Lenders target veterans again with predatory home loans


For years, serving military personnel and veterans looking to buy or refinance homes have been the target of unfair loan programs, ranging from high fees and high interest rates to unfavorable refinancing plans – a practice that was at the center of federal lending reforms in 2018.

Corn a report published on Tuesday by Rep. Katie Porter, D-Irvine, suggests that these protections may have been short-lived.

According to Porter’s report, two lending practices generally viewed as unfavorable to all consumers have been steadily increasing among seasoned consumers since July 2020. One is cash refinancing, in which homeowners are encouraged to cash out a portion of equity in their home, but owe much more money, often on less favorable terms. The other is loan churning, in which a homeowner is asked to refinance a mortgage soon after it is issued in order to generate income from repeated closing costs for the lender.

Porter said some of the lenders punished for such tactics a few years ago are back, charging “tens of thousands of dollars more for the same loan as their competitors,” adding that she called for further reforms to prevent the resumption of these practices. .

She also called on regulators to immediately suspend two major Veterans Affairs, or VA, real estate lenders: NewDay USA and The Federal Savings Bank.

“The administration has a duty to step in and prevent these scams from happening,” said Porter, a former UC Irvine law professor and author of a legal textbook, “Modern Consumer Law.”

John Calk, managing director of Federal Savings Bank, a Chicago-based lender with an office in Irvine, said in a statement Tuesday that his management team did not have time to review Porter’s full report and n had not yet been able to comment.

NewDay USA released a company statement that refuted several of Porter’s claims. Among other things, the Maryland-based company said its interest rates were higher than those of its competitors because it sells cash refinance loans to customers with lower average credit scores, a group of customers generally ignored by other lenders.

“NewDay USA’s mission is to serve the veterans of our country and we are proud of the work we do to help them achieve their dream of home ownership.

Seven members of Congress – led by Representative Mike Levin, D-San Juan Capistrano – on Tuesday signed a letter asking federal regulators to review Porter’s analysis.

“We all need to make sure that VA lenders do not abuse this program for their own benefit and diminish the ability of veterans to afford and retain ownership of their homes.”

The VA Home Loan Program, established in 1944, has traditionally provided the military, veterans, and eligible dependents with affordable mortgages. Often times, because the loans are guaranteed by the VA, these mortgages do not require a down payment.

But while the program has helped many military families reach the middle class, Porter said it has also become a target-rich environment for predatory lenders because many military borrowers are young and these companies can set up businesses. offices around military bases, where few other lenders operate. .

“Because the big banks have chosen not to provide VA loans, veterans have only a small number of lenders to choose from,” said Jason Richardon, director of research and evaluation at the National Community Reinvestment Coalition, a nonprofit organization that tracks lending practices in underserved communities.

Although VA data shows NewDay USA was the 10th largest VA lender in the second quarter of this year, with 7,075 total loans valued at nearly $ 1.6 billion, the company was No. 4 in terms of cash refinancing loans.

NewDay USA says VA withdrawal loans were only 13% of products sold in 2020. And the company says its customers saved an average of $ 617 per month by opting for VA withdrawal refinance.

The Federal Savings Bank was No. 12 for overall loans last quarter, but No. 6 for cash refinance loans.

Porter’s report includes a sample 2019 letter sent to veterans by the Federal Savings Bank labeled “expiration notice.” Porter argues that while the mail was designed to look like an official government document telling veterans to take action regarding their VA loan, it was actually an advertisement offering a loan from the government. refinancing in cash.

In August 2018, cash-out 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 up to the equivalent of an additional $ 28,000 on a $ 400,000 mortgage.

There were also reports of lenders giving loans with high interest rates so that they could later push veterans to refinance quickly and collect additional fees.

In a 2018 report, the VA wrote, “Essentially, lender is reigniting subprime lending under a new name,” referring to the type of financial product that in 2007 triggered the Great Recession.

Senators Thom Tillis, RN.C., and Elizabeth Warren, D-Mass., Helped push through the 2018 reforms to curb these practices. The Trump administration and Congress have passed regulations to reduce mortgage turnover and strengthen consumer protection for seasoned borrowers. Among other things, the new rules established a six-month “cool-down” period before any new mortgage could be refinanced.

From 2018 to 2019, eight different lenders were suspended from the VA home loan program due to churning concerns.

NewDay USA was among those suspended at the time, although the company argued on Tuesday that it was on the list because “other companies were targeting recent NewDay USA withdrawal loan customers for refinancing in the months after closing a loan with NewDay USA because their credit scores started to improve.

New cash-out refinancing loans remain below their 2019 high, but are up 50% since July 2020.

“It is likely that the veterans who received these loans in 2020 accessed these assets to help them overcome the financial challenges of the pandemic,” Levin and colleagues wrote in their letter to regulators.

“However, (Porter’s) report found that some VA lenders are imposing unfavorable loan terms and higher than average costs on veterans.”

Porter’s report says that in 2020, the average initial cost of a cash refinance issued by NewDay USA was nearly double that of competitor USAA and higher than all but one of the major lenders.

“This bad behavior has to stop,” Porter wrote.

Levin and his colleagues have asked the VA, the Consumer Financial Protection Bureau and Ginnie Mae to share their findings and inform them of any action they take regarding the issues pointed out in Porter’s report.

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