VA Thought of the Week: Interest Rate Reduction Refinance Loan Transactions

Blog posted On June 24, 2019

In the first 4 installments, we covered overall refinance rules and a detailed review of cash-out refinance rules.  In this installment, we will cover the specifics of an Interest Rate Reduction Refinance Loan transaction.

VA IRRRL loans, and VA Refinance loans in general, were changed in 2018 with the signing of SB 2155 into law on May 24, 2018.  This new law designated as 38 USC 3709 made several new requirements to VA refinance loans, including the VA IRRRL. 

Recoupment:

The new law, begins by requiring all VA Refinance loans, including an IRRRL, to recoup the cost of the loan in 36 months.  This requirement details the fees to include in this calculation as “closing costs, and any expenses (other than taxes, amounts held in escrow, and fees paid under this chapter) that would be incurred by the borrower in refinancing the loan.”  The recoupment is calculated by dividing the cost of refinancing by the monthly savings in the P&I for the new loan.

For the IRRRL Comparison Statement, add the following categories from the Loan Estimate or Closing Disclosure: (1) Origination charges, services borrower did not shop for, services borrower did shop for, taxes and other government fees, other, or VA funding fee (2) For the final Statement, subtract any lender credits from section J. (3) The remainder is the closing costs for the final recoupment calculation. (4) Divide the closing costs in (3) above by the decrease in monthly principal and interest payment for the number of months to recoup.

Net Tangible Benefit Test:

A VA IRRRL must have a benefit to the Veteran and the rate on a fixed rate loan to a fixed rate loan must reduce the rate by 50 basis points, or ½ percent. (no valuation is required specifically based on whether or not discount points are used to obtain the rate; CMG standards for requiring a valuation product based on CMG credit score thresholds do apply)

• A VA IRRRL refinancing a fixed rate loan to an adjustable rate loan must reduce the rate by 200 basis points, or a full 2 percent, and
• The lower rate cannot be produced solely from discount points, unless
  • The points are paid at closing; and
  • The points are not added to the principal loan amount, unless
    • Discount points of 1% or less the LTV cannot exceed 100% (a value must be established in this case)
    • Discount points of more than 1% the LTV cannot exceed 90% (a value must be established in this case)

This statement on valuation and discount points means that if the borrower pays discount points in cash, a valuation is not necessary unless required per CMG credit score thresholds as noted in the guidelines.

Loan Seasoning:

All VA IRRRLs must meet a seasoning requirement.  To meet this requirement, the loan being refinanced must be seasoned at least 210 days after the date the first payment was made on the loan.  This doesn’t mean the date the borrower sent the payment, nor does it mean the date the first payment was due.  It clearly means the date the servicer applied the first payment on the loan being refinanced.

The loan being refinanced must also have at least 6 payments made.

To be safe, never set a closing date on any loan less than 9 months from origination without knowing the date the first payment was applied by the servicer.  And then don’t set the new closing date until day 211, not 210 days from the date the first payment was made.  In addition, any loan with less than 12 months of seasoning must have the payment history from the servicer, or from a credit report.  Obviously, if the loan is more than 9 months old, and the credit report shows at least 6 payments have been made and none of them were late (especially the 1^st payment) then the credit report will satisfy the need for the history showing that we have exceeded the 210 day requirement as well as 6 payments.  However, if we cannot ascertain when the first payment was made, then we must have the payment history from the servicer.

Disclosure:

All VA IRRRLs must have a disclosure sent to the borrower within 3 days of application and again at closing with the CD.  The disclosure must provide the borrower with a comparison between the old loan and the new loan that explains the benefit to the borrower and the recoupment of the cost of the new loan.  The disclosure MUST be accurate to the best of your knowledge and cannot be estimated.  In other words, you have to have the best knowledge of the borrower’s old loan:  remaining balance, date of origination, P&I payment.  You have to have this in order to complete an LE so you will need to know it for this disclosure as well. 

There are no exceptions to getting this disclosure correct and you could be forced to cancel the loan and start it over.  A grossly incorrect disclosure could affect your interest rate lock if you have to cancel the loan and start over with a new loan and new lock.  It could possibly affect your ability to make the loan if rates change enough to keep you from getting the reduction required by law.  It is up to you as the Loan Officer to ensure the information on the disclosure is correct BEFORE it is sent to the borrower.

Several policy statements have been issued recently regarding the disclosure requirements.  Please make sure you seek these out and ensure that you have completed the disclosures correctly.