For years, active-duty military and veterans looking to buy or refinance a home were the target of unfair loan schemes that ranged from costly fees and high interest rates to unfavorable refinancing schemes — a practice that spurred federal loan reforms in 2018. was the center of
but a report released on Tuesday Representative Katie Porter, D-Irvine, suggests those protections may be short-lived.
As per the Porter report, the two lending practices, generally seen as unfavorable for all consumers, have been steadily increasing among experienced consumers since July 2020. One is a cash-out refinance, in which homeowners are encouraged to cash in some equity in their homes, but often under less favorable terms, leaving due to more money. The second is loan churning, in which a homeowner is urged to refinance a mortgage shortly after it is issued as a way to generate repeated closing cost income for the lender.
Porter said some lenders who were penalized for such tactics a few years ago have come back, charging “thousands of dollars more for the same loan than their competitors,” adding that he doesn’t care about these practices. Calling for new reforms to stop the revival of .
She called on regulators to immediately suspend two major Veterans Affairs, or VA, home loan lenders: Newday USA and The Federal Savings Bank.
“The administration has a duty to try and prevent these scams,” said Porter, a former law professor at UC Irvine and author of “Modern Consumer Law,” a legal textbook.
John Kall, chief executive officer of Federal Savings Bank, a Chicago-based lender with an office in Irvine, said in a statement Tuesday that his leadership team did not have time to review Porter’s full report and could not yet comment.
Newday USA issued a company statement refuting several of Porter’s claims. Among other things, the Maryland-based company said its interest rates were higher than those of competitors because it sold cash-out refinance loans to customers with low average credit scores, a customer group that is usually overlooked by other lenders. .
“NewDay USA’s mission is to serve our nation’s veterans and we are proud of the work we do to help them achieve their dream of home ownership.”
Seven congressional members — led by Representative Mike Levine, D-San Juan Capistrano — signed a letter Tuesday asking federal regulators to review Porter’s analysis.
“We should all make sure that VA lenders don’t abuse this program to their own advantage and undermine veterans’ ability to afford and maintain home ownership.”
The VA Home Loan Program, established in 1944, has traditionally provided affordable mortgages to service members, veterans, and eligible dependents. Often, because the loans are backed by the VA, those mortgages do not require a down payment.
But while the program has helped many military families reach the middle class, Porter said it has become a target-rich environment for predatory lenders, as many military borrowers are young and these companies set up offices around military bases. Where some other lenders operate. .
“Since the big banks have chosen not to make VA loans, the giants have only a small number of lenders from which to choose,” said Jason Richardon, director of research and evaluation at the National Community Reinvestment Coalition, a nonprofit that Tracks lending practices from traditionally disadvantaged communities.
Although VA data shows Newday USA was the 10th largest VA lender in the second quarter of this year, with a total of 7,075 loans valued at approximately $1.6 billion, making the company No. 4 in terms of cash-out refinance loans.
NewDay USA argues that VA cash-out loans accounted for only 13% of products sold in 2020. And the company says its customers saved a weighted average of $617 per month by opting for a VA cash-out refinance.
Federal Savings Bank was No. 12 for overall loans last quarter but No. 6 for cash-out refinance loans.
Porter’s report includes an example of a 2019 mailer sent by The Federal Savings Bank to veterans labeled “termination notices.” Porter argues that while the mailer was designed to look like an official government document telling veterans they needed to take action related to their VA loans, it was actually a cash-out refinance. There was an ad pitching the loan.
In August 2018, cash-out refinance loans peaked, accounting for 87.1% of all new VA home loan products. Such loans may come with lower monthly payments but can add long-term costs to VA loans, in some cases the equivalent of an additional $28,000 on a $400,000 mortgage.
There were also examples of lenders offering loans with elevated interest rates to prompt veterans to refinance quickly and collect additional fees later.
In a 2018 report, the VA wrote: “Essentially, the lender revives the subprime lending period under a new name,” referring to the type of financial product that triggered the Great Recession in 2007.
Censors Thom Tillis, RNC, and Elizabeth Warren, D-Mass., helped pass 2018 reforms to reduce such practices. The Trump administration and Congress passed rules to reduce mortgage churn and strengthen consumer protections for veteran borrowers. Among other things, the new rules established a “cooling” period of six months before any new mortgage could be refinanced.
From 2018 to 2019, eight different lenders were suspended from the VA home loan program based on concerns over churn.
Newday USA was among those suspended at the time, although the company argued Tuesday that the list was included because “other companies with Newday USA sought to refinance loans in the months following the closure of loans with Newday USA cash-out loan customers.” as her credit score started improving.”
New cash-out refinance loans are down from 2019 highs but up 50% from July 2020.
“It is likely that veterans who received these loans in 2020 will use these assets to help them through the financial challenges related to the pandemic,” Levine and his colleagues said in their letter to regulators.
“However, the (Porter’s) report found that some VA lenders are grieving veterans with disadvantageous loan terms and higher-than-average costs.”
The Porter report noted that the average up-front cost of cash-out refinances issued by NewDay USA in 2020 was nearly twice that of competing firm USAA, and higher than all but one major lender.
“This bad behavior must stop,” Porter wrote.
Levine and his colleagues asked the VA, the Consumer Financial Protection Bureau and Ginny Mae to share any findings and to inform them of any action taken related to the issues flagged in Porter’s report.