WASHINGTON -- The federal agency that helps millions of veterans obtain mortgage money is cracking down on lenders who overcharge unsuspecting applicants seeking to lower the interest rate on their existing loans.
In a national policy directive sent out to all Department of Veterans Affairs offices Jan. 25, the head of the VA loan program warned that the agency "has recently seen a number of [refinance] loans in which the veteran is being charged a high number of points, and the points are included in the loan." The directive "strongly urged" lenders to limit the number of points charged in all "streamline" refinances to no more than two on new VA mortgages they originate.
A point is equal to 1 percent of the loan amount. Under the VA's popular "interest rate reduction refinancing" program, veterans with mortgages carrying rates above currently prevailing levels can apply for a quick rate reduction through any lender approved to do business with the VA. The program is dubbed "streamline" because the homeowner need not undergo a new credit check or pay for a new appraisal of the property. All closing costs -- including "reasonable" points -- can be rolled into the new loan amount.
Although fiscal 1995 statistics on the program were not available, streamline refis accounted for 289,000 loans guaranteed by the agency in fiscal 1994. In an interview, Keith Pedigo, director of the VA guaranty service, offered a real-life example of the type of fee overcharges the new policy is aimed at curbing:
A veteran with an existing $100,000 VA mortgage at 8 1/2 percent was contacted by a lender who offered to reduce his rate to the current market level of 7 percent. No credit hassles, no cash out of pocket, no new appraisal. It sounded like a smart move, and the vet signed up. What he found at closing, however, was that in exchange for the 7 percent rate, he got socked with about $8,000 in new fees that were rolled into the refinanced principal balance. Roughly $6,000 of that was in loan discount fees -- six points. Loan originators typically pocket most or all of such points before selling off the loan to a secondary market investor.
The homeowner walked away with a $108,000 loan in this case, rather than the $100,000 loan he started with. Monthly principal and interest payments were indeed lower -- roughly $719 versus $769 -- but the veteran essentially got ripped off. ln the event the owner needs to sell the house, said Pedigo, "it is likely the loan balance would exceed the [sale] proceeds" -- leaving the vet in the hole.
The vast majority of lenders who work with the VA, Pedigo emphasized, "charge reasonable fees and comply with the spirit of the program."
Though the agency expects most lenders to adhere to the new two-points-maximum directive, Pedigo confirmed that issuance of formal regulations will be required for the policy to have full legal effect. Since that process may take weeks to complete, the Jan. 25 directive requires that in the interim all new, streamline-refi loans closed with more than two points will have to include a printed statement, signed by the veteran, as part of the closing package. The statement warns of consequences of higher-point loans.