02 a.m., in
Room 334, Cannon House Office Building, Hon. Jodey Arrington
[Chairman of the Subcommittee] presiding.
OPENING STATEMENT OF JODEY ARRINGTON, CHAIRMAN
Mr. Arrington. The Subcommittee will come to order.
Good morning, everyone, and welcome to today's Subcommittee
on Economic Opportunity and our oversight hearing entitled
``Home Loan Churning Practices and How Veteran Homebuyers are
Being Affected,'' and additionally, how taxpayers could be
affected. This is the second oversight hearing that we have
held this Congress related to VA's Loan Guaranty Program and
the benefits that are provided to our American servicemembers
and veterans on account of this program.
As Mr. London with the Department of Veterans Affairs
discusses in his testimony, VA has guaranteed over 23 million
loans in excessive of $2 trillion since the 1940s. That
represents millions of veterans, servicemembers, and their
families who may not have otherwise been able to achieve the
American Dream.
And while this program is one of the more well-run programs
at the VA--and I have some thoughts about why it is. Mainly
because they guarantee it. But the lenders are involved, and
they underwrite it, there are more people involved in
administering it in the private sector.
But they have recently had some concerns about certain
activities being conducted by some lenders, potentially
unscrupulous lenders, which have the potential for harmful
outcomes for veteran home buyers. But not only for the home
buyers, but for more the mortgage industry and for, again, the
taxpayer who in guaranteed programs like this are ultimately on
the hook.
We have seen reports of what may be deceptive practices
that seem to be, in some cases, misleading veterans to
refinance their homes with the idea that they will have lower
interest rates or be able to skip a mortgage payment or take
cash out of their homes that will, quote, unquote, save them
money down the road. And as our dads taught us, if something
sounds too good to be true, oftentimes it is too good to be
true.
So we have heard stories of individual veterans receiving
dozens, dozens of solicitations from certain lenders in the
immediate week after closing on their homes, leading some of
them to believe that they will pay less cash each month if they
just refinance their homes with these lenders. However, due to
the realities of hidden fees, adjustable interest rates, and
other products like that, the veteran can end up paying much
more than they ultimately can afford or even remove all their
equity in the home, such that they end up upside down on their
mortgage.
These practices are troubling. They don't seem to have the
best interests of the veteran in mind. They can have a negative
impact on financial institutions and the investors that support
them. And then, most disconcerting to me, they are depreciating
the value of the VA guaranteed loans and the integrity of the
program, and they are exposing--potentially exposing taxpayers
to greater risk.
I understand that many households do experience instances
where refinancing through an Interest Rate Reduction
Refinancing Loan, or an IRRRL, is necessary and appropriate for
their own financial circumstances. However, we must ensure that
there are appropriate standards in place to prevent unfair and
deceptive practices, number one; and, number two, that these
products are being offered consistent with safe and sound
practices to protect the integrity of the Home Loan Program.
I look forward to discussing these solutions with our
witnesses today to ensure that we are appropriately protecting
the veteran consumer, the integrity of the program, the
taxpayer, who, by the way, has agreed to make this investment
and be a guarantor for this program so that we can serve our
veterans in this way.
I again thank the witnesses for being here this morning,
and I look forward to your testimony.
And I now want to yield time to my friend, Ranking Member
Beto O'Rourke.
OPENING STATEMENT OF BETO O'ROURKE, RANKING MEMBER
Mr. O'Rourke. Mr. Chairman, thank you for helping to
organize this meeting, to your staff and the minority staff for
ensuring that we are prepared for it. I am looking forward to
hearing from those who are here today to testify and answer our
questions.
And as always, you have done such an excellent job of
describing the benefit of the program that we seek to enhance,
some of the challenges that face that program right now, and
specifically the veterans for whom it is set up and
administered and intended to benefit.
And as we have often done in this Subcommittee, which I
think really distinguishes it from so much of the other work in
Congress, I would love to see us, perhaps by the end of this
meeting, suggest some commonsense solutions that the VA could
either adopt administratively or that we will work on as,
literally, an act of Congress, if necessary. I think that is
something that we have been able to do in many of our meetings
together with the participation of the Members, input from VSOs
and veterans, and the wisdom that we gain from the panel here.
And so I have come in with some ideas. I want to listen to
yours. I want to hear what the experts have to say. And then,
perhaps, in summary at the end of this, we could hopefully get
on the same page about how we could correct this in a way that
is not burdensome or onerous but protects veterans from fraud
or duplicity or decisions that they may not be making in an
informed way.
So I am looking forward to the conversation and grateful
that you brought us all together today on this important issue.
And with that, I will yield back.
Mr. Arrington. Thank you, Ranking Member O'Rourke. And I
share your sentiments and the desired outcome to find out where
the problem lies and what tools the folks here, the
stakeholders need to solve the problem, and then move forward
with just a better environment altogether for our veterans and
taxpayers.
So with that, let's make introductions of those who are
here to testify with us.
We have Mr. Jeffrey London, Director of VA's Loan Guaranty
Service. And he is accompanied by Mr. John Bell, Deputy
Director of VA's Loan Guaranty Service.
Mr. Michael Bright, Executive Vice President, Chief
Operating Officer of the Government National Mortgage
Association, better known as Ginnie Mae.
Glad to have you here with us.
Mr. J. David Motley, President of Colonial Savings, who is
testifying on behalf of the Mortgage Bankers Association, an
important stakeholder, no doubt, in this discussion.
And finally, Mr. Brock Cooper, General Counsel for Veterans
United Home Loans.
Thanks, everybody, for being here, and certainly look
forward to hearing from you.
Let's start with Mr. London. You have 5 minutes for your
opening statement.
STATEMENT OF JEFFREY LONDON
Mr. London. Good morning, Chairman Arrington, Ranking
Member O'Rourke, and other Members of the Subcommittee. Thank
you for the opportunity to appear before you today to discuss
the Department of Veterans Affairs Home Loan Guaranty Program
and the issue of serial refinancing and the impact it can have
on veteran borrowers.
Making sure refinance loans provide veterans with a benefit
and not future financial harm is a very important matter. No
one is helped when a refinance loan ends in a foreclosure.
It is also very important to ensure that VA loans
facilitate healthy mortgage-backed securities and continue
investment in our Nation's housing market.
Today I am pleased to share with you our assessment of the
situation, the activities to assist veterans that we have
undertaken in collaboration with our colleagues thus far, and a
sensible, impactful approach we have crafted to ensure program
success.
First, I would like to give a sense of the scope and nature
of the situation in our program. The vast majority of
refinanced loans are providing veterans with benefits. For
example, one disabled veteran living on Social Security income
and VA disability was able to reduce the interest rate and
change terms to save over $500 a month. Another veteran who was
a police officer with two children was able to reduce the
interest rate and save over $400 a month.
Data from the last 2 fiscal years also show positive
trends. Not only did the number of veterans who obtained two or
more streamlined refinances in a given fiscal year decline
significantly, approximately 80 percent year over year, the
number of lenders engaging in notable habitual refinancing also
declined from approximately a dozen in fiscal year 2016 down to
only a handful in fiscal year 2017.
So, yes, there have been instances of lenders not using the
streamlined refinance program for its intended purpose.
Although we believe those instances are not indicative of a
systematic problem, VA's steadily high loan volume reverberates
to Ginnie Mae's investors. And, of course, one veteran being
misled or taken advantage of is one veteran too many. So we are
compelled to act and make an impactful change.
Our program's success is built on a longstanding history of
employing policy actions that are appropriate for the given
situation. We take measured approaches to policy interventions
and complex situations.
A regulation has been drafted with due care. Our
overarching concern in developing the rule was to ensure that
our veteran borrowers receive a net tangible benefit.
In addition to analyzing seasoning requirements appropriate
for streamlined and regular/cash-out refinance loans, we
examined the long-term cost veteran borrowers could face in
obtaining them. Meanwhile, we also collaborated with our
colleagues at Ginnie Mae and the Consumer Financial Protection
Bureau to employ non-regulatory actions that could quickly
serve veterans, taxpayers in general, and mortgage investors
alike.
The VA team has focused a great amount of time and energy
in working with Ginnie Mae in a joint task force which has
resulted in two all-purpose memorandums aimed at the frequency
of refinance loans. We collaborated with the CFPB on a warning
order which provided veterans with important consumer and
financial information to consider when deciding whether to
refinance an existing mortgage. We have held a number of
meetings with the Mortgage Bankers Association and their
members to discuss program policy and data as they relate to
the underwriting, origination, and performance of VA guaranteed
loans.
As the draft regulation makes its way to publication for
comment, we have turned that eye to examining the impacts that
recent market conditions may have on other segments of our
business, more particularly, the Regular/Cash-out refinance
program. We anticipate that, in response to market conditions,
lenders will shift their business models to originating more
purchase loans or more regular/cash-out refinance loans.
As a result, we will be keeping a close eye on trends in
these programs to ensure they are being stringently
underwritten to our established standards and the loans provide
the intended benefit to our veteran borrowers.
Members, despite the concern that others may have expressed
about the heading we have followed and the speed at which we
have traveled, I am confident that the road we have engineered
is a sensible one and that it will have a net positive impact
for our veterans, for lenders, and for the broader origination
and secondary markets.
Thank you again for the opportunity to speak to you today.
And as always, I thank you for your unwavering commitment to
serving our Nation's veterans and servicemembers. I look
forward to entertaining any questions you may have.
[The prepared statement of Jeffrey London appears in the
Appendix]
Mr. Arrington. Thank you, Mr. London.
Now, from Ginnie Mae, Mr. Michael Bright. We yield 5
minutes for your introductory statement.
STATEMENT OF MICHAEL R. BRIGHT
Mr. Bright. Chairman Arrington, Ranking Member O'Rourke,
and Members of the Subcommittee, good morning, and thank you
for inviting me here today.
My name is Michael Bright, and I am the executive vice
president and chief operating officer of the Government
National Mortgage Association, or Ginnie Mae. I thank you very
much for inviting me here to testify on this critical issue.
For background, Ginnie Mae is a Federal agency, chartered
by Congress in 1968, responsible for providing liquidity to the
market for mortgages in the Veterans Affairs, Federal Housing
Administration, and USDA rural housing programs. We do this by
applying a full faith and credit government guarantee to loans
that qualify for delivery into our security.
Qualifying loans are those guaranteed by the USDA, VA, and
FHA under their respective program guides. These loans are then
pulled into our mortgage-backed securities, or MBS.
The Ginnie Mae guarantee and the Ginnie Mae brand is
globally recognized and trusted. The strong value of our brand
leads to investment in the U.S. housing market from large asset
managers, pension funds, and central banks across the globe,
all of which makes lending to low-income, first-time, rural,
and veteran borrowers possible.
It would be very difficult for me to overstate the
consequences for the U.S. housing market if Ginnie Mae and our
partner Federal agencies, the USDA, VA, and FHA, did not
successfully police our programs. Global capital is drawn to
our market in part because of the strength of the United States
and its credit worthiness. But if our program is abused or
taken advantage of, this capital can and will find other
investment vehicles. That would drive up interest rates and
make mortgage credit less available for millions of Americans.
As such, it is imperative that we all work together, those
of us here on this panel as well as Congress, to solve the
issue we are here to discuss today.
We believe we are seeing abusive practices by some lenders
in the VA program, namely the rapid refinancing of borrowers
multiple times without significant economic benefit. We
believe, and our data shows, that this practice is the result
of a relatively small percentage of lenders. But, importantly,
it has become endemic enough in the market that it threatens
the health of our security, and so action to curb this behavior
is imperative.
Abusive lending practices in the VA market are alarming on
so many levels. First, as I mentioned before, if this behavior
persists, we run the risk of losing the capital needed to fund
critically important home ownership programs.
Second, to watch behavior that is borderline predatory in
nature return to our country is terrifying. Much of this
behavior is too reminiscent of the lending practices used by
many in the industry prior to the 2008 financial crisis. And
finally, the fact that this behavior is targeted at veterans
should be sickening to all of us.
The best way to stop this behavior is to put in place more
stringent rules and to say that it will not be tolerated.
For Ginnie Mae's part, we have already announced that we
are putting in place the following new requirements.
One, no loan can be refinanced and delivered into a Ginnie
Mae multi-issuer security within 6 months of the first payment
due date of the original loan.
Two, no loan that is more than 150 basis points or 1.5
percentage points above what we define as par will be eligible
for delivery into a Ginnie Mae multi-issuer security.
And, three, lenders who are clearly and demonstrably
abusing our program will be put on notice.
Ultimately, under forthcoming rules, some pools will no
longer enjoy the benefits of delivery into our flagship
security and instead will be forced into what we call custom
pools. This is a powerful tool that Ginnie Mae can and will
use.
Let me repeat: Issuers who produce pools of loans that
perform materially different than our average will need to find
their own investors. This action will help prevent the bad
actions of some issuers from filtering into poor security
pricing for those who use our program in a responsible manner.
I believe that 2018 will be a critical year for this issue.
If we cannot get a handle on this behavior, abusive lending
will continue to infect our market and our program. That could
drive away important sources of capital and may create an
environment where veterans are viewed as suitable prey for
aggressive lending.
I would like to take a moment and also say to veterans that
you have the right to make unwanted calls or solicitation stop.
Refinancing your loan multiple times likely has consequences
that you may not be aware of. And if you see terms on a loan
that appear too good to be true, they probably are. Veterans
should feel free to contact me or any other official at Ginnie
Mae at any time if they feel they are being harmed.
In conclusion, let me thank you all once again for bringing
attention to this issue. At Ginnie ae, we are here to work with
all of you in doing everything that is needed to root out
abusive behavior from this important loan program.
Thank you, and I am happy to answer any questions that you
have.
[The prepared statement of Michael R. Bright appears in the
Appendix]
Mr. Arrington. Thank you, Mr. Bright.
Mr. Motley, you now have 5 minutes.
STATEMENT OF J. DAVID MOTLEY
Mr. Motley. Thank you.
Chairman Arrington, Ranking Member O'Rourke, and Members of
the Subcommittee, I appreciate the opportunity to testify this
morning on behalf of the Mortgage Bankers Association.
My name is Dave Motley, and I am president of Colonial
Savings, a privately held, federally charted thrift
headquartered in Fort Worth, Texas.
For over 65 years, we have been originating loans for
veterans. In fact, our founder, a veteran himself, saw the
opportunity to serve veterans returning from World War II.
Today, roughly 10 percent of our origination volume is to
veterans, and we service over 6,000 loans for VA borrowers.
I am also Chairman this year of the MBA. I am a certified
mortgage banker, and I previously served as a board member of
the Texas MBA and a member of the Community Bank Advisory
Council for the Consumer Financial Protection Bureau.
I would like to begin by applauding this Subcommittee for
its efforts to better understand problematic practices with
respect to certain mortgage refinances marketed to
servicemembers and veterans of the U.S. military. The VA's
mortgage loan program plays an important role in increasing the
availability of mortgage credit for servicemembers, veterans,
and surviving spouses. By guaranteeing a portion of the loan
balance, the VA enables lenders to offer loans with more
favorable terms, such as no required down payment.
While those borrowers seeking to refinance their VA loan
may apply and be evaluated by their lender's full underwriting
process, the VA Interest Rate Reduction Refinance Loan, IRRRLs,
allows for a streamline refinance process that is often faster
and entails lower costs.
Generally, refinancing with an IRRRL allows the borrower to
lower the interest rate on the mortgage. And in doing so, the
borrower incurs fees from the lender which are either paid by
the borrower at origination or rolled into the principal
balance of the new loan.
Recently a small number of lenders have undertaken
aggressive and potentially misleading advertising campaigns to
generate increased IRRRL volumes and fees. In some cases, this
advertising targets VA borrowers who have just recently engaged
in an IRRRL, convincing them to refinance yet again to lower
their interest rate by a modest amount while adding even more
fees to the principal balance on the loan.
Such serial refinance refinancing, or churning, strips
borrowers' equity and often further extends the time period it
takes for the cost to be recouped through lower payments. Some
lenders also use the IRRRL to lower the rate, but only by
moving the veteran from a 30-year fixed rate to a 3-year
adjustable rate mortgage.
Many borrowers may not fully comprehend the net economic
impact of their decision to refinance, leaving them vulnerable
to situations in which they add substantial amounts to their
overall loan balance while achieving only small reductions in
their monthly payments. This is not what the program was
intended to do, and these practices should be put to an end.
Aggressive use of IRRRLs by some lenders also threatens to
weaken investor demand for Ginnie Mae securities that are
partially backed by VA loans. This outcome increases costs and
negatively impacts access to credit for a wide range of
borrowers.
It is worth noting that IRRRL churning is not a widespread
problem among the mortgage lending community, but rather an
activity that is confined to a small subset of lenders. MBA
fully supports supervisory efforts to improve the policing of
the market as well as new rules to remove the ability or
incentive for any lenders to engage in churning.
We applaud Ginnie Mae for taking important steps to both
study and address this issue. However, the problem of loan
churning cannot be solved by Ginnie Mae alone.
Fortunately, many practical options fall within the
existing authority of VA to implement. For example, instituting
a maximum recoupment period would inhibit lenders from charging
substantial fees in exchange for minor reductions in mortgage
interest rates.
Similarly, requiring a net tangible benefit test, which is
already required for FHA streamline refinances, could more
effectively ensure that the terms of the refinance produce real
benefits for borrowers. Limits on the amounts that can be added
to the principal balance would reduce equity stripping. And
finally, targeted consumer financial education about churning
can better inform borrowers about the potential for abuse.
It is important to focus on options that target churning
while not impeding the ability of servicemembers and veterans
to obtain a beneficial refinancing. We recognize that the VA
program is a unique program: an entitlement program for
veterans who have served our country. As such, while we support
quick action to limit abuses, it needs to be done thoughtfully
to ensure that legitimate low-cost refinancing options for
veterans are retained.
MBA is committed to the promotion of best practices and
standards that generate a healthy and responsible mortgage
market, and we stand ready to assist in developing and
implementing solutions to the problems we have discussed today.
[The prepared statement of R. David Motley appears in the
Appendix]
Mr. Arrington. Thank you, Mr. Motley.
I yield 5 minutes now to Mr. Cooper for his opening
remarks.
STATEMENT OF BROCK COOPER
Mr. Cooper. Good morning, Chairman Arrington, Ranking
Member O'Rourke, and other Members of the Committee. My name is
Brock Cooper, and I am general counsel of Veterans United Home
Loans. I would also like to thank the rest of the Members of
the panel for being here today to address this issue.
Thank you for allowing me the opportunity to come here
before you today to discuss lending practices that impact our
Nation's servicemembers and veterans.
I have worked for Veterans United for nearly 10 years and
have headed VU's legal department for that entire time. I am a
veteran myself and have used the VA loan several times,
including an IRRRL. I have a VA loan today, and I have seen
firsthand the aggressive and misleading refinance practices
employed by some in the industry.
Veterans United is a full-service family-owned lender. We
are headquartered in Columbia, Missouri, and we make VA loans
in all 50 States and the District of Columbia.
Our primary mission is helping veterans, servicemembers,
and their families achieve the American Dream of home
ownership. We have been the Nation's number one VA purchase
lender the past 2 years, closing more than 37,000 purchase
loans in 2017. Veterans United now represents approximately one
out of every seven VA purchase loans made in the country among
the top 100 VA purchase lenders.
If I could impress one thing upon you today, it is that the
VA loan is not like other mortgages. It differs from FHA loans
and all other mortgage programs because it is an earned service
benefit to our veterans and our Active Duty personnel and
surviving spouses. It is part of a deep bond between those who
serve and the Nation these veterans pledged to defend.
As we work to find solutions to the issues discussed here
today, I implore the Committee to examine whether or not
particular solutions may result in fewer earned benefits for
veterans.
The VA loan program stands out as a true success story.
Before the mortgage crisis, the VA loan was a little-used
product. But due to unique underwriting, VA loans were the only
shining light through the mortgage crisis, performing better
than any other program.
Today, VA loans represent about 10 percent of the mortgage
market. The program has featured the lowest average interest
rates for more than 3 years, along with the lowest foreclosure
rates for about 10 years. In particular, the IRRRL program has
helped hundreds of thousands of veterans save money in their
monthly mortgage payments.
Unfortunately, as the Members of the panel stated before,
some IRRRLs fail to live up to the spirit and intent of this
program. The idea behind the IRRRL is to put veterans in a
better financial position today than they were yesterday. We
are here today to discuss improvements to this program that
will ensure this spirit is carried out in every IRRRL.
We have seen many, many veterans harmed by this activity.
And in many situations, the veteran is left so far underwater,
they may have difficulty selling their home in the future.
Still others are left with adjustable rate loans that they
don't understand and could result in higher payments down the
road. And others have costs that could just never be recouped.
We commend the VA and Ginnie Mae for their active
engagement on this issue, and we salute their commitment to
protecting veterans.
We are here to talk about next steps. Going forward, the VA
is in the best position to solve this issue without
compromising veterans' benefits. However, the VA inhibited from
moving with solutions due to administrative requirements that
are part of the VA program.
Unlike VA, other agencies, such as Ginnie Mae, Fannie Mae,
Freddie Mac, and FHA, can make changes more quickly. We support
legislation that would empower the VA to make program changes
in a similarly expeditious manner, potentially including
seasoning and recoupment periods for IRRRLs. Additionally,
policymakers should ensure that non-cost-saving reasons are
considered through the process to protect benefits of our
deserving veterans.
Thank you again, Mr. Chairman and Ranking Member and the
Committee, for allowing me to come before you today, and I look
forward to questions.
[The prepared statement of Brock Cooper appears in the
Appendix]
Mr. Arrington. Thank you, Mr. Cooper.
I now recognize and yield myself 5 minutes. I may have to
leave early. I would rather yield to my colleagues, but in the
event I have to leave, I wanted to go ahead and put my thoughts
out there and ask you guys some questions.
I spent 4 years as a regulator here in Washington during
the Bush administration, George W, at the FDIC, and my
philosophical view of regulation is that the best way to
regulate in a private market is to have full transparency and
robust competition so that people know what they are getting
and they have choices.
Because, presumably, if people are buying things, if they
are choosing to enter into these transactions, there must be a
need. There is no market if there is no need. And I think that
Mr. Motley would understand that being in the industry.
But this isn't a private market. This is a government
market. Explain that to me more, Mr. Bright, explain the
difference between the sort of light touch, limited
intervention with the sort of transparent, robust competition
that free marketeers like me believe in and rely on as the best
way to weed out the riffraff. Now we got a government market.
What is different about it? What is skewed in that dynamic?
Mr. Bright. Yes, sir. Thank you for the question.
It is true that in the mortgage finance base, in particular
in FHA, VA, and USDA lending, the term ``market'' we use a
little bit loosely, because you have originators who are
originating a loan and they are purchasing government insurance
on that loan, in this case, in terms of the VA, and then they
are purchasing another form of government insurance to wrap the
mortgage-backed securities. So you have actually two taxpayer
layers of involvement to ensure that there is no credit risk at
the end product.
Mr. Arrington. So the full faith and credit of the United
States Government is now brought to bear in this.
Mr. Bright. Absolutely.
Mr. Arrington. We created this market with the full faith
and credit of the taxpayer backing up not just once with the
guarantee--
Mr. Bright. Yes.
Mr. Arrington [continued].--from the VA program but--
Mr. Bright. Twice.
Mr. Arrington.--with Ginnie Mae.
Mr. Bright. Yes. So, absolutely, a policy decision was made
that we want to as a country make sure that, in this case
veterans, but in the FHA's case low-income Americans, have
access to loans on terms that they otherwise would not have. In
order for that to be successful, we have to police our program.
So we have created, as you say, a double-layered government
market.
Mr. Arrington. So in the absence of robust market forces,
we have to play a greater role to protect those stakeholders,
but namely the veteran and the taxpayer as the backstop here.
So I am curious, is this an issue of safety and soundness
for the program, for the taxpayer ultimately, or is this an
issue of consumer protection or what we might refer to as an
unfair and deceptive practice?
So let me ask Mr. Cooper, are they disclosing, these folks
that we are talking about as churners, are they disclosing that
they are churning? Are they disclosing everything that they are
going to do? Or are they being deceptive and unfair, in your
opinion?
Mr. Cooper. Thank you.
I personally don't know if these things are deceptive
initially. But I can tell you that we see disclosures that come
through that don't put the veteran in a better financial
position. So they may be disclosing it, but we feel like that
they are being pressured to make these loans in certain
situations.
Mr. Arrington. So here is my problem with that. And, I
mean, I feel like our veterans are some of the toughest,
mentally strong, mentally competent, mature, wise. These folks
have borne tremendous responsibility. And now all of a sudden,
if somebody is disclosing things to them, I have a hard time
believing that they are being necessarily taken advantage of.
They may, but I struggle with that.
Now, if they are being deceived and folks are putting out,
holding out to do one thing, and then they are doing another,
that is a problem. And if you can't stop that at the VA and
Ginnie Mae, let's figure out how we can have an act of Congress
to do that. But to suggest that they can't fend for themselves
when reading about what they are getting into, I struggle with
that.
My last question, then I am going to yield to my colleagues
that is on the consumer protection side. So if there is not the
disclosure, if there is not transparency, we need to know that
and if you don't have the tools to deal with that.
The other issue is the safety and soundness. So whether
they are disclosed fully and they are completely transparent or
not and know what they are getting into or not, if it puts
greater risk to Ginnie Mae and to the VA and the taxpayer, that
is a real problem for me regardless.
So would the panel just kind of opine on that? I would ask
Mr. London and Mr. Bright to just make some comments on that.
And then I am going to yield to the Ranking Member for his
remarks. And thanks for being a little generous here on my
time.
Mr. London. Yes, Mr. Chairman. Thank you for the
opportunity to respond to your question.
Mr. Arrington. And, by the way, if you want to also comment
on what I said about the veteran reading and understanding
versus deceptive, I think there is a real difference there. So
feel free to opine on any of what I said.
Mr. London. Sure. And I have to start by saying, like, you
spent 4 years at the FDIC. Four or 5 years of my time with the
VA was in oversight and compliance. So I share your sentiments
about making sure that there is safety and soundness in a
program. That is just built in my DNA.
And if you look at the outcomes that our program has, the
numbers do not lie. The VA program is a sound program. Mr.
Cooper mentioned that for the last 10 years we have had the
lowest foreclosure rate and the lowest series delinquency rate.
That is an indicator of the safety and soundness of our
program.
And as I mentioned in my opening statement, the actions
that we have taken over the years to ensure that we continue to
have those type of performances is exactly what we need to do
for the issues that are brought out today.
So I do believe that VA has the statutory authority to
address the issues. I agree with you about consumer education.
And our veterans can make sound decisions on their own. It is
our job in the VA to make sure that we give them the tools to
make those decisions.
Mr. Bright. I agree. I would add it is entirely true that
the VA loan program has low delinquencies, and I think that is
a testament to the VA, I think it is a testament to the deal
that officers and enlisted folks make with themselves when they
apply for this program. There is a very strong sense that,
``Hey, this is an earned benefit, but we have to continue to
earn this benefit by performing on our loan,'' and that is a
great pact. The problem is we have some lenders who don't seem
to be living up to that pact as well.
Absolutely this type of behavior puts taxpayers at risk in
a couple of very concrete ways. The first is that at Ginnie Mae
we wrap the mortgage-backed security. Our recourse, meaning if
a lender fails to remit principal and interest on time, we have
to make that payment for them. Whether the borrower makes it or
not, if a lender fails to make on time, we have to make that
for them. That is what our guarantee is.
Our asset, the asset that we have recourse to, and you, as
a former chief of staff of the FDIC understand you go in and
you pull out an asset in the case that an institution fails to
live up to its obligations, our asset is the MSR, the mortgage
servicing rate.
When we have prepayment speeds that are inexplicable by any
economic measure whatsoever, what that does is that drives down
the value of the mortgage servicing rate or the MSR, which
means the collateral that the taxpayer has, has access to and
has recourse to in the event that our counterparty fails to
live up to their obligations, that asset is declining rapidly
in value because we have issuers who have prepayment speeds
where their entire book turns over in 6 months.
And so it is a technical issue, and I don't mean to get too
weedy on it. But absolutely 100 percent the asset that Ginnie
Mae has recourse to falls in value because of this behavior.
And then the final small point would be, if you have
lenders who are solely in the refi business and that goes away,
those lenders face insolvency. And when they go insolvent, that
is when Ginnie Mae's wrap kicks in, and we have to go in there
and take their book. And as I just explained, the asset that we
are taking has just fallen in value.
So this is a full ecosystem degeneration thing that we have
got going that is separate and apart from the veterans who are
doing a very admirable job of paying their loans on time.
Mr. Arrington. I yield now 5 minutes, as much time as you
may need, actually, to ask any questions and make any comments,
Ranking Member O'Rourke.
Mr. O'Rourke. Yeah. I thank the Chairman and take his point
about ensuring that there is transparency and adequate
information for the consumer, in this case the veteran, to make
an informed decision.
As someone who has purchased a home with my wife, and I am
not a veteran nor is she, and we have refinanced our home, I do
have to say you are battling a mountain of that transparency
and information. And I would be lying to you if I told you that
I read every single page that I signed. I didn't. We trusted
those who had helped us to facilitate the sale and the
mortgage.
And so when you pit the veteran against those who would
practice churning, serial refinancing, abusive lending, and
they have got their marketing teams, they have got the folks in
the call rooms who are calling these veterans within days,
maybe hours, after they have already refinanced a loan, I think
we need to do more than just ensuring that they have
information.
And I wonder if there is a way to prioritize this
information. And, Kathy, if you don't mind, I will disclose you
and I were talking about this yesterday and talking about
whether--there is just one page with four bullets on it in 16-
point type that says this is your principal right now, this
will be your principal with the refinancing costs that you will
incur if you move forward in this process. This is the
consequence.
I mean, no more than those four, not in 9-point type, not
in addition to everything else, especially if this is your
second or third or fourth refinancing, here is how your
principal has grown over that time.
And then if you want to make that very bluntly informed
decision to proceed, so be it. You have assumed the risk with
the taxpayer backing that up.
And so I wonder if that might make it a little bit more of
a fairer engagement between the veteran borrower and the
originator of the mortgage.
Mr. Motley, you said the net economic impact, which is what
I am trying to get at, may not be understood by the borrower,
and you said perhaps some more targeted consumer information.
Are we getting at the same thing in terms of this prioritizing?
Like, look, this is what you are about to take on. I want to
make sure you are good with it because it may not be clear from
what the person trying to sell you on this originally told you.
Mr. Motley. Yeah. Thank you, Congressman.
I think we are moving in the right--in the same direction
there. I believe that some sort of a net tangible benefit test
that is shown to the veteran is the way to go, because it is
going to show him what the actual costs associated with that
new refinance are going to be against the timeframe it is going
to take to recoup those costs through lower payments.
And so if that time horizon is outside of his time horizon,
then that deal makes no sense for that veteran. It is a
decision, though, that he can make or she can make.
So I think that there is definitely a need to establish
some kind of a net tangible benefit test, similar to what the
FHA has, to demonstrate to the borrower that this refinancing
makes some sense.
And if we have that in place, then you either abide by it
or you don't abide by it. And if you don't abide by it, then
you, as the lender, are subject to sanctions or maybe getting
out of the program.
But at least you have provided that disclosure to the
borrower and he has been able to make that decision himself
based on his circumstances, his terms, and his expected term of
living in that house.
Mr. O'Rourke. Yeah. And so Mr. Motley is talking about
consequences to bad actors in the system.
Mr. London, can you talk a little bit about that and how we
hold people accountable for churning and taking advantage of
veterans who may not be told in the clearest or necessary terms
just what they are taking on?
Mr. London. Sure. Before I answer that question
specifically, I do want to touch base on what you were talking
about, about the disclosure, and share some good news with you.
Mr. O'Rourke. Great.
Mr. London. Today in our program we have a requirement that
lenders do exactly what you described. We call that the IRRRL
worksheet where, on the company's letterhead, they have to
disclose the terms of the loan to include the recoupment of
that new transaction. So we do that today.
Unfortunately, what happens is the veteran gets that at the
closing table, like you described, with a mountain of paperwork
that they don't read.
Mr. O'Rourke. Right.
Mr. London. So a decision that I have already made is to
ensure that that disclosure is provided up front to the
veteran. VA will also get a copy the same time the veteran gets
a copy so that we can be that partner with the veteran, if he
or she has questions about those terms that we can advise him
or her, and they can make their own informed decision.
That is something I can do today administratively without
any regulation or statutory changes.
Mr. O'Rourke. When does that start?
Mr. London. We have to make some system changes. And,
obviously, we have to put out some guidance to lenders on what
information we need to make that happen. And my goal is to have
that happen this year, this calendar year.
Mr. O'Rourke. Okay. It seems like--again, you know this far
better than I do--seems like a relatively easy fix to make.
And, first of all, thank you for doing it. And I love that it
wouldn't require an act of Congress to get that done. So first
and foremost, thank you.
Secondary, the sooner the better, obviously, right?
Mr. London. Absolutely.
Mr. O'Rourke. And we would love to be kept appraised of
your progress on that. And maybe just to the staff, if we could
have something that triggers a request to see what the progress
made on this is within the next few months, I think that would
be helpful.
And then lastly, again, and sorry to be so specific on
this, but the larger that information is made and the less
surrounding information within which it is buried, the better
chance that the consumer is going to understand exactly what
those consequences are.
But I love the idea that you are going to move this up to
the front of the process. And I think, to the Chairman's point,
you are going to have a much more informed, much more
transparent transaction. So I think that is good news.
I am going to yield back to the Chairman, but I do hope
that in the questions from the other Members we get to hear
from Mr. Cooper. He said that he had some specific program
changes in mind, and I would love to know what those are as
well.
But thank you, Mr. London.
Mr. Arrington. Great line of questions. And now we will
yield 5 minutes to Mr. Banks for any questions he has.
Mr. Banks. Thank you, Mr. Chairman.
Mr. London, my wife and I's experience with our VA loan has
been tremendous, and we appreciate the service that we have
received through the process as we have taken advantage of that
opportunity for us as a family.
But I wonder, could you tell us what level of attention
have some of these problems been raised to the higher levels of
your organization's leadership? Has Secretary Shulkin been
briefed? Is he well aware of these issues? Is he in tune with
your strategies to combat them?
Mr. London. Absolutely. And myself, along with the
actingacting undersecretary, have spoken to the Secretary about
this very issue, so he is personally aware. Also, our deputy
secretary is well versed on this issue and, in fact, couple
weeks ago met with Mr. Bright and others to discuss this issue.
So this issue has the attention at the highest levels of VA,
and they are extremely supportive of what we are doing.
Mr. Banks. Very good. I appreciate Secretary Shulkin's
leadership more and more every day. And that testament of his
interest in issues like these is a great compliment even more
so of his leadership.
Mr. Cooper, I wonder if you could talk about your company's
ethics, how you arrived at a place to be an ethical company,
not to take advantage of some of these predatory examples we
have heard about in the testimony.
Mr. Cooper. Sure. Thank you, Mr. Banks. That is a great
question.
We, as a company, are based on a set of values that we
worked really hard on as a group, as all of our employees, to
set how we wanted to act as a company. And we carry that out
every day. And it is something that we believe strongly in.
And we came up with a mission as well, that we want to help
get veterans into homes, and we are very focused on that. We
offer IRRRL refinances. We offer traditional cash-out
refinances.
But our marketing practices don't focus on bringing those
people right after closing to churn through them. And that is
just something we felt is always in the best interest of--we
are looking out for the best interest of the veteran in what we
are doing, we feel like, is we want to educate veterans on the
VA loan and how they can best make use of the program.
Mr. Banks. Have you seen a decline in those values among
your competitors during your time in the industry?
Mr. Cooper. I wouldn't say that I have seen a decline. I
think the other Members of the panel have said that there are a
few actors out there, and this is not something really new. It
just becomes more prevalent when certain market factors change,
interest rates tick up slightly or tick back down. It is very
interest-rate dependent.
Mr. Banks. So what would be your advice to us how do we
model those ethics and values that your company has taken so
seriously in your business in hopes that other companies will
adopt those values as well?
Mr. Cooper. I mean, I think that in and of itself is very
difficult from a congressional standpoint to model. I like what
the Chairman has said about the veteran being able to make
decisions for themselves. I like the idea of disclosures, being
as transparent as we can be. There is always room for
improvement in that area.
I really like what Mr. London was saying about the VA being
able to step in. They have been very successful with that kind
of process on early intervention for servicing. And so if they
implement a similar process there, I think that can be very
helpful to kind of rein this activity in.
Mr. Banks. Okay. Thank you. You give me great hope that
other companies will emulate the same values and principles
that your company does as well. And at the very least, our
hearing today will publicize that, give a public hearing to
those thoughts, and hopefully some of your competitors will
raise that threshold as well.
So thank you very much, Mr. Chairman. I yield back.
Mr. Arrington. Thank you, Mr. Banks.
I now yield 5 minutes to the gentleman from California, Mr.
Takano.
Mr. Takano. Thank you, Chairman Arrington.
Chairman Arrington, I just want to express my gratitude for
this hearing. I am impressed that you are focusing on an area
of consumer protection and that you have made this distinction
between an absolute free marketplace and a government
marketplace and that the government marketplace is defined by
money that is backed by the taxpayers or subsidized by the
taxpayers.
And, therefore, the question of the veteran being able to
make a complete decision all by himself is a bit modified here,
because that veteran is not making a decision that only solely
affects his or her assets. It is also the assets of the
taxpayer that are at stake.
So we have a duty to make sure that the program is set up
properly and that there isn't--I am forgetting the term when
there is a moral liability, that there is a lack of--a moral
hazard. There is a moral hazard here because the risk has been
reduced greatly on the person benefiting from the decision.
I hope, Mr. Chairman, we can hold some hearings into
another area where I think the government marketplace
distinction applies, and that is in our educational benefits. I
am disturbed that in another Committee forum there is a
proposal to do completely away with 90/10 and allow educational
institutions to take 100 percent, 100 percent of the revenue
from the Federal Government, including federally backed student
loans. So I hope we can delve into that area.
But I want to ask this question of--I can't see the name
back there, but the guy at the end.
Mr. Cooper, as we approach the situation, I want to be
careful that any action we take does not have any unforeseen
consequences. And one proposal that has been discussed is
capping lender fees and tying the cap to the benefit of the
loan for the veteran so that the lender would not be able to
collect fees in excess of what the veteran saves over a period
of time.
Now, would such a proposal or others like it, to cap
origination fees, somehow help this problem of loan churning,
or do you think that as long as there are any fees permitted,
lenders will still seek to churn?
Mr. Cooper. Thank you for the question.
I believe personally that there are already restrictions in
place in the amount of fees that can be charged. The difficulty
becomes when you are buying down the interest rate in the form
of discount points that can then be rolled into the loan, those
things become another disclosure issue. It is how far down did
your rate go when you purchased these points, so to speak.
And so I think it does fall in line with the other pieces
that we have talked about already, is that there may be other
ways to handle it. I don't know specifics of what the caps
might look like in addition to what is already there. But it
could be one solution.
Mr. Takano. Mr. London, have there been financial service
organizations that have been fined by the VA for predatory
behavior? Is there an ability to do that? And have they been
fined at all?
Mr. London. We do have some ability. We have civil
penalties that we can apply. But that is in reference to
lenders who actually try to defraud the veteran or to mislead
the government through forgery, so it is very specific.
Mr. Takano. Very specific.
Mr. London. Yes.
Mr. Takano. But does Ginnie Mae--can someone answer about
Ginnie Mae being able to have this capacity in this, an
analogous circumstance?
Mr. Bright. We do have a decent amount of authority at
Ginnie Mae in terms of policing access to our security. And
that is authority that we have been using and are going to
continue in the next weeks to expand.
Mr. Takano. Can you tell me whether or not you have
actually fined companies for this analogous--
Mr. Bright. We have. We have fined companies for violation
of our program in this space, yes.
Mr. Takano. And do you publish the names of those companies
that you have fined?
Mr. Bright. No.
Mr. Takano. Why not?
Mr. Bright. I don't know, but I will find out. And I am
happy to speak with you offline with that specific information.
Mr. Takano. Mr. London, would this sort of authority be
useful to the VA if we were able to provide that authority?
Mr. London. We will be happy to meet with you and your
staff and provide technical assistance for any type of
legislation that you think may be helpful in this regard. We
are ready to assist you.
Mr. Takano. I would be interested in meeting with both of
you offline and to discuss this matter further.
Mr. Arrington. Thank you, Mr. Takano.
And now yet another gentleman from California, Mr. Correa,
we yield 5 minutes.
Mr. Correa. Thank you, Mr. Chairman, for having this most
important hearing. I want to thank the folks here as well.
Just a little bit about my background. I am a licensed
realtor and a former loan broker. And, gentlemen, as you know,
this can be one of the dirtiest businesses that there is out
there, real estate, real estate loans.
And, Mr. Cooper, have you ever had to fire anybody?
Mr. Cooper. I have not personally had to fire anyone, no.
Mr. Correa. That is impressive, because most of time there
are a lot of bad apples out there, and you end up firing folks
out there because sometimes it doesn't matter what your mission
statement is, the interest of making a buck sometimes outweighs
the interest of following your mission statement.
In reference to what my colleague Mr. Takano brought up,
which is do you put this online, the State of California, if
you have a doctor that is civilly fined, that goes online. The
Bureau of Automotive Repairs, any violations go online. So you
as a consumer have any issues, you immediately go online, see
who the heck it is that you are dealing with, and that
information is disclosed to the world. It is not rocket
science, folks. We can do this very easy.
You know, it is very hard also to try to second guess the
economic motives, the financial motives, for a veteran to
refinance. You know, buy-downs, interest loan, fees, points.
And as you know, sir, sometimes what with these folks do is
they will give you discount on the points but they will jack
you up on the fees. And at the end of the day, you get hit one
way or the other.
It would be interesting if you come up, not rocket science,
but an application, an app somewhere so a veteran consumer can
punch in a couple of numbers and come up whether this is good
or bad.
And another question I would have, Mr. London, is do you
keep records of the folks, the loan originators, and how many
loans that they are originating so that you can detect whether
there is a pattern there of churning or not?
Mr. London. We do keep a record of every loan that is
originated, but I am glad that you asked that question, so
thank you for asking, because one of the things that Mr. Cooper
mentioned was that we have, on the back end, if you will, for
servicing of loans, when a veteran goes into default, we have a
comprehensive system where on every single defaulted loan we
have tremendous amounts of data so that we can see exactly what
the servicer is doing and we can intervene on the veteran's
behalf if we need to.
Unfortunately, we don't have a system like that on the
front end. However, we have recently let a contract where we
reengineering the entire system that I just described and we
are building the capability on the front end to get information
on every single loan origination to have the same type of
intervention and monitoring that we have in servicing a loan.
So we are very close to having that.
Mr. Correa. And I am glad to hear that, and I am hoping you
put as much of that information online and you direct our
veterans to that Web site so that they can be a better educated
consumer.
Good faith estimates, don't we still have those out there,
that when you originate a loan you give people something that
says what that loan is going to cost them? Do we still have
that?
Mr. London. Yes. The borrower will get what is called a
loan estimate with that type of information.
Mr. Correa. And, again, I hope that you keep some kind of a
database, work on it up front, so that if any of these folks
are out there originating loans and begin to see a pattern that
every 2 or 3 months they are churning a loan, and if you can
look at it then, whether they are doing it for their own
benefit or the consumer actually benefits.
Mr. London. Absolutely.
Mr. Correa. A lot of neat stuff we can do here to protect
our veterans.
Mr. Chair, I yield.
Mr. Arrington. Thank you, Mr. Correa.
I will yield myself another 5 minutes. I think this already
proved to be a very productive discussion. I think we should
continue it.
Most of my thoughts and comments and questions were
philosophical. I mean, I just truly believe that choice for the
consumer and disclosure is generally the best way to regulate.
Mr. Arrington. Again, and Mr. Takano articulated it better
than I could, the market is skewed because government is
intervening. In fact, without government or the taxpayer there
wouldn't be this market, presumably, because if there would, we
shouldn't do it.
So now comes the question of so we should regulate and
engage more readily in this on behalf of the taxpayer. And
certainly if there are ways to have better disclosure and a
simpler, easier way to digest what product and transaction that
they are about to engage in, by all means, I am hoping you guys
are reviewing that and constantly thinking of ways to do that,
although oftentimes more regulation to protect the consumer
ends up with more paperwork for the consumer and I think makes
it more difficult and burdensome.
But I would like to see that new disclosure product that
you guys are working on. And as the Ranking Member suggested,
if you all could submit that, it would be good for us all to
look at it.
But trying to regulate in this space a way those products
that we deem bad for the veteran, because they are churning,
because of some definition that we agree is bad, versus--and
doing that without diminishing the opportunity for products
that they may need, real products that are good, safe, sound,
useful to the veteran so that they can maybe lower their
payments. Maybe they need to lower their payments. Maybe they
know exactly what they are doing and they need that.
Help me, Mr. Motley and Mr. Cooper, tell me where the line
is, where it is a good product, it is useful, it is safe, it is
sound. I mean, there is always a transaction cost for the
institution. And if there is more risk, then the institution
has to charge commensurate with the risk. We see that in payday
loans all the time. I know folks that without a payday loan
couldn't fix their car and go to work again because a bank
won't finance them.
Anyway, what are your thoughts about the line between the
appropriate and sound versus the not-so-sound churning? Where
is that? Define that for me.
Mr. Motley. Well, it is really not that easy to define
because every situation is different. I think, as Mr. Cooper
said earlier, we try to look at all of our borrowers in terms
of what is best for them, what is the best outcome for them,
for their particular situation. You have to take a lot of
things into account.
And so I think that you want to have guardrails put in
place on any program to avoid abuse, and you want to have
transparency. So your point about proper disclosure is a good
one, and having it done up front is also a very good one. But I
think that we have to balance additional regulation with the
benefit of that and the onerousness and the extra cost of
providing additional disclosures.
But I think that the main point is, is that if we are sure
that the veteran is benefiting from the refinance transaction,
and we can do that by showing what the costs are, what the
payment reductions, are how long it is going to take him to
break even on that transaction, and if that makes sense in his
situation, then we should have satisfied the net tangible
benefit test and satisfied VA that we have done the right thing
for that veteran.
Mr. Arrington. So let's assume that we can define a
reasonable, useful, sound product or transaction that allows
the veteran to benefit, and the costs are commensurate, they
are built in, the fee is commensurate with transaction costs.
So let's say we can define that. Do you all, VA and Ginnie Mae,
have the authority, legal authority, to define that and to
regulate in this space in that regard? Do you have the legal
authority? And cite for me the legal authority.
Because here is my thing. I want you to appropriately,
because of the taxpayer, and I think it is sometimes necessary
and appropriate, but I don't want you to make it up. I don't
want you to just create it out of the ether. And so if we as
Congress do need to act to give you that legal authority, that
is the way this thing works, as you know.
So do you have the legal authority? Cite the legal
authority for me, both you and Ginnie Mae, please.
Mr. London. Yes, sir. Thank you for the question.
As I mentioned, we have a draft regulation that we believe
is a measured approach to address this issue. And the specific
statutory authority that we used, there are several, 38 U.S.C.
3710 is one, specifically subsection (e), you also have 37O3(c)
and 38 U.S.C. 501, are the three specific statutory references
that we believe gives us the authority to regulate this issue.
Mr. Arrington. And summarize for me, if you would, what
that legal authority is if you can. I mean, I can go back and
look it up, and everybody here can. But give me one of the
three, the best nexus to that authority from which you would
promulgate a rule to define this net tangible benefit.
Mr. London. Sir, I will be happy to provide you more detail
for the Record, but the one that I will choose that gives the
agency the broadest authority is 38 U.S.C. 501. And that
specific reference gives the Secretary the authority to
regulate VA programs across the board, and the other two
references that I gave you were specific to the Loan Guaranty
Program.
Again, I will be happy to provide you those details.
Mr. Arrington. I have taken too much time already. Thank
you for the answer.
Mr. Ranking Member, 5 minutes.
Mr. O'Rourke. I think Mr. Motley made a really good point
about ensuring that we do the right thing for the consumer
without overburdening the lender. And I have heard from many
lenders in El Paso about how really well-intended legislation
to rein in the too-big-to-fail institutions inadvertently hurt
the smaller independent originators.
They make a really good compelling case about, look, we
know the community best, Beto, and when you make it more
expensive and harder for us to originate, then those who don't
know the community are left with those choices and you see less
capital coming into the community.
So your point is very well taken.
I will say just in the example that we discussed and that
Mr. London has committed to in terms of prioritizing the net
economic impact disclosure at the outset and the O'Rourke
addendum to that, that it be in 16-point type so that it is,
like, really easy to see and you know what you are getting
into, doesn't seem incredibly burdensome or onerous. It seems
fair and seems very workable, again, from my perspective, not
knowing your all's business as well as you do so.
So I hope that you could agree with that or that the
industry would see that as well. But your point is well taken
that we want to make sure that we don't in any way undermine
the ability to get these loans made or these refinancing
transactions completed for those who would benefit from them.
One of the last things, I think, Mr. Chairman, that we need
to do is make sure that we are hearing from veterans on these
proposals and the veteran service organizations who advocate
for them. I want to make sure that there are no additional
suggestions or ideas or proposals that have gone unheard or
unimplemented.
Because in Texas alone we see just last year 60,000 total
home loans, 21,000 of those were refinances, and we want to
make sure that we are advocating and protecting those veterans
who have done everything we have asked them to do and have
earned this, and that we are able to follow through on it.
And lastly I want to say this, Mr. London. You really are a
breath of fresh air. I just left the GAO High Risk List
roundtable about VHA being able to implement corrections that
will improve access to care, and some of the responses we got:
Well, we are going to have a conference call on this. You can
see something later this year. And in some cases, we have seen
to progress on any of these.
So the fact that you came to this meeting with action
already undertaken and specific proposals about what you are
going to change, for example, moving up this information to the
outset of the transaction instead of the moment when you sign
and you are under all that pressure, very refreshing. I love
seeing that, and I hope that you will follow up on that by
keeping us informed of your progress on implementing this, I
think we all agree, sooner better than later. And then would
certainly love to hear back from the industry, and most
importantly, veterans on the efficacy of those efforts.
So thank you all for what you are doing and your testimony
today.
And I will yield back to the chair.
Mr. Arrington. Mr. Takano, 5 minutes.
Mr. Takano. Let me just look at my notes here.
Mr. Bright, when we say that Ginnie Mae is able to fine
companies in this space, does that space include the VA? I
mean, am I misunderstanding that the VA and Ginnie Mae operate
in partnership and together to operate this program?
Mr. Bright. So Ginnie Mae has the authority to issue rules
that pertain to lenders' ability to access our security. So we
have broad statutory authority to write rules for access to our
security as we need to protect it.
So if you actually look at Ginnie Mae's charter, of our top
five mandates, the first four relate to making sure that there
is liquidity in the mortgage market and the ability to
promulgate regulations to ensure that liquidity maintains in
the mortgage market.
Once we issue a rule to our issuers or the lending
community and say, ``Here are the rules that you need to abide
by,'' we have about an 800-hundred page issuer guide, if there
are violations of that guide, we can issue civil money
penalties.
So our rulemaking ability is pretty much restricted to the
ability to access the Ginnie Mae security and under what terms.
We really can't issue civil money penalties for violations of
the VA program itself. That would be the VA. Nor could we issue
civil money penalties for violation of consumer protection
laws. That would be CFPB or the FCC.
So what we have been doing in those cases is when we see
instances where we think it is possible that some of those laws
are being violated, we are making referrals to those relative
agencies.
So our CMPs, they pertain to violations of the rules that
we put in place for access to our security.
Mr. Takano. Mr. Cooper, you said earlier that during the
financial crisis that overall the VA home loans held up the
best. To what do you attribute that?
Mr. Cooper. Thank you for the question.
We attribute that to the underwriting that was in place
from the VA from well before the crisis. And specifically the
way the VA looks at it is not just at how much, what is their
payment, what is their DTI. They are also looking at the back
end of, like, how much money do you have left over, their
residual income.
And so that is a really essential part of the program.
Residual income, it protects the person from--at the end of the
day, they still have money to live their daily life, and then
they are still able to, hopefully, then they are still able to
make their mortgage payments. That has been a really big part
of the VA program. It is different from any other program that
is out there. No one else requires that.
Mr. Takano. Mr. London, again, do you have any other
thoughts on appropriate regulation or appropriate authority
that you might need to police the bad actors that we are
talking about today more effectively?
Mr. London. Sure. As I mentioned in my testimony, we have a
draft regulation that we believe will take into account the
very recommendations that you have heard from other panelists
today. We evaluated things like the net tangible benefit,
seasoning requirements, and recoupment requirements, and many
other actions to see what will best handle the issue.
But I definitely have to get one point on the table. All
the panelists agree that we are talking about a relatively
small number of lenders who are involved in this.
Mr. Takano. Very small. I realize that.
Mr. London. And the fact that we have drafted a rule very
carefully that is going to not only impact those small number
of actors, it is also going to impact every single veteran's,
potentially, their access to his or her earned benefit. It is
going to have an impact potentially on every single lender and
servicer that participates in the program. And as Mr. Bright
and others say, it is also going to have a downstream effect on
mortgage investors.
So there is not just one answer or one thing that can be
done. We looked at it holistically. And as I stated to the
Chairman, we believe we have the statutory authority to
regulate in those areas.
Mr. Takano. And you haven't published it yet because it is
a draft, and so is there a kind of a comment period from the
public that has to be undergone before it is implemented?
Mr. London. Yes. The rule is currently drafted as a
proposed rule, and there will be an opportunity for public
comment.
Mr. Takano. And you don't have any idea--I mean, you have
been taking input from the industry in crafting the rule?
Mr. London. Absolutely. The good news is in analyzing and
thinking about the rule, we met, as I mentioned in my
testimony, we met with the Mortgage Bankers Association and
their members and many other stakeholders as we were
contemplating and evaluating what policy actions we needed to
take under this draft regulation. And obviously we will welcome
additional comments that anyone has to offer once the rule is
published.
Mr. Takano. And when do you anticipate the rule being
published?
Mr. London. Unfortunately, I don't have a specific timeline
for you today, but I am happy to report that the rule, as I
say, is in final draft, and that is a good indication that we
are very close to having it publicized in a relatively short
timeframe, but I don't have a specific timeframe for you today.
Mr. Takano. All right. Well, thank you very much.
And I yield back, Mr. Chairman.
Mr. Arrington. Mr. Takano, I will give you more time if you
have any follow-up questions or comments.
Mr. Takano. Mr. Chairman, just thank you very much for the
spirit of this hearing, and I congratulate you on that. And I
hope we can continue to work in this vein.
I really do respect your free market views. I actually do
entertain the thought that some of these products could be
useful to some veterans, and we don't want to be overly
aggressive in regulation. But, again, we are talking about
taxpayer resources that we have to protect.
Mr. Arrington. That is right. That is right. And it is good
that we can agree like this, huh? Somebody get a picture. Is
somebody recording this?
No, it is true. I mean, this is a space where we need to
engage on behalf of the taxpayer because of the full faith and
credit, and we need to strike that balance.
And that is why I asked the question of defining it. You
know, how do you define this? Because if somebody was charged
any fee, they may say, ``Hey, I shouldn't be charged for
this.'' But there is a cost to the institution for that
transaction.
So what is that threshold that is unreasonable and abusive
and not a tangible benefit. Well, I feel like I have heard
enough to know that the stakeholders, including the industry,
can strike that and in fact have. And I give you credit and
join the Ranking Member in his praising you and your team for
the way you have conducted your business.
It is best that a regulator engages the stakeholders prior
to public comment. I mean, you are going to have agreement
here, it seems like. And we are talking about a few potentially
bad actors, potentially, and maybe not bad actors, maybe they
are just playing with the rules that exist. We just need to
tighten them up so that we raise the bar of what we expect for
safe and sound practices and the protection, if you will, and
minimal standards for fair practices.
In this space, I am curious, because the FTC should be able
to regulate unfair and deceptive practices. Have there been any
cases referred to the FTC where there has been unfair and
deceptive--and I understand there are lots of things going on
here--they could disclose better, so let's do that? There is
safety and soundness for the taxpayer and the program, but then
there is real deception and unscrupulousness by offering one
thing and it be really another thing.
Have those been referred to the FTC and have they acted
upon those, Mr. London?
Mr. London. I am not personally aware of any referrals that
have been made.
Mr. Arrington. Mr. Bright?
Mr. Bright. Yeah. What we have been doing is collecting
solicitation materials that are generally from actually
brokers, not lenders themselves, but then what they do is they
originate these loans and then sell them to a lender.
And what I would love to do is we have got a pile of them,
so I have asked all the veterans at Ginnie Mae to sort of
collect these solicitation materials they get. I will share
them with you.
They are not lies, they are just--we will sit down and talk
to them.
Mr. Arrington. So I am trying to be real careful even in
this hearing to not say ``predatory'' and ``deceptive.''
Mr. Bright. Right. Right.
Mr. Arrington. Because the FTC ought to pursue that and
bring the full force of the law against people that are doing
that.
And then where we need to tighten it up, where there is
some fastness and looseness, that is what you guys can do. And
then again for me ultimately, the safety and soundness of the
program. This is offered because the taxpayers allowed this to
happen, because they love their veterans and they want them to
have this benefit, but they want it done in a safe and sound
and a fiscally responsible way.
Mr. London. Mr. Chairman, if I may, can I amend my comment
that I made?
Mr. Arrington. Yeah, please.
Mr. London. Because your question was specific to the FTC.
Mr. Arrington. Yes.
Mr. Arrington. Okay. Thank you.
Thank you, colleagues. Great discussion.
Let's continue in your efforts as you described to tighten
up in this space, and let us see whatever draft documents just
for our information, as the Ranking Member requested, if you
would, and continue to notify us if you need the authority
where you don't and don't regulate where you don't have the
authority. That is not your job. That is the United States
Congress' job, Article I. But I feel good about what I have
heard today. So good hearing.
This now concludes our hearing. And I ask unanimous consent
that all Members have 5 legislative days in which to revise and
extend their remarks and include any extraneous material on
today's hearing.
Without objection, so ordered.
Thank you all again being here today. Great hearing. God
bless.
[Whereupon, at 11:23 a.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Prepared Statement of Jeffrey London
Good morning Chairman Arrington, Ranking Member O'Rourke, and other
Members of the Subcommittee. Thank you for the opportunity to appear
before you today to discuss the Department of Veterans Affairs (VA)
Home Loan Guaranty Service, certain lenders' home loan churning
practices, and the effects of those practices on Servicemembers and
Veterans. I am accompanied by Mr. John Bell, Deputy Director, Loan
Guaranty Service.
Overview
The mission of VA's Home Loan Guaranty Service is to maximize
opportunities for Servicemembers and Veterans to obtain, retain, and
adapt their homes by providing viable and fiscally responsible benefits
in recognition of their service to our country.
We empower Servicemembers and Veterans with information and access
to innovative, high-quality products and services, and we engage
industry partners to make loans in an efficient and effective manner.
Through our focus on Servicemembers and Veterans, the partnerships we
have developed, and our continuous drive to innovate in areas of
operations and performance, we have built a high-performing program
that has provided guaranties for more than 23 million loans totaling in
excess of $2 trillion over the last 70-plus years. Last fiscal year
alone, VA guaranteed an all-time record of over 740,000 loans, totaling
more than $189 billion. Of those loans, over 380,000 were purchase
loans (an annual record for purchase loans), nearly 191,000 were
interest rate reduction refinancing loans (IRRRL), and about 167,000
were cash-out refinancing loans. Over the past four fiscal years, the
vast majority of VA-guaranteed loans have been purchase and cash-out
refinance loans; not IRRRLs. VA's purchase loan volume has ranged from
about 62 percent of all guaranteed loans in Fiscal Year (FY) 2014 to
just over 51 percent last fiscal year. Cash-out loans have ranged from
roughly 16 percent of guaranteed loans in FY 2014 to just shy of 23
percent last fiscal year. IRRRLs were roughly 21 percent of guaranteed
loan volume in FY 2014 and roughly 26 percent last fiscal year. VA has
provided more loan guaranties over the past 5 fiscal years
(approximately 3.1 million) than it did in the 10 years prior
(approximately 2.9 million).
The overwhelming majority of VA-guaranteed loans (upwards of 98
percent) are sold in the secondary mortgage market with a full faith
and credit guaranty from the Government National Mortgage Association
(GNMA or Ginnie Mae). GNMA's role in the secondary market provides the
necessary liquidity of capital so that lenders can then fund additional
mortgage loans (e.g., additional VA-guaranteed loans to Servicemembers
and Veterans).
Program Success
The VA-guaranteed home loan benefit helps provide Servicemembers
and Veterans with access to a low-cost mortgage option. VA-guaranteed
loans require low or no down payment, require no private mortgage
insurance, and often have lower interest rates than other products.
According to industry data, interest rates for VA-guaranteed loans have
been the lowest in the marketplace for over 2 years.
VA loans perform very well compared to other government loan
programs and conventional loans. During the worst housing-market crash
since the Great Depression, VA helped almost 700,000 Servicemembers,
Veterans, and their families retain their homes or otherwise avoid
foreclosure. Cumulatively, for the period between fiscal years 2009 and
2017, VA worked with private sector loan servicers to avoid foreclosure
for over 80 percent of Servicemembers and/or Veteran borrowers who
defaulted on their home loans. This equates to the government avoiding
over $22 billion in foreclosure claim payments. Further, VA's
foreclosure inventory rate (the percentage of loans in foreclosure)
outperformed that of even prime loans during, and immediately
following, the market crash.
VA's portfolio of about 2.9 million active home loans outperforms
or is on-par with other loan types. According to the most recently
available Mortgage Bankers Association National Delinquency Survey data
(Q3 2017), VA's overall delinquency rate of 4.24 percent is just
slightly higher than the 3.97 rate for Conventional loans. This
compares favorably to the 9.4 percent delinquency rate for the Federal
Housing Authority's (FHA) loan program. In terms of serious
delinquencies and foreclosure inventory, VA outperforms all other loan
types. According to the most recently available Mortgage Bankers
Association National Delinquency Survey data (2017 third quarter), VA
has the lowest foreclosure inventory rate in the industry: 0.95 percent
compared to 1.15 percent for Conventional loans and 1.76 percent for
FHA loans. VA also has the lowest seriously delinquent rate: 2.08
percent compared to 2.28 percent for Conventional loans and 3.86
percent for FHA loans. This means that of the over 2.9 million active
VA loans, only 2.08 percent are 90-days or more past-due and less than
one percent are in foreclosure.
Refinance Loan Program Overview
There are two types of VA refinance loans. The first, an IRRRL, is
generally used by Servicemembers or Veterans to obtain a lower interest
rate than the current rate the Servicemember or Veteran is paying on
his or her existing home loan. IRRRLs are sometimes called streamlined
refinances because they have fewer underwriting requirements than other
types of refinance loans. The purpose of an IRRRL is to place a
Servicemember or Veteran in a better financial position than he or she
is in on an existing mortgage, typically by reducing the interest rate
on the existing loan, which lowers the monthly mortgage payments. An
IRRRL may also be used in order to (i) reduce the term of the loan,
thereby reducing the total of payments on the loan, (ii) to convert an
adjustable rate mortgage to a loan with a fixed interest rate, or (iii)
to make energy efficient improvements to the home. A Servicemember or
Veteran may not use an IRRRL to obtain cash for the equity he or she
may have in the property securing the loan.
A second type of VA refinance loan is one in which a Servicemember
or Veteran may also use the home loan benefit to refinance an existing
loan or other lien (not necessarily a VA-guaranteed loan) and borrow
against the value of the property that is the security for the existing
loan. In other words, a Veteran may ``pull cash'' out of the home's
equity using a ``regular,'' non-IRRRL, refinancing loan.
Refinance Loan Challenges
While the overwhelming majority of lenders (more than 1,500) who
originate IRRRLs are conducting business with Servicemembers and
Veterans in a responsible manner, we have in recent months identified a
very small number of lenders (arguably less than 10) that appear to
regularly close loans in a manner inconsistent with the program's
intent. Instead of offering loan products that provide a tangible
benefit to borrowers, these lenders appear to be targeting
Servicemembers and Veterans who have made less than six payments on
their original loan.
The practice of refinancing a mortgage multiple times within short
timeframes is called ``serial refinancing'' or ``loan churning,'' and
it may cause Servicemembers and Veterans to prolong debt repayment by
adding more payments and interest to the new loan. Serial refinancing
of VA-guaranteed loans may also strip equity, increase the principal
balance, and increase the loan-to-value ratio, which potentially raises
the risk of loan default. In addition, the unpredictability of when and
how often these refinances take place is causing investors to be
pessimistic about purchasing GNMA-backed loan pools, due to the
perceived risk associated with buying debt that will be paid off in a
shorter time frame than the investors anticipated at the time of
pricing. This risk of prepayment affects pricing, which could cause
lenders to offset the difference by charging higher interest rates for
VA-guaranteed loans.
In order to entice Veterans to refinance their mortgages, a small
number of lenders have also implemented aggressive and often misleading
marketing practices, such as phone solicitations or frequently mailed
print materials. It is concerning that such loans can have terms that
may not be in the Servicemember's or Veteran's best financial interest.
Our colleagues at GNMA have frequently espoused in recent months
that the impacts felt by investors in the secondary markets have been
acute. Lenders who systematically engage in serial refinancing, or
``churning,'' VA loans have focused almost exclusively on IRRRLs,
which, unlike VA origination and cash-out loans, do not require
underwriting or valuation determinations. These lenders have focused
their efforts on targeting Servicemembers and Veterans who have VA-
guaranteed loans precisely because IRRRLs are relatively inexpensive
and quickly completed. It is important to note that although VA's
overall loan volume has been historically high over the past four
fiscal years, on average, IRRRLs have represented about only a third of
VA's overall volume for FY 2015 and FY 2016. VA notes, however, that
only a small number of lenders are systematically engaging in churning
practices, and a relatively small number of Veterans have been
affected. VA estimates that approximately 8,000 Veterans obtained two
or more IRRRLs (or about 4 percent of the IRRRL volume) in FY 2016.
That number declined significantly in FY 2017 to approximately 1,600
Veterans who obtained two or more IRRRLs (or about 0.8 percent of the
IRRRL volume). .
VA Focus on Serial Refinancing
Even though the serial refinancing issue is not systemic to our
overall portfolio, VA has over the past several years been very
concerned about serial refinancing or ``churning,'' in the IRRRL
program. In fact, when VA published an Interim Final Rule (IFR) on May
9, 2014, implementing provisions of the Dodd-Frank Act, VA defined the
types of VA loans that are ``qualified mortgages,'' and addressed this
very issue. Pursuant to the Ability-to-Repay provisions of the Truth in
Lending Act, qualified mortgages have either safe harbor protection or
the presumption that the borrower is able to repay a loan. In the IFR,
VA established that in order for an IRRRL to be considered a safe
harbor qualified mortgage, the loan being refinanced must meet certain
seasoning and recoupment requirements to prevent serial refinancing and
equity skimming.
VA believed that the IFR would eliminate the demand for loans that
did not receive the safe harbor protections. In other words, VA
intended for the market to use pricing differentials to deter churning
practices. However, this did not occur. Despite VA's intention to
prevent serial refinancing, some lenders ignored the seasoning and
recoupment guidelines because VA would still guarantee the loan if
other requirements were met. In response, VA has been evaluating
program and industry data related to IRRRLs to ascertain the overall
impact on the VA Home Loan Guaranty Program and to determine what
policy changes could be made to curb serial refinancing.
While VA's focus has been on serial refinancing of IRRRLs, we
realize that some lenders may be shifting their business models in
response to current market conditions. Although credit underwriting and
appraisal requirements provide guard against affordability and
valuation concerns, VA has been examining VA and other industry data to
ensure that our Regular/Cash-out refinance programs are also serving
their intended purpose as loans that benefit our Veteran borrowers.
There are multiple factors that VA believes will contribute to the
reduction of serial refinancing practices. In addition to longer-term
measures like regulatory action, VA has also focused attention on
policy changes that can be implemented rather quickly. For example, VA
has worked closely with GNMA to curb some serial refinancing practices.
This effort resulted in the issuance of an October 2016 GNMA All
Participants Memorandum (APM). The APM established a 6-month seasoning
requirement for streamlined refinance loans, which includes IRRRLs, to
be eligible for certain GNMA issuer pools. Since the GNMA policy became
effective in February 2017, VA's overall IRRRL volume has declined from
over 35,000 loans per month to approximately 8,000 loans per month. VA
also saw a decline in the number of potential serial refinance actions
between FY 2016 and FY 2017. As mentioned previously, VA estimates that
the number of Veterans affected by serial refinances is much smaller
than the overall IRRRL portfolio, declining from approximately 8,000 in
fiscal year 2016 to approximately 1,600 in fiscal year 2017. In short,
there was a significant decline in the number of multiple loans by the
same Servicemember or Veteran for the same property in a given year.
In October 2017, VA and GNMA established a ``Joint Ginnie Mae - VA
Refinance Loan Task Force.'' As stated in the press release announcing
the partnership, ``The task force will focus on examining critical
issues, important data and lender behaviors related to refinancing
loans, and will determine what program and policy changes should be
made by the agencies to ensure these loans do not pose an undue risk or
burden to Veterans or the American taxpayer.'' On December 7, 2017, the
taskforce issued a GNMA APM, which established a 6-month seasoning
requirement for streamlined and cash-out refinancing loans to be
eligible for certain GNMA securities.
In addition to VA's work with GNMA, VA has worked with the Consumer
Financial Protection Bureau (CFPB) over the last several years to
address complaints from Servicemembers and Veterans about misleading
solicitations to refinance VA-guaranteed loans. VA and CFPB's Office of
Military Affairs have monthly meetings to discuss issues and establish
plans to educate the Servicemember and Veteran communities about issues
regarding VA-guaranteed loans. In November 2017, VA and CFPB issued our
first Warning Order to Servicemembers and Veterans who currently have a
VA-guaranteed loan. The Warning Order provided information on what to
consider when receiving advertisements and when thinking about
refinancing an existing VA-guaranteed loan. Specifically, the Warning
Order advised Servicemembers and Veterans of the dangers associated
with solicitations that promise extremely low interest rates, thousands
of dollars in cash back, and skipped mortgage payments.
While the collaboration with GNMA and CFPB has helped to address
the serial refinancing problem, VA plans to further address churning
practices by issuing a proposed rulemaking. In determining what policy
actions to take, VA is evaluating a range of possible measures - such
as net tangible benefit tests, seasoning requirements, recoupment
requirements, and others - and the effects that the measures might have
on Servicemembers' or Veterans' access to their earned benefits, as
well as, the impact on lenders, servicers, and mortgage investors.
Conclusion
Mr. Chairman, with the continued high volume of loans in the VA
Home Loan Guaranty Program, the coming months at VA will continue to be
busy and challenging, but I know we will continue to provide our
country's Servicemembers and Veterans with a safe and viable loan
guaranty option. Thank you for your continued support of our programs
and for this opportunity to speak today.
This concludes my testimony, and I welcome any questions that you
or other Members of the Subcommittee may have.
Prepared Statement of Michael R. Bright
Introduction
Chairman Arrington, Ranking Member O'Rourke, and Members of the
Subcommittee, thank you for inviting me to appear today to discuss the
important issues regarding aggressive practices by some lenders in the
VA market, and the impact this is having on veteran borrowers.
Role of Ginnie Mae in the Market
For background, the Government National Mortgage Association, or
``Ginnie Mae,'' was established in 1968 with the mission of bringing
global capital into the U.S. housing market while at the same time
minimizing risk to the American taxpayer. Ginnie Mae does this by
guaranteeing the timely payment of principal and interest to our bond
holders on behalf of borrowers who qualify for our program. By allowing
these investors the opportunity to lend capital into the U.S. housing
finance system with the knowledge that the federal government stands
behind the credit risk of our mortgage-backed securities (``MBS''),
Ginnie Mae provides access to global capital for lenders of all sizes
and supports the federal mortgage insurance programs at the Federal
Housing Administration, the Department of Veterans Affairs, the
Department of Agriculture, and HUD's Public and Indian Housing.
Ultimately, more than 98 percent of the loans insured by the FHA, VA,
and USDA are financed through Ginnie Mae MBS.
Ginnie Mae provides this government backstop on qualifying MBS to
protect against losses in catastrophic situations, and our securities
are the only MBS to carry the explicit full faith and credit guaranty
of the U.S. government. We are also responsible for policing our
program to protect against loss. Our statutory mission is to provide
liquidity to the U.S. housing market and to protect taxpayers.
Since 1968, Ginnie Mae has performed these twin missions
successfully, growing to almost $2 trillion in outstanding principal
balance guaranteed today. This has helped millions of low-and-moderate
income, veteran, and rural Americans obtain financing that otherwise
would not be available to them. Just as important, Ginnie Mae has never
needed an emergency infusion of funds to do its job, even during the
2008 financial crisis. The design features of the Ginnie Mae model
significantly limit taxpayer exposure to risks typically associated
with secondary market transactions while still providing liquidity for
the overall housing finance system.
The easiest way to understand Ginnie Mae's mission is that we
oversee a process for ensuring the success of the government's MBS
guarantee. To accomplish this, Ginnie Mae manages technology and
infrastructure designed to track the payment of principal and interest,
made by borrowers to their lenders, making sure it ultimately gets into
our common security and to investors on time and in full every single
month. When a low-income borrower in an FHA loan, a rural borrower in a
USDA loan, or a veteran borrower in a VA loan makes a mortgage payment,
we make sure the servicer of the mortgage submits that payment to the
investor who owns the MBS. If we do our job well, veterans gain access
to more affordable home financing terms, and the capital necessary to
make these loans remain reliably available through all economic cycles.
VA Loan Churn Background
The issue we are here to talk about today - the rapid refinance of
VA loans held in Ginnie Mae securities - has had a significant impact
on Ginnie Mae MBS market trading and pricing dynamics over the past few
years. I thank you very much for bringing attention to this issue.
Hopefully increased Congressional and federal agency oversight can help
effectuate some needed changes in behavior.
At times what we are here to discuss may seem like a technical
issue, but the consequences are anything but. Without proper policing
by Ginnie Mae or the VA, every single veteran who relies on our program
will pay a higher rate than they should. If we take for granted the
capital that makes our program work, it may not continue to flow into
our market. That is not a risk we should take.
It is difficult to describe what is transpiring without using
jargon or technical terms like ``prepayment speeds,'' ``loan
seasoning,'' and ``premium MBS pricing.'' But ultimately what we care
about is the following: if our security is not functioning well,
veterans will have difficulty getting a home loan, and if they do get a
loan they will pay a higher rate. Since this ``loan churn'' problem
began, Ginnie has recognized that failure to curtail these practices
could ultimately harm borrowers in the form of higher interest rates.
That is why we take this issue incredibly seriously, and why we pledge
to you today that we are working hard to put an end to it once and for
all.
In early 2016, Ginnie Mae and our investors first began to identify
early loan repayments and serial refinancing as a problem with much
greater incidence in the VA mortgages in our securities than loans
insured by other agencies. Mortgage loans often prepay, especially when
interest rates drop. But Ginnie Mae began to notice prepayments at
speeds that could in no way be justified by economic factors.
Some strange pricing dynamics in our security - specifically a
weakening of Ginnie MBS prices versus other MBS - further alerted us to
the growth of anomalous refinancing behaviors. Clearly, Ginnie Mae
investors had begun to take note as well. After some initial internal
analysis, it became more obvious that some lenders had apparently found
an opportunity to take advantage of service members and veterans to
make a quick profit for themselves by aggressively pushing a series of
loan refinance offers. These are done without any regard for the
consequences for our security, other veterans, or other borrowers who
rely on our program.
It seems that the core issue stems from two fundamental, underlying
dynamics. First, we have an increasing number of veterans in the United
States, and many of them fall prey to advertising schemes that give the
appearance of coming from reputable sources. Second, the Ginnie Mae
security trades at a premium price, and this incentivizes lenders to
pull loans from pools at ``par \1\ '' and deliver them into a security
at a premium, booking a profit each time this occurs. We believe it may
be the confluence of these factors that has enabled this new,
unacceptable and dangerous market behavior.
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\1\ Par simply means a bond that trades at 100 cents on the dollar,
often denoted as ``100-00.'' Most Ginnie MBS trade above this price
today. Specifically, prices closer to 105. This means every time a
lender pulls a loan from a pool at par and redelivers it into a new
security at 105, it books 5 points (or 5% of the loan balance) as
profit.
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Upon further investigation, we believe that some lenders have
capitalized on these dynamics by employing two patterns of note. The
first is the origination of a loan substantially above prevailing
market interest rates, sometimes called a ``premium loan.'' At times
these loans may include debt consolidation, and at times they are
provided to borrowers with very low credit scores, which explains some
of the reasons that they carry high interest rates. But often our
analysis has found that premium VA loans simply represent a business
model of using aggressive marketing tactics to originate a loan at an
interest rate higher than the veteran borrower should otherwise be
paying, as proven by the rapid refinance that occurs almost immediately
thereafter.
These loans are profitable for the company originating the loan and
issuing the loan into a Ginnie Mae security because they can
immediately sell the loan into a Ginnie Mae MBS pool at a high dollar
price because of the high accompanying interest rate, and pocket the
so-called ``cash gain on sale.'' This essentially means those lenders
who originate high interest rate loans charge veterans too much and
book a large profit right up front, knowing that the veteran has a rate
that is above market and knowing that the veteran will likely refinance
in the future to obtain a true market rate. These loans not only give
the borrower an interest rate half of one percentage point or more
above what they could be paying, but they are ripe to be cherry-picked
out of a Ginnie security by that same lender or another lender looking
to profit on a quick refinance.
And this is when we see another tactic used by many lenders - a
quick refinance, or sometimes multiple refinances, of a premium loan.
Soon after a veteran's first loan closes, veterans begin to immediately
receive a constant stream of solicitations for refinance offers from
other companies using the data from the first loan closing. These
offers promise anything from skipping a few monthly payments to taking
cash out to lowering a rate by getting into an adjustable rate
mortgage. Many of the solicitations appear misleading, but many also
prove successful, as we see veteran borrowers being convinced to
refinance their loans multiple times in a year without much tangible
benefit.
This entire scheme relies on a steady stream of veterans who may
not be exceptionally financially savvy, or may be having financial
difficulties making them desperate for some cash, which these offers
often promise to help fix.
In many cases, a single veteran is refinanced multiple times in
less than a one-year period, sometimes, according to our data, with
very limited benefit to the veteran. Sometimes, in fact, with each
refinance the veteran is seeing his or her loan balance grow. According
to many of the flyers and advertisements we've collected, quite often
the fees to refinance are buried or hidden. The refinances, advertised
with teaser rates and no money down, are in many cases leaving veteran
borrowers further and further in debt, while providing minimal monthly
cost savings.
In reviewing recent months' data on VA refinances, we have found
the average cost of doing a fixed rate to fixed rate refinance is
approximately $6,000 in fees, for an average payment savings of $90 per
month. That means it will take the veteran five and a half years to
break even on the fees incurred for the refinance.
Another alarming development that you need to be aware of is that,
with interest rates having bottomed out and opportunities to refinance
from a fixed rate loan into a new fixed rate loan having been
exhausted, we are now seeing a trend of brokers and lenders marketing
the refinancing from a fixed rate loan into an adjustable rate
mortgage. When veterans do this, the new loan may result in a short-
term teaser rate that lowers the borrowers' monthly payment, but could
also result in higher monthly payments for the borrower in the future.
For refinances from fixed rate to adjustable rate loans, the average is
$12,000 in fees for a monthly payment savings of $140 and seven years
to break even, assuming the mortgage rate doesn't adjust upward.
Additionally, as home prices have risen in recent years, some
lenders have come to specialize in the ``cash out refinance'' business.
There is nothing wrong with helping veterans take advantage of this
benefit. But our data raises some pretty serious questions, for example
we see loans where borrower credit characteristics appear to change
inexplicably from one month to another. And, we are seeing the creation
of a large group of veterans who once had equity in their home but no
longer do after the cash out refinance. In these instances, if a
veteran borrower someday chooses to move, he or she might need to bring
a check to the closing to do so. In our view, this is an area of
concern.
Finally, we now also see offers by refinance lenders to refund the
tax and insurance escrows normally maintained by the servicer and
accumulated as part of the monthly ``PITI'' (principal and interest,
taxes and insurance) mortgage payment. In these cases, the veteran is
lured in by a scheme to skip a mortgage payment while the new loan is
initiated, get an escrow refund, and look at the monthly payment
without an escrow charge, with the closing costs folded into the loan.
This tactic can lead to larger mortgages, more debt and the veteran
paying a lot of money in fees for a riskier mortgage without sufficient
escrows.
The bottom line is that marketing and promotional materials being
received by many veterans today often include misleading terms that are
too good to be true. These mailers are also frequently disguised as
checks or documents appearing to be official correspondence from the
Department(s) of Defense or Veterans Affairs, or the IRS, instructing
the veteran to call the number listed to discuss their VA benefits, or
a similar ploy.
Investors and the MBS Market
Beyond the problems created for individual veteran borrowers
targeted for high rates or rapid refinancing, loan churning has serious
implications for the broader mortgage market as well. In recent years,
investors have priced Ginnie Mae bonds at a premium to the conventional
market due to the explicit government guaranty. This premium directly
translates into lower interest rates enjoyed by veterans as well as
borrowers from the other government loan programs. As the VA loan
program has grown as a percentage of the Ginnie Mae portfolio, the
increase in loan churning activity has also become more apparent and an
increasing area of concern.
Loan churning is a problem for investors because, as loans are
refinanced, they are removed from MBS pools and with them, the return
expected from the monthly principal and interest payments. Because of
this increased prepayment risk, investors are today less willing to
price Ginnie Mae bonds at a premium (or, as noted above, a price above
``par''). A reduction in investor demand puts downward pressure on the
prices of Ginnie Mae securities, which ultimately harms veterans by
increasing borrowing costs, since as bond prices fall, interest rates
offered to borrowers increase. And, because loans from the other
government loan programs are comingled in Ginnie Mae securities,
borrowers in the other government loan programs are paying the
increased costs as well. This represents a direct wealth transfer from
VA, FHA, USDA, and PIH borrows to a relatively small number of VA
lenders who abuse our program. \2\
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\2\ Because the loan churning problem has been most pronounced in
the VA loans in our pools, this testimony focuses on the veteran loan
experience as we have observed it. However, Ginnie Mae single-family
MBS pools comingle VA, FHA, RD and PIH loans in the pools. The
consequence is that a detracting feature of one agency's program that
results in a loss of value for that agency's mortgage loans, will have
an effect on the price of the overall MBS and, therefore, all of the
government loans will suffer a loss in value at the risk of entailing
higher interest rates.
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These challenges are not theoretical. They very much exist today
and impact the rates that all FHA, VA, and USDA borrowers pay every
month. As recently as December of last year, Ginnie Mae leadership
spoke directly with several large foreign institutional investors
regarding their ongoing investment in Ginnie Mae MBS. A common theme in
every conversation was concerns about the VA loan churn issue and its
impact on their investment in Ginnie Mae MBS. The foreign investor
market, particularly central banks and government pension funds, has
been a major source of capital for the Ginnie Mae program, and we have
no choice but to take these concerns very seriously. The inability to
model and price Ginnie Mae MBS due to the unpredictable nature of the
rapid prepayment speeds on Ginnie Mae bonds is a serious challenge for
any securitization program and all who rely on it. If this dynamic
continues and investors choose to flee the Ginnie Mae market, it could
very well cause even higher borrowing cost for all veterans and others
in the coming years.
To mitigate this problem in the short-term, we have been outlining
for these investors the additional steps we are taking. We must take
these risks seriously at all times, and we must deliver on tangible
solutions this year.
Ginnie Mae Changes, Task Force, and Upcoming Actions
Broadly, we believe the long-term solution to this issue comes in
three steps. The first is through Ginnie Mae tightening its
requirements for access to our security when we see patterns of
injurious behavior. We have taken some steps here and more will be
forthcoming throughout 2018, including the elimination of premium loans
from our securities. The second is by VA establishing a solid framework
that would ensure veterans are protected from predatory lending
practices, including excessive fees, thereby ensuring any refinance
represents a tangible benefit to the veteran. The third is the
continuous surveillance of data collection and analysis to enforce
adherence to the first two steps.
Looking at these steps in more detail, I will begin by outlining
the actions that Ginnie took in 2016, but more importantly the actions
we plan for 2018.
In late 2016, in order to attempt to combat these practices, Ginnie
made an initial program change to the Ginnie Mae rules in an attempt to
address the issue within Ginnie Mae's legal and regulatory authority.
Specifically, we changed rules on how soon after one mortgage loan is
originated, a streamline refinance transaction of that same loan could
be pooled into a Ginnie Mae security.
Those initial measures were successful in stopping the rapid
refinance practices with many lenders for a short period of time.
However, after the first required six-month seasoning period lapsed
following the effective date of the 2016 rule, in mid-2017 Ginnie Mae
again saw an increase in loan repayments and securitization that
strongly suggested further steps were needed. Notably, we also saw that
some lenders had actively worked to evade the new rules Ginnie Mae
implemented by changing their tactics. For example, some lenders
starting using ``cash-out'' or other types of refinances, which were
not addressed by the 2016 rule change.
As part of our ongoing effort to curtail these practices and to
protect the health of our security, in December of 2017 Ginnie Mae
announced a strengthened rule, saying that absolutely no refinances,
including both streamline and cash-out refinance loans, will be
permitted into Ginnie pools for six months after origination of the
underlying loan, thus eliminating the loophole that some lenders used
to evade our original 2016 rules. We also announced the outline of the
additional steps we will be taking in the coming weeks to continue to
put a stop to this behavior, which I will discuss in more detail below.
As it has been widely reported, in late 2017 Ginnie Mae and VA
formed the Ginnie Mae - VA Refinance Loan Task Force to continue and to
intensify our work on this issue. The task force meets regularly and is
focused on closely examining the issue as a team, gathering market
data, and reviewing lender behaviors related to refinancing loans to
determine the program and policy changes needed to stop detrimental
market behavior. At its core, the task force is in place to make
changes that stop bad actors from posing an undue risk or burden to
veterans or the American taxpayer.
The first action to come out of the task force is the change Ginnie
Mae announced early last month - the expansion of the loan seasoning
requirements for cash-out refinance loans securitized into Ginnie Mae
securities. But we do not intend to stop there. To help identify market
outliers, we have also greatly increased the tracking and analysis of
the prepayment rates of issuer portfolios. An inexplicably fast
prepayment rate is an indication that the lender is aggressively
churning borrowers without regard to whether or not a refinance
actually benefits a veteran. As such, in 2018, any issuer with pool
performance that appears materially out of step with market peers will
receive increased attention and engagement from Ginnie Mae, and we will
be putting such lenders on notice in the coming weeks.
Furthermore, we recently announced that prepayment information will
be included in Ginnie Mae's internal Issuer Operational Performance
Profile (``IOPP'') scorecard. This scorecard is used to evaluate
issuers against their peers, and it is the first set of data we look to
in evaluating an issuer on a regular basis. Appropriate action will be
taken against issuers found to be consistent outliers, potentially
including removing them from the Ginnie flagship (``Ginnie II'')
security.
An additional change we are actively working to address is the
definition of a premium rate loan as it pertains to their
permissibility in the Ginnie Mae standard MBS pools. These loans, which
I discussed earlier in my testimony, are identified as having an
interest rate spread of more than 150 basis points in rate (or 1.50%)
above prevailing market interest rates for Ginnie securities. We will
soon be announcing definition and operational processes that will
clarify our definition of a premium loan and enable the enforcement of
this rule. We believe this will help to curtail abusive origination
practices and slow Ginnie Mae prepayment speeds, lessen investor
concerns over the health of our security, while at the same time
helping prevent veterans from paying more on a loan than they otherwise
should.
Finally, it is worth noting that we have received whistleblower
calls from employees who work in firms that they believe are engaging
in unethical churning of veteran loans. Ginnie Mae does not today have
sufficient legal authority to offer whistleblower protections to these
individuals, but, because our securities are traded, the SEC does, and
so we have connected these individuals with the SEC. At the same time,
we have been receiving complaints from veteran borrowers about
aggressive solicitation practices, and we have alerted the Consumer
Financial Protection Bureau (CFPB).
Conclusion
In conclusion, I believe that 2018 will be an inflection point for
this issue. Changes must be made to finally put a stop to bad actors
abusing the VA home loan program and the Ginnie Mae security,
delivering harmful loan products to veterans, and jeopardizing the
efficient borrowing costs for all government borrowers.
I very much appreciate the opportunity to discuss this critical
issue and to work with Congress to bring increased attention to lending
practices that are negatively impacting many Americans. At Ginnie Mae
we are determined to continue our efforts until concrete solutions have
been implemented that protect veterans, the Ginnie Mae program, and
ultimately the American taxpayer. Thank you again, for inviting me to
testify today. I look forward to answering your questions.
Prepared Statement of J. David Motley
Chairman Arrington, Ranking Member O'Rourke, and members of the
subcommittee, thank you for the opportunity to testify on behalf of the
Mortgage Bankers Association (MBA). My name is Dave Motley, and I am
President of Colonial Savings, a privately-held, federally-chartered
thrift headquartered in Fort Worth, Texas. I also currently hold the
position of Chairman of the MBA. I am a Certified Mortgage Banker
(CMB), and I have previously served as a Board member of the Texas MBA
and a member of the Community Bank Advisory Council of the Consumer
Financial Protection Bureau (CFPB).
MBA is the national association representing the real estate
finance industry, an industry that employs more than 280,000 people in
virtually every community in the country. The association works to
ensure the continued strength of the nation's residential and
commercial real estate markets, to expand homeownership, and to extend
access to affordable housing to all Americans. MBA promotes fair and
ethical lending practices and fosters professional excellence among
real estate finance employees through a wide range of educational
programs and a variety of publications. MBA's membership of over 2,300
companies represents all elements of real estate finance, including
firms serving both the single-family and commercial/multifamily
markets. Our membership features commercial banks, community banks,
credit unions, independent mortgage bankers, investors, brokers,
conduits, and industry vendors, among others.
I applaud the subcommittee for its efforts to better understand
problematic practices with respect to certain mortgage refinances
marketed to servicemembers and veterans of the U.S. military.
Servicemembers and veterans generally benefit from the streamlined
process for refinancing mortgages backed by a partial guarantee from
the U.S. Department of Veterans Affairs (VA). However, recent activity
in this market appears to be resulting in increased fee income for a
small group of lenders while leaving some borrowers in a worse economic
position. Such conduct is unacceptable and should be put to an end.
The remainder of my testimony will describe the VA mortgage market,
the mechanics of loan ``churning,'' the harm caused to borrowers by
such churning, and options for addressing the recent churning we have
witnessed in the market.
The VA Mortgage Market
VA mortgage loan programs play an important role in increasing the
availability of mortgage credit for servicemembers, veterans, and
surviving spouses. By guaranteeing a portion of the loan balance, VA
enables lenders to offer loans with more favorable terms, such as no
required downpayment. The VA share of the mortgage market has grown
over the past decade, constituting 10.3 percent of total originations
in 2016 versus 1.2 percent of total originations in 2007. Among
purchase loans, the VA share has increased from 2.4 percent to 9.2
percent over this period, while the VA share of refinances increased
from 0.3 percent to 11.5 percent (see Figure 1).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
While borrowers seeking to refinance their VA loans may apply and
be evaluated through their lender's full underwriting process, the VA
Interest Rate Reduction Refinance Loan (IRRRL) allows for a streamlined
refinance process that is often faster and entails lower costs. For
example, IRRRLs do not require a traditional appraisal or credit
underwriting package and can be originated with no additional funds
provided by the borrower at the time of closing. IRRRLs are, however,
limited to VA-to-VA refinances on properties for which the borrower has
already used his or her VA loan eligibility, and the borrower cannot
receive cash from the loan proceeds.
Generally, refinancing via an IRRRL allows the borrower to lower
the interest rate on the mortgage. In doing so, the lender may charge
the borrower origination fees, which are sometimes paid by the borrower
at origination and in other cases are rolled into the principal balance
of the loan. Depending upon the magnitude of both the fees and the
interest rate reduction, it may take the borrower a number of years to
recognize a net economic benefit on the refinance. The period of time
after which the fees are fully recovered through lower interest
payments is known as the ``recoupment period.'' The longer the
recoupment period, the less likely it is for a borrower to ultimately
recognize a net economic benefit from the refinance.
Loan Churning
Most lenders with VA loan products offer both purchase and
refinance loans to their servicemember and veteran customers. However,
the recent extended period of low interest rates has encouraged some
lenders to specialize in marketing and originating IRRRLs. A smaller
subset of these lenders, who in many cases are not the lenders that
originated the initial purchase loan, have reportedly undertaken
aggressive-and potentially misleading-advertising and solicitation
campaigns to generate increased IRRRL volume. In some cases, this
advertising or soliciting targets VA borrowers who have already
recently engaged in an IRRRL, convincing them to refinance yet again to
lower their interest rate by a very small amount while adding even more
fees to the principal balance on the loan. Some IRRRLs also move the
borrower from a low, fixed-rate loan to a slightly lower, but now
adjustable-rate, loan. In other instances, borrowers are promised
``cash back'' from their escrow account or the ability to effectively
``skip a payment.'' Such serial refinancing, or churning, provides
little or no long-term benefit to the borrower while essentially
stripping their equity and further extending the overall recoupment
period.
VA borrowers are particularly susceptible to churning in an
environment of falling interest rates, as these lower interest rates
present more opportunities for lenders to offer IRRRLs. And lenders
engaging in churning target IRRRLs due to their much lower origination
costs relative to fully-underwritten refinances. Many borrowers may be
unaware or may not fully comprehend the net economic impact of their
decision to refinance (or continually refinance), leaving them
vulnerable to situations in which they add substantial amounts to their
overall loan balance or lose their fixed interest rate while achieving
only small reductions in their monthly payments.
The harm caused by loan churning is not limited to the financial
condition of the individual borrower, however. Aggressive use of IRRRLs
by some lenders threatens to weaken investor demand for Government
National Mortgage Association (Ginnie Mae) securities that are
partially backed by VA loans. This outcome would negatively impact
access to credit for a wide range of borrowers.
The vast majority of VA loans are bundled into mortgage-backed
securities (MBS) that receive a guaranty of timely payment of principal
and interest by Ginnie Mae. These Ginnie Mae MBS in turn receive a full
faith and credit guaranty of the U.S. government. Importantly, however,
Ginnie Mae MBS are backed not only by VA loans, but also by loans
originated through the Federal Housing Administration (FHA), the U.S.
Department of Agriculture's Rural Development (RD), and the Public and
Indian Housing (PIH) insurance programs.
And like other mortgage refinances, IRRRLs represent a prepayment
of the original VA loan along with the origination of a new loan (with
new terms). Those prepayments flow through to the Ginnie Mae investors.
While these investors do not assume credit risk on the MBS due to the
U.S. government guaranty, they are exposed to prepayment risk. More
specifically, investors take into account the timing of future cash
flows from a bond when determining the price they are willing to pay
for that bond. If the rate of actual prepayments increases materially
and beyond what was reasonably estimated by the investor, the
anticipated income stream from the MBS will fall short of investor
expectations. This outcome lowers demand for Ginnie Mae MBS, thereby
decreasing the price of the bonds and increasing their yields.
The higher yields on Ginnie Mae MBS directly correspond to higher
mortgage interest rates for not only VA borrowers, but also FHA, RD,
and PIH borrowers. These higher interest rates broadly decrease access
to credit and exacerbate affordability concerns in the housing market,
particularly for first-time homebuyers and servicemembers and veterans.
It is worth reiterating that IRRRL churning does not appear to be a
widespread problem among the mortgage lender community, but rather an
activity that is confined to a small subset of lenders. Ginnie Mae has
recently taken steps to meet with lenders that may be engaged in this
practice, and to modify pooling requirements in order to limit the
economic benefits of churning. While helpful, these efforts are not
sufficient to end abusive activity.
MBA fully supports supervisory efforts to improve the policing of
the market, as well as appropriate regulatory and legislative efforts
to remove the ability or incentive for lenders to engage in churning.
MBA is mindful that any changes must be carefully crafted so as to
preserve legitimate refinancing options for servicemembers and
veterans. Among MBA's core objectives is the promotion of best
practices and standards that generate a healthy and responsible
mortgage market, and the association stands ready to assist in
developing and implementing solutions to the problem of churning.
Potential Policy Options
Many such solutions are available to address the problem. As noted,
Ginnie Mae has already begun taking positive actions using its limited
unilateral authority, first by issuing a six-month seasoning and
payment requirement on all streamlined refinance loans prior to their
eligibility for pooling, and then extending this requirement to all
cash-out refinance loans, as well. Ginnie Mae and VA have also
established a joint task force to analyze data and further develop
coordinated policies.
While loan seasoning requirements and joint analysis are important
steps, more is needed to fully prevent IRRRL churning. Fortunately,
many other practical options fall within the existing authority of VA
to implement. The most promising of these options target churning while
not impeding on the ability of servicemembers and veterans to obtain a
refinancing that does result in an economic benefit to them. For
example, a maximum recoupment period would inhibit lenders from
charging substantial fees in exchange for minor reductions in mortgage
interest rates. Further, a requirement instituting a net tangible
benefit test, which is already present for FHA streamlined refinances,
would more effectively ensure that the terms of the refinance produce
real benefits for borrowers. Limits on the amounts that can be added to
the principal balance would reduce equity stripping that can leave
borrowers worse off as a result of the IRRRL. And finally, targeted
consumer financial education regarding loan churning would better
inform borrowers about the potential for abuse. Such efforts should
focus particularly on servicemembers and veterans who are vulnerable to
abuses in IRRRL lending. MBA firmly believes that some or all of these
options-if crafted carefully-can eliminate abusive activities while
preserving appropriate streamlined refinancing opportunities for VA
borrowers.
Once again, I appreciate the opportunity to present this testimony,
and I look forward to working with the subcommittee to develop
practical solutions that will curtail VA loan churning and better
protect mortgage borrowers across the country.
Prepared Statement of Brock Cooper
Good morning, Chairman Arrington, Ranking Member O'Rourke and
members of the Committee. My name is Brock Cooper, and I am the general
counsel for Veterans United Home Loans.
I would like to thank you for allowing me the opportunity to come
before you today to discuss this important issue regarding lending
practices that impact our service members, our Veterans and our
military families. Before working for Veterans United, I served in the
Missouri Army National Guard from 2000 to 2006, achieving a rank of
Sergeant E-5. During my service in the National Guard, I was called to
active duty for an 18-month period from 2003 to 2005 for stateside
military police law enforcement duty at Fort Bragg in North Carolina.
Additionally, I was activated for Hurricane Katrina relief in 2005.
I purchased my first home in 2008 using the VA Loan, and used the
VA Interest Rate Reduction Refinance Loan (IRRRL) program to help lower
my monthly payment and interest rate on that initial home. I have
subsequently used the VA Loan to finance the purchase of three other
homes for my family. I have a current VA Loan, and fully understand the
pressures of the marketing practices employed by some industry
participants around the IRRRL program.
Two years after separating from the National Guard, I joined
Veterans United. We are a full-service, family-owned lender,
headquartered in Columbia, Missouri. We have nearly 2,400 employees
nationwide and are licensed in all 50 states and Washington D.C. Our
primary mission is helping Veterans, service members and their families
achieve the American dream of homeownership. We have been the nation's
No. 1 VA purchase lender each of the past two fiscal years, closing
more than 37,000 purchase loans in VA fiscal year 2017 alone. We have
now closed more than 165,000 VA purchase loans since originating our
first VA loan in 2003. Today, Veterans United represents 1 out of every
10 VA purchase loans originated. These stats are reflective of our
mission to help Veterans and their families get the most from their
hard-earned home loan benefit.
The Success of the VA Home Loan Program
Since our first VA Loan in 2003, we can attest the VA Loan is not
like other mortgages. It differs from conventional and all other
federal mortgage programs in that it is an earned service benefit - not
a federal discretionary program - available to our Veterans, qualified
active duty personnel and qualified surviving spouses. It is part of a
deep bond between those who serve and the taxpayers these Veterans
pledge to defend.
The VA Loan program stands out as a true success story. In VA
fiscal 2017, the program had a record 740,000 closings, hitting a
record $189 billion in volume. \1\ As of today, VA Loans represent 10
percent of the mortgage market. \2\ The program has featured the lowest
average interest rate on the market for more than three years, along
with the lowest foreclosure rate for more than 10 years. \3\ At the
same time, VA purchase loans are closing within two days of the entire
market - 47 days. \4\ These statistics are powerful considering VA
Loans represented about 1 percent of the mortgage market as recently as
2007. These facts demonstrate that by and large the VA Loan program is
providing the desired benefit that it was designed to deliver.
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\1\ Veterans Benefits Administration's VA Home Loans web page.
https://www.benefits.va.gov/HOMELOANS/Lender--Statistics.asp
\2\ EllieMae Origination Insight Report. November 2017. https://
static.elliemae.com/pdf/origination-insight-reports/Ellie--Mae--OIR--
NOVEMBER2017.pdf. Page 3.
\3\ EllieMae Origination Insight Report. November 2017. https://
static.elliemae.com/pdf/origination-insight-reports/Ellie--Mae--OIR--
NOVEMBER2017.pdf. Page 5 & Mortgage Bankers Association National
Delinquency Survey.
\4\ EllieMae Origination Insight Report. November 2017. https://
static.elliemae.com/pdf/origination-insight-reports/Ellie--Mae--OIR--
NOVEMBER2017.pdf. Page 4
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This is the story we must protect. All decisions about the VA Loan
program must be made to ensure we improve this hard-earned service
benefit, while making sure the program continues to be healthy and
sustainable as it continues to make homeownership possible for
America's bravest.
Improvements to the VA IRRRL Program
Veterans United has been involved in the policy discussion
surrounding the IRRRL program for many years. Our primary concerns
remain that in some instances IRRRLs do not represent a true reasonable
value to Veterans, and that serial abuse of IRRRLs could impact
interest rates long-term, making it more difficult for Veterans to
purchase homes.
At Veterans United, we offer IRRRLs primarily as a way to better
serve the Veterans and service members who have initially come to us
for purchase loans, and whose loan we are now servicing. As of the
beginning of 2018, we service about $8 billion in VA Loans. To provide
perspective, IRRRLs accounted for a little more than 6 percent of our
overall loan volume in VA fiscal 2017.
It is critical to remember that first and foremost, the whole idea
behind the IRRRL is to put Veterans in a better financial position
today than they were yesterday. This is what guides our approach - is
this new loan making the Veteran's life better today and in the future?
No lender should look only at immediate or long-term benefits. The
lender must understand how long the Veteran intends to live in the
home, the consequences of interest rate increases or decreases and the
overall financial makeup of each customer. It does not matter how much
a refinance purports to save a Veteran homeowner if it will take them a
decade to recoup loan costs and fees that swell their loan balance.
That does not put Veteran homeowners in a stronger financial position
because they have less equity or may even be upside down on their home
when they go to sell. The same could be said for convincing someone to
refinance into an adjustable-rate mortgage without discussing the
possibility for future rate increases or the potential for additional
costs and decreased equity when later refinancing back into a fixed-
rate mortgage.
We believe there is a clear value when Veterans lower their
mortgage payments or when they can move from adjustable-rate mortgages
to fixed-rate mortgages, as long as they can recoup the costs and fees
from that new loan within a reasonable time frame and do so after a
reasonable time period from the initial close.
This is an important way we look at refinance loans - there is not
a strict, one-size-fits-all savings because there is a not a one-size-
fits-all Veteran or military family.
In addition, an IRRRL serves a valuable function outside of
reducing interest rates - it accounts for life's changes and
challenges. Veterans and service members have a unique service benefit
in using IRRRLs to account for these changes and challenges, such as
the death of a spouse, marriage or a divorce. These are three common
reasons to use the IRRRL to clean up a title, and we feel strongly they
should be maintained.
We all know of serial refinance companies that are aggressively
contacting Veterans and their families with misleading mortgage offers.
Three primary problems are caused by this activity: long-term financial
harm to the Veteran; increased interest rates for Veterans purchasing a
home; and long-term harm to the VA Loan program.
The harm to the Veteran homeowner may be a recoupment period that
is unjustifiably long, leaving them owing more than their home is worth
or higher future costs because they've been convinced to refinance
their fixed-rate loan into an ARM.
The harm to Veterans purchasing a home is higher interest rates.
When Veterans with a VA Loan are convinced to refinance again and
again, the company making the original mortgage must buy it back from
the secondary market, often paying steep penalties. While hard to
quantify, this cost is inevitably passed on to Veteran homebuyers in
the form of higher interest rates.
These higher interest rates are also a negative to the overall
program. High interest rates make the program less competitive in the
marketplace, and that hurts the VA Loan program's ability to invest for
the future.
Maintaining Strong Service Benefits for Veterans, Service Members and
their Families
We appreciate that the VA Loan Program's leadership and Ginnie
Mae's leadership are actively engaged on this issue and committed to
protecting Veterans while ensuring they have full access to their hard-
earned benefits. We support the agencies' joint task force, and we
believe that Ginnie Mae's recent decision to pool IRRRLs made within
six months of the original closing differently is a step in the right
direction. We support the quick call to action Ginnie Mae has made to
address churning of VA loans, including Ginnie's move this past month
to incorporate cash-out refinances into their refinance pooling policy.
These rules would appear to address most of the problems affecting
Veterans using their IRRRL benefit; the only portion we feel is still
missing is the recoupment of refinance costs and fees within a set time
frame.
We support efforts to empower the VA to make program changes in a
more expeditious manner. Today, Ginnie Mae, Fannie Mae, Freddie Mac and
the FHA can make corrective program guidance decisions relatively
quickly for a wide range of topics pertaining to the programs they
administer. Alternatively, the VA has to go through a full, formal
rulemaking process for relatively narrow, technical program changes
that could be much more easily corrected through these other programs.
This can prevent needed narrow fixes that would benefit our Veterans
from ever taking place. While rulemaking should still be required for
extensive program changes, we support a more expeditious process for
lesser ones.
We would urge that any Congressional fixes not become too ``in the
weeds'' or prescribe specific requirements that could potentially cut
off the VA Home Loan benefit for some Veterans who have earned it.
Instead, Congress should empower the VA to quickly implement new
reasonable guidelines for IRRRLs given the VA's vast experience with
the program and the Veterans it benefits, and those guidelines can be
adapted over time. Mortgage markets do change and Congressional
legislation, once enacted, can be set for 10 or even 20 years. A
solution must work well this year, next year and 10 years down the
road. We see instances time and again where rules that consider the
unique circumstances of each Veteran create real value for our military
families.
The Next 70 Years of the VA Home Loan Program
Members of this Committee, the IRRRL is an important aspect of a
hard-earned service benefit created more than 70 years ago. The entire
premise of the IRRRL is to provide a no-frills, low-cost loan to help
Veterans save money, strengthen their overall financial health and
adjust to life's unforeseen events, while not hurting the ability of
fellow Veterans to make their own homeownership dreams a reality.
Unfortunately, loans are being made that fail to live up to the spirit
and intent of this long-cherished service benefit.
Veterans United believes reasonable seasoning and recoupment
periods are essential to protect Veterans and the long-term viability
of the VA Loan program and to ensure Veterans are clearly benefitting
from a VA refinance. To date, Ginnie Mae has addressed the seasoning
requirements, and we believe VA is best suited to address a recoupment
period. We look forward to helping the VA Loan Guaranty Program, Ginnie
Mae and other stakeholders in any way we can to best serve those who
have served us.
Finally, it's worth noting that those entering the military take an
oath of office very similar to the oath taken by Members of the House:
all swear to ``support and defend the Constitution of the United States
against all enemies, foreign and domestic, bearing true faith and
allegiance to the same.''
All serve, of course, but those in the military pledge their very
lives in the process. We are all here to ensure that those pledging so
much receive the very best from us in return.
Thank you again, Mr. Chairman and the Committee, for allowing me to
come before you today.
Statements For The Record
QUESTIONS & ANSWERS FOR THE RECORD
Ginnie Mae Responses
1. Please explain in detail the reason that Ginnie Mae does not
publicly publish on its website the names of lenders that it has fined
in the past, including those it has fined for breaking the 2017 Ginnie
Mae policy that required VA loans to be at least six months old before
being refinance.
Ginnie Mae has the statutory authority to levy Civil Money
Penalties (CMP) for many types of program violations. Typically, Ginnie
Mae's use of CMPs focuses on violations that relate to reporting and
remittance of principal and interest, as those are clear cut program
violations and are critical to Ginnie Mae operations. As noted in the
hearing on January 10, 2018, Ginnie Mae has issued CMPs for violations
of All Participants Memorandum (APM) 16-05, but has not made public the
list of issuers who received CMPs.
Ginnie Mae is not statutorily required to publicize CMPs, and
historically it has chosen not to do so. The two principal reasons for
this are:
Most Issuers take program violations seriously, and they
are usually responsive to Ginnie Mae enforcement actions.
For publicly traded companies or companies that rely on
borrowing facilities, the introduction of reputational risk into Ginnie
Mae enforcement activities could result in market consequences for
issuers that would be harmful to the overall management of the Ginnie
Mae MBS program.
2. Please state whether, in the future, Ginnie Mae would consider
publicly publishing the names of lenders it has fined for breaking its
policies.
There are circumstances where it could be in Ginnie Mae's interest
to publicize a CMP enforcement action. Ginnie Mae reserves the right to
do so if it deems such action would be warranted, helpful, and
appropriate. Ginnie Mae is currently examining the benefits and
drawbacks of publicizing CMPs in relation to the VA loan churn APM.