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VA: Circular 26-18-30: Revisions to VA-Guaranteed Cash-Out Refinancing Home Loans (RIN 2900-AQ42)

Updated 12/21/18: The U.S. Department of Veterans Affairs (VA) issued a revised version of Circular 26-18-30. The circular clarifies loan seasoning requirements for TYPE II cash-out refinancing loans.

Link to circular

Investor Update
December 19, 2018

Source: VA

1. Purpose. This purpose of this Circular is to announce the Department Veterans Affairs’ (VA) new policies regarding VA-guaranteed cash-out refinancing loans, including refinancing of construction loans (construction-to-permanent).

2. Background. On December 17, 2018, VA published an interim final rule addressing VA guaranty requirements for cash-out refinance loans (83 FR 64459). This rule implements section 309 of Public Law 115-174, The Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). Section 309 of the Act provides new statutory criteria to determine when VA may guarantee a refinancing loan. The Act required VA to promulgate regulations for cash-out refinancing loans, specifically refinancing loans in which the loan amount will exceed the payoff amount of the loan being refinanced. This rule amends VA regulations pertaining to all cash-out refinancing loans (38 CFR 36.4306). This includes refinancing of construction loans (construction-to-permanent loans), regardless of whether there is a change in the principal loan amount. VA is accepting public comments on the interim final rule through February 15, 2019, and encourages lenders to submit official comments and/or suggestions through the Federal Register at https://www.regulations.gov.

3. Effective. The rule is effective on February 15, 2019, and will apply to VA cash-out refinance loan applications taken on, or after, this date.

4. Action.

a. VA-guaranteed cash-out refinancing loans must meet the requirements of the new law. VA has categorized refinancing loans as the following:

(1) Interest Rate Reduction Refinancing Loan (IRRRL): a refinancing loan made to refinance an existing VA-guaranteed home loan at a lower interest rate.

(2) TYPE I Cash-Out Refinance: a refinancing loan in which the loan amount (including VA funding fee) does not exceed the payoff amount of the loan being refinanced.

(3) TYPE II Cash-Out Refinance: a refinancing loan in which the loan amount (including VA funding fee) exceeds the payoff amount of the loan being refinanced.

b. This rule does not apply to VA regulations pertaining to IRRRLs. Updates to VA’s IRRRL regulations will be published separately from this Circular. Lenders and VA Regional Loan Center (RLC) personnel should continue to follow current IRRRL regulations and VA policy guidance shown in VA Circular 26-18-13.

c. All cash-out refinancing loan applications taken on or after February 15, 2019, as reflected by the application date, that do not meet the following requirements will not be eligible for guaranty by VA:

(1) Loan-to-Value (LTV). VA will no longer guaranty refinancing loans when the LTV exceeds 100 percent. If the Veteran chooses to close a loan in which the loan amount exceeds 100 percent of the reasonable value of the property, the Veteran must pay the amount which exceeds 100 percent of the property value at loan closing.

(a) LTV Calculation. Divide the total loan amount (including VA funding fee, if applicable) by the reasonable value on the Notice of Value of the property determined by the appraiser.

(2) Net Tangible Benefit Test (NTB). Lenders must ensure that all cash-out refinancing loans pass a NTB, which includes providing the Veteran with the following information no later than the third business day after receiving the Veteran’s loan application, and again at loan closing:

(a) The refinancing loan satisfies at least one of the following eight NTB:

(i) The new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance;
(ii) The term of the new loan is shorter than the term of the loan being refinanced;
(iii) The interest rate on the new loan is lower than the interest rate on the loan being refinanced;
(iv) The payment on the new loan is lower than the payment on the loan being refinanced;
(v) The new loan results in an increase in the borrower’s monthly residual income;
(vi) The new loan refinances an interim loan to construct, alter, or repair the home;
(vii) The new loan amount is equal to or less than 90 percent of the reasonable value of the home, or;
(viii) The new loan refinances an adjustable rate loan to a fixed rate loan.

(b) A comparison of key loan characteristics or terms for the existing and refinancing loan, including:

(i) Refinancing loan amount vs. the payoff amount of the loan being refinanced.
(ii) Loan type (i.e., fixed, adjustable) of the refinancing loan vs. the loan being refinanced.
(iii) Interest rate of the refinancing loan vs. the loan being refinanced.
(iv) Loan term of the refinancing loan vs. the loan being refinanced.
(v) The total the Veteran will have paid after making all payments (principal and interest), and mortgage insurance, as scheduled, for both the refinancing loan and the loan being refinanced.
(vi) LTV of the refinancing loan vs. the loan being refinanced

(c) An estimate of the home equity being removed from the home as a result of the refinance and explain how the removal of home equity may affect the Veteran.

(3) Loan Seasoning. VA will not guarantee a refinancing loan if the loan being refinanced has not been properly seasoned. This requirement applies to TYPE I refinancing loans made to refinance an existing VA-guaranteed home loan and all TYPE II refinancing loans. A loan is considered seasoned on the later of the date that is:

(a) 210 days after the first monthly payment is made, and

(b) Six monthly payments have been made on the loan.

(4) Fee Recoupment. The recoupment period of all fees, closing costs, expenses (other than taxes, escrow, insurance, and like assessments), and incurred costs must not exceed 36 months from the date of loan closing. The lender must certify the recoupment period to VA to obtain a Loan Guaranty Certificate. This requirement only applies to TYPE I cash-out refinancing loans made to refinance an existing VA-guaranteed home loan.

(a) Recoupment Calculation. Divide all fees, closing costs, expenses, and incurred costs (excluding taxes, escrow, insurance, and like assessments), by the reduction of the monthly principal and interest payment as a result of the refinance. If the loan being refinanced has been modified, the principal and interest reduction must be computed/compared to the modified principal and interest monthly payment.

5. Rescission: This Circular is rescinded January 1, 2020.

By Direction of the Under Secretary for Benefits

Jeffrey F. London Director Loan Guaranty Service

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CEO

Alan Jaffa

Alan Jaffa is the Chief Executive Officer for Safeguard Properties, steering the company as the mortgage field services industry leader. He also serves on the board of advisors for SCG Partners, a middle-market private equity fund focused on diversifying and expanding Safeguard Properties’ business model into complimentary markets.

Alan joined Safeguard in 1995, learning the business from the ground up. He was promoted to Chief Operating Officer in 2002, and was named CEO in May 2010. His hands-on experience has given him unique insights as a leader to innovate, improve and strengthen Safeguard’s processes to assure that the company adheres to the highest standards of quality and customer service.

Under Alan’s leadership, Safeguard has grown significantly with strategies that have included new and expanded services, technology investments that deliver higher quality and greater efficiency to clients, and strategic acquisitions. He takes a team approach to process improvement, involving staff at all levels of the organization to address issues, brainstorm solutions, and identify new and better ways to serve clients.

In 2008, Alan was recognized by Crain’s Cleveland Business in its annual “40-Under-40” profile of young leaders. He also was named a NEO Ernst & Young Entrepreneur Of The Year® Award finalist in 2013.

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Esq., General Counsel and EVP

Linda Erkkila

Linda Erkkila is the General Counsel and Executive Vice President for Safeguard Properties, with oversight of legal, human resources, training, and compliance. Linda’s broad scope of oversight covers regulatory issues that impact Safeguard’s operations, risk mitigation, strategic planning, human resources and training initiatives, compliance, insurance, litigation and claims management, and counsel related to mergers, acquisition and joint ventures.

Linda assures that Safeguard’s strategic initiatives align with its resources, leverage opportunities across the company, and contemplate compliance mandates. She has practiced law for 25 years and her experience, both as outside and in-house counsel, covers a wide range of corporate matters, including regulatory disclosure, corporate governance compliance, risk assessment, compensation and benefits, litigation management, and mergers and acquisitions.

Linda earned her JD at Cleveland-Marshall College of Law. She holds a degree in economics from Miami University and an MBA. Linda was previously named as both a “Woman of Influence” by HousingWire and as a “Leading Lady” by MReport.

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COO

Michael Greenbaum

Michael Greenbaum is the Chief Operating Officer of Safeguard Properties, where he has played a pivotal role since joining the company in July 2010. Initially brought on as Vice President of REO, Mike’s exceptional leadership and strategic vision quickly propelled him to Vice President of Operations in 2013, and ultimately to COO in 2015. Over his 14-year tenure at Safeguard, Mike has been instrumental in driving change and fostering innovation within the Property Preservation sector, consistently delivering excellence and becoming a trusted partner to clients and investors.

A distinguished graduate of the United States Military Academy at West Point, Mike earned a degree in Quantitative Economics. Following his graduation, he served in the U.S. Army’s Ordnance Branch, where he specialized in supply chain management. Before his tenure at Safeguard, Mike honed his expertise by managing global supply chains for 13 years, leveraging his military and civilian experience to lead with precision and efficacy.

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CFO

Joe Iafigliola

Joe Iafigliola is the Chief Financial Officer for Safeguard Properties. Joe is responsible for the Control, Quality Assurance, Business Development, Marketing, Accounting, and Information Security departments. At the core of his responsibilities is the drive to ensure that Safeguard’s focus remains rooted in Customer Service = Resolution. Through his executive leadership role, he actively supports SGPNOW.com, an on-demand service geared towards real estate and property management professionals as well as individual home owners in need of inspection and property preservation services. Joe is also an integral force behind Compliance Connections, a branch of Safeguard Properties that allows code enforcement professionals to report violations at properties that can then be addressed by the Safeguard vendor network. Compliance Connections also researches and shares vacant property ordinance information with Safeguard clients.

Joe has an MBA from The Weatherhead School of Management at Case Western Reserve University, is a Certified Management Accountant (CMA), and holds a bachelor’s degree from The Ohio State University’s Honors Accounting program.

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Business Development

Carrie Tackett

Business Development Safeguard Properties