Last month, Ginnie Mae and the Department of Veterans Affairs began to crackdown on VA loan churning, or persuading homeowners to refinance a mortgage when unneeded to generate additional profit for the lender. In order to boost its oversight, the government-owned corporation introduced a new task force to specifically monitor any refinance activity; however, a bipartisan group of senators does not think this task force will eliminate the problem. Instead, the 12 senators have voted to enforce the “Protecting Veterans from Predatory Lending Act”.
In addition to requiring lenders to establish a “material benefit” for those deciding to refinance, the bill mandates the following:
- The VA refinance will only be approved if all associated fees can be repaid within three years through lower monthly payments
- The refinance loan must be 50 basis points lower than the prior fixed-rate loan or 200 basis points lower than the initial adjustable-rate loan to get VA insurance for a refinance loan
- The refinance must be filed no less than six months after the initial loan to receive VA insurance or a Ginnie Mae guarantee
Although the Protecting Veterans from Predatory Lending Act serves to diminish the targeting of active service members and veterans, it is important for men and women requesting VA loans to learn how to spot predatory lenders themselves. For example, if you are an active-duty, active-reservist, or family member, then you are covered by the Military Lending Act (MLA). If you fall in this category, you should particularly be aware of the following protections:
- Lenders cannot charge you more than 36% interest on loans of less than $2,000 that are to be repaid within 91 days
- Rolling over a payday loan is prohibited by the MLA
- You can NOT forfeit your right to legal remedy as an active service member
- You do NOT need to pay through the military allotment system, as it can lead to added costs
All active service members and veterans should also develop a strategy to avoid these types of lenders. Make sure to note the following as you create this action plan:
- Short-term loans should NOT be your go-to option. Many predatory lenders market short-term loans as a quick and easy way to get financial aid when needed. Most short-term loans, however, have higher fees than long-term ones and can lead to more debt in the long-run.
- Store the Department of Defense number in your phone book. They can provide any and all information you need regarding MLA protections. The number is 1-800-342-9647.
- If the repayment term is longer than 91 days, make sure to conduct extensive research on your lender, as MLA protections will likely not apply.
- Research your state’s collection laws. If you default on a loan, this is what your lender will collect from you.
Overall, Congress has made great progress in cracking down on predatory lenders for VA loans; however, active servicemen and veterans must still learn to recognize and protect themselves and their finances. For more information about how veterans can protect themselves from predatory lenders, or to learn more about VA loans in general, contact one of our mortgage specialists today.