As Veterans Day approaches and we take time to honor the men and women who have selflessly served in our armed forces. We must also recognize that the financial services industry can take important steps to address a very real threat to veterans and protect those who may become targets of predatory lending practices.
Veterans making mortgage payments on VA loans are likely receiving multiple requests from lenders to save them money on their mortgage payments. Offers to frequently refinance loans at lower interest rates may sound appealing, but veterans and active military must be extremely cautious as many of these enticements to refinance could cost them much more money in the long run.
This predatory practice is called “loan churning.” It occurs when lenders make multiple offers to reduce home loan interest rates, but only by a negligible amount, perhaps only a quarter percentage point. Lenders then tack on origination fees and expensive closing costs to the unpaid loan balance as part of the loan refinance process.
Churning is a disreputable practice that takes advantage of military men and women and retired veterans. This predatory activity can be halted by the lending industry working closely with financial regulators.
The biggest target by churners is a widely used loan called the VA Interest Rate Reduction Refinance Loan (IRRRL). At my Veteran’s mortgage lending company, we have long established lending practices that can become an industry standard to greatly reduce, if not put an end to loan churning.
First and foremost, loan origination fees on IRRRLs should be eliminated. Origination fees often add thousands of dollars to the unpaid principal balance and take years to repay. Lenders should not have the ability, as they do now, to continue charging origination fees each time they refinance a borrower using the IRRRL program. Eliminating origination fees on IRRRLs removes the incentive to churning.
We can further protect veterans and servicemembers by only refinancing a borrower once per year using the IRRRL program. Under existing rules, these loans can be refinanced after six months.
The Veterans Administration (VA) and the Government National Mortgage Association (Ginnie Mae) are also taking a hard look at this practice and those who engage in this activity. Reputable lenders and Ginnie Mae officials are now discussing ways to end aggressive churning scams. A combination of lending industry input and a focused approach by government regulators could yield more solutions that would slow if not completely halt the practice of churning.
Our nation’s veterans along with their families have served selflessly. In many cases veterans have courageously risked their lives protecting the liberty and freedom we hold dear. I joined NewDay USA as Executive Chairman to help our nation’s veterans and service members with the financial services they need.
I am hopeful the lending industry and policy makers in Washington can work together to ensure veterans have the financial peace of mind they deserve.
Rear Admiral Thomas C. Lynch USN (Ret.) is the Executive Chairman of NewDay USA. Admiral Lynch served more than 31 years in the Navy which included command of the Eisenhower Battle Group during Operation Desert Shield and as the Superintendent of the U.S. Naval Academy