For years, military personnel and veterans looking to buy or refinance a home have been the targets of unfair lending schemes, ranging from high fees and high interest rates to unfavorable refinancing plans – a practice that has been the focus of federal lending reforms in 2018.
But report released on tuesday Rep. Katy Porter, Dr. Irvina, suggests that these protections may have been short-lived.
Since July 2020, two types of lending have steadily grown among older consumers, which are generally considered unfavorable for all consumers, according to Porter’s report. One is cash-based refinancing, in which homeowners are encouraged to cash out some of the equity in their homes, but they still owe significantly more money, often on less favorable terms. Another is loan cancellation, in which the homeowner is encouraged to refinance the mortgage shortly after issuing it in order to get a second income from closing costs for the lender.
Porter said some lenders punished for this tactic several years ago have come back to her, charging “tens of thousands of dollars more for the same loan than their competitors,” adding that she is asking for more reforms to prevent such a resurgence. practice. …
She also called on regulators to immediately suspend two major mortgage lenders: NewDay USA and The Federal Savings Bank.
“The administration has a responsibility to step in and prevent this fraud,” said Porter, a former law professor at the University of California, Irvine and author of the legal textbook Modern Consumer Law.
John Kolk, chief executive of The Federal Savings Bank, a Chicago-based lender based in Irvine, said Tuesday in a statement that his management had not seen Porter’s full report and could not comment yet.
NewDay USA released a company statement refuting some of Porter’s claims. Among other things, the Maryland-based company said its interest rates were higher than those of competitors because it sells cash-to-cash refinancing loans to clients with lower average credit ratings, a group of clients that are usually ignored by other lenders.
“NewDay USA’s mission is to serve our country’s veterans, and we are proud of the work we do to help them fulfill their dream of owning a home.”
Seven members of Congress, led by MP Mike Levin, a demon from San Juan Capistrano, signed a letter Tuesday asking federal regulators to revise Porter’s analysis.
“We must all make sure that VA lenders do not abuse this program to their advantage or limit the ability of veterans to afford and retain ownership of housing.”
The VA Home Loan Program, established in 1944, has traditionally provided military personnel, veterans, and eligible dependents with affordable mortgages. Often, as the loans are secured by VA, these mortgage loans did not require a down payment.
But while the program has helped many military families get to the middle class, Porter said it has also become a breeding ground for predatory lenders, as many military borrowers are young and these companies can open offices around military bases where few other lenders work. …
“Because the big banks have opted not to lend VA loans, veterans have only a handful of lenders to choose from,” said Jason Richardon, director of research and evaluation for the National Community Reinvestment Coalition, a nonprofit that tracks lending practices in traditional countries. underserved communities.
Though VA data show NewDay USA was the 10th largest VA lender in the second quarter of this year with 7,075 loans totaling nearly $ 1.6 billion, the company was the 4th largest cash-based refinancing loan.
NewDay USA claims that VA cash-settled loans accounted for only 13% of products sold in 2020. The company says its clients saved an average of $ 617 per month by opting for VA cash-back refinancing.
Last quarter, the Federal Savings Bank ranked 12th for total loans and 6th for refinancing cash-based loans.
Porter’s report includes an example of a 2019 mailing sent to veterans by the Federal Savings Bank labeled “expiration notice.” Porter argues that while the mailing list was designed to look like an official government document telling veterans to take action on their VA loan, it was actually an advertisement for a cash-in refinancing loan.
In August 2018, cash-settled refinancing loans peaked, accounting for 87.1% of all new VA home loan products. Such loans can come with lower monthly payments, but add long term costs to VA loans, in some cases even the equivalent of an additional $ 28,000 on a $ 400,000 mortgage.
Cases have also been reported of lenders providing loans at higher interest rates so that they can later push veterans to refinance quickly and collect additional fees.
In a 2018 report, VA wrote, “Essentially, the lender is resurrecting the subprime lending period under a new name,” referring to the type of financial product that triggered the Great Recession in 2007.
Senator Tom Tillis, North Carolina, and Elizabeth Warren, Massachusetts helped introduce reforms in 2018 to curb the practice. The Trump administration and Congress have passed regulations aimed at curbing mortgage outflows and strengthening consumer protection for old borrowers. Among other things, the new rules established a six-month “cooling off” period before refinancing any new mortgage.
From 2018 to 2019, eight different lenders were suspended from the VA home loan program due to fears of churn.
NewDay USA was among those suspended at the time, although the company said Tuesday it was listed because “other companies were targeting NewDay USA’s recent cash-out loan clients for refinancing for several months thereafter. how they closed the loan with NewDay USA because their credit ratings started to improve. “
New cash-on-demand refinancing loans remain below the 2019 high but are up 50% since July 2020.
“It is likely that the veterans who received these loans in 2020 gained access to these assets to help them overcome the financial problems associated with the pandemic,” Levin and his colleagues wrote in their letter to regulators.
“However, (Porter’s) report showed that some VA lenders are burdening veterans with unfavorable loan terms and above average costs.”
Porter’s report says that in 2020, the average upfront cost of cash-to-cash refinancing issued by NewDay USA was nearly double that of rival firm, USAA, and higher than all but one major lender.
“This bad behavior must stop,” Porter wrote.
Levine and his colleagues asked VA, the Consumer Financial Protection Bureau and Jeannie Mae to share any findings and notify them of any action they take on the issues highlighted in Porter’s report.