Recent news reports examining predatory lending practices targeting American veterans are failing to account for the efforts of how many respectable lenders are working to help an underserved veteran community access the benefits they have been promised and rightly deserve.
Both the Veterans Administration and the Government National Mortgage Association (Ginnie Mae) are working with the lending industry to address a practice known as veteran loan “churning.” Churning is a term used to describe how veteran borrowers are continuously enticed by unscrupulous lenders to refinance their mortgages and even skip a month or two of mortgage payments. The practice hurts veterans as they often pay expensive origination fees each time they refinance their loans and only reduce their mortgage payments by negligible amounts.
Ginnie Mae is considering several policy changes to stop churning. I commend efforts to end this unscrupulous practice so long as they don’t shut down legitimate financial products and services for veterans. The only real way to end loan churning is to eliminate the economic opportunity.
NewDay has called for two policy changes — practices we already implement — that could virtually end loan churning. The first is to end loan origination fees charged on the VA Interest Rate Reduction Refinance Loan program (IRRRL). Unnecessary origination fees represent a substantial cost to veteran families. The second policy change is to allow lenders the ability to refinance a borrower using the IRRRL program only once a year. Under existing rules, these loans can be refinanced after six months.
A veteran’s financial journey consists of accessing two very important VA benefits, the VA Cash Out Mortgage as well as the interest rate reduction refinance loan.
Step one is the VA Cash Out Mortgage benefit. Veterans, like anyone else, occasionally encounter life-altering events such as death of a spouse, job loss, divorce or a health issue. In these cases, they need extra money for their families or to consolidate debt. A cash out refinance may be the best option, and NewDay serves these borrowers by providing such financing.
By using the VA Cash Out benefit, veterans can consolidate high-interest debt, increase their monthly cash-flow by $650, saving nearly $8,000 per year. Many veterans are also able to place thousands more into savings. This transformation also results in their credit scores improving by nearly 30 points.
The second step on a veteran’s financial journey often consists of taking advantage of the VA IRRRL program. The only time NewDay refinances a veteran’s existing loan is if the veteran moves into a better financial position determined by the VA’s net tangible benefit test. Our long-established business practice of not charging borrowers an origination fee when they use the VA IRRRL program is a practice the rest of the industry can follow.
One out of four veteran customers tells us they have been rejected by major banks while applying for the VA benefits they are entitled to receive. When veterans cannot access their VA benefits, they pay much higher credit card interest rates of 20 percent or go to high interest, payday lenders.
It is my hope the Ginnie Mae, the VA and the lending industry can work together to enact policy changes that effectively end loan churning, but in the meantime we will act as an advocate for American veterans and provide them with sound financial services they deserve.