VA: Circular 26-19-05: VA-Guaranteed Cash-Out Refinancing Home Loans (AQ42)

Updated 2/15/19: The VA issued a revised version of Circular 26-19-05 featuring a change made to page 4, section d, subsection (3).

Link to revised circular

Investor Update
February 14, 2019

Source: VA

1. Purpose. This Circular clarifies the Department of Veterans Affairs’ (VA) new policies regarding VA-guaranteed cash-out refinancing loans, including refinancing of construction loans (construction-to-perm).

2. Background. Public Law 115-174, The Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), was signed into law by President Donald Trump on May 24, 2018. 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.

a. On December 17, 2018, VA published interim final rule (AQ42) in the federal register setting forth requirements relating to cash-out refinance loans. See https://www.federalregister.gov/documents/2018/12/17/2018-27263/loan-guaranty-revisionsto-va-guaranteed-or-insured-cash-out-home-refinance-loans. This includes the Regulatory Impact Analysis (RIA) that provides details concerning VA’s analysis in developing this rule. AQ42 amends VA regulations pertaining to all cash-out refinancing loans (38 CFR 36.4306). This includes refinancing of construction loans (construction-to-perm loans), regardless of whether there is a change in the principal loan amount. However, AQ42 does not implement rules pertaining to interest rate reduction refinance loans (IRRRLs).

b. VA will update IRRRL regulations in an upcoming rulemaking.

3. Effective date. The rule is effective on February 15, 2019, and will apply to VA cash-out refinance loan applications taken on, or after, this date. Loan applications taken prior to the effective date that were submitted to an Automated Underwriting System (AUS) either before or after the effective date, where subsequent and/or final AUS submissions result in a Refer recommendation, require manual underwriting.

4. Action. All-VA guaranteed cash-out refinancing loans must comply with the Act and AQ42. All refinancing loan applications taken on or after the effective date that do not meet the following requirements may be subject to indemnification or the removal of the guaranty. Failure to provide initial disclosures to the Veteran within 3 business days from the initial application date and at closing may result in indemnification of the loan up to 5 years. There are three categories of refinance loans; Interest Rate Reduction Refinancing Loans (IRRRL), TYPE I Cash-Out Refinance, and TYPE II Cash-Out Refinance.

a. Definitions.

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

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

b. Loan-to-Value (LTV). VA will no longer guaranty refinancing loans when the LTV exceeds 100 percent. Inclusion of any funding fee that is financed, in part or whole, cannot cause the loan to exceed the reasonable value of the property.

(1) LTV Calculation. Divide the total loan amount (including VA funding fee, if any) by the reasonable value of the property determined by the appraiser.

c. Net Tangible Benefit (NTB). NTB standards apply to all cash-out refinancing loans. It consists of the NTB test, Loan Comparison, and Home Equity Disclosure

(1) NTB Test. All cash-out refinancing loans must past pass the NTB test. This requirement is met if the refinancing loan satisfies at least one of the following:

(a) The new loan eliminates monthly mortgage insurance; or
(b) Loan term of the new loan is less than the loan term of the loan being refinanced; or
(c) Interest rate of the new loan is less than the interest rate of the loan being refinanced.
(Note: If the loan being refinanced had an adjustable interest rate or was modified, the current interest rate must be used when determining if this requirement has been met.); or
(d) The monthly (principal and interest) payment of the new loan is less than the monthly (principal and interest) payment of the loan being refinanced; or
(e) The Veteran’s monthly residual income is higher as a result of the new loan. (residual income, including refinancing monthly PITI (principal, interest, taxes, and insurance) payment vs. current residual income, including monthly PITI payment of the loan being refinanced.) In cases where TI amounts are changing between the application date and the closing date of the refinance transaction, the new TI amount will be used in determining residual income for both the current and refinanced loan); or
(f) The new loan is used to payoff the Veteran’s interim construction loan; or
(g) The new loan LTV is equal to or less than 90 percent of the reasonable value of the home, i.e. LTV ≤ 90%; or
(h) Refinance of an adjustable-rate mortgage to a fixed-rate mortgage.

(2) Loan Comparison Disclosure. The lender must provide the Veteran a comparison of the new loan to the existing loan being refinanced. VA requires lenders to generate two loan comparison disclosures, one within 3 business days from the initial date of the loan application and at loan closing. The borrower must certify receipt of both disclosures (i.e. signature, e-signature, email from borrower certifying receipt, email read receipts, system time/date stamp where a borrow certified receipt, etc).

(a) Initial 3-Day Disclosure. Lender’s shall provide a reasonable estimate within 3 business days of loan application. Reasonably accurate estimates, may involve the use of borrower documentation, such as their mortgage statement, closing documents, their own estimation of the existing loan terms, online property valuation tools, and manual calculations. Lenders are encouraged, but not required, to continually update the disclosure as additional, and more accurate, information becomes available throughout the origination process.

(b) Final Loan Closing Disclosure. The final loan comparison disclosure provided at loan closing shall be accurate with respect to the new loan information, while the initial loan information may be a generally accurate representation of the existing loan, given that payments may be in transit, tax and insurance amounts may be pending, and payoffs may fluctuate when the final closing date has not been determined.

(c) Contents of the Initial 3-Day Disclosure and the Final Loan Closing Disclosure. VA has provided a sample disclosure in Exhibit A that includes both the loan comparison and home equity provisions stated in this Circular. The following information will be provided in the disclosures:

1. Refinancing loan amount (including VA funding fee, if financed into the loan) vs. the payoff amount (including fees, escrow shortages, and prorated interest) of the loan being refinanced.
2. Interest Rate
3. Mortgage Loan Type (i.e., fixed, adjustable)
4. Loan term of the refinancing loan vs. the remaining term of the loan being refinanced. The term may be expressed in months or years and months.
5. The total payments the Veteran will have paid after making all payments (principal and interest) as scheduled on the refinancing loan vs. the total remaining payments the Veteran will have paid after making all remaining payments of principal, interest, and mortgage insurance (if applicable) as scheduled on the loan being refinanced.
6. LTV of the refinancing loan vs. loan payoff (including fees, escrow shortages, and
prorated interest) to current value of the loan being refinanced.

(3) Home Equity Disclosure. The lender must disclose the amount of home equity being
removed from the home as a result of the new loan to the Veteran within 3 business days from
the initial date of the loan application and at loan closing. The disclosure must also explain to
the Veteran how the removal of home equity may affect the sale or refinance of the home in
the future. Similar to the Loan Comparison Disclosure, the borrower must certify receipt of
the Home Equity Disclosure (i.e. signature, e-signature, email from borrower certifying
receipt, email read receipts, system time/date stamp where a borrow certified receipt, etc.).
VA has provided a sample disclosure in Exhibit A that includes both the loan comparison and
home equity provisions stated in this Circular.

(a) For the initial home equity disclosure, lenders may use estimated loan payoff or unpaid principal balance and estimated current property value to determine the home equity being removed from the home. However, the lender must use the final payoff amount (including fees, escrow shortages, and prorated interest) and the reasonable value shown on the Notice of
Value (NOV) to determine the home equity being removed from the home on the home equity disclosure provided to the Veteran at loan closing.

d. Loan Seasoning. Loan seasoning applies to all cash-out refinancing loans made to refinance a VA-guaranteed home loan (VA-to-VA). A cash-out refinancing loan, Type I nor Type II, is not eligible for guaranty by VA, if the VA-guaranteed loan being refinanced has not been seasoned as of the date of closing. A loan is considered seasoned if both of the following conditions are met as of the date of loan closing:

(1) The first monthly payment of the loan being refinanced was made 210 days or more prior to the closing date of the refinancing loan; and
(2) Six monthly payments have been made on the loan being refinanced.

(3) For loans being refinanced within 1 year from the date of closing, lenders must obtain a payment history/ledger from the servicing lender documenting all payments. If the loan is selected for audit by VA, the lender must include the payment ledger/history of the loan being refinanced in the loan file for VA review.

e. Fee Recoupment. Fee recoupment applies to TYPE I cash-out refinancing loans made to refinance a VA-guaranteed home loan (VA-to-VA). To obtain a Loan Guaranty Certificate (LGC) the lender must certify that the recoupment period of fees, expenses, and closing costs (included in the loan and paid outside of closing), do not exceed 36 months from the date of the loan closing.

(1) Recoupment Calculation: The recoupment period is calculated by dividing all fees (not including VA funding fee per), expenses, and closing costs included in the loan and paid outside of closing by the reduction of monthly principal and interest (PI).

(a) Example:
PI (VA loan being refinanced): $654.00
PI (new VA refinancing loan): – $604.00
Reduction of monthly PI: = $ 50.00

If the loan being refinanced loan has been modified, the reduction of monthly PI should be computed using the modified monthly PI of the loan being refinanced.

(b) Example:
Fees/expenses/closing cost: $1,436.49
Reduction of monthly PI: ÷ $ 50.00
Fee Recoupment Period: = 29 months (28.72 months rounded)

(c) Escrow and prepaid expenses, such as, insurance, taxes, special assessments, and homeowners’ association (HOA) fees shall be excluded from the recoupment calculations.

(d) VA allowable fee as established in 38 C.F.R. § 36.4313 offset by lender credits and/or premium pricing may also be excluded from the recoupment calculation.

4. Rescission: This Circular is rescinded April 1, 2021.

By Direction of the Under Secretary for Benefits

Jeffrey F. London
Director, Loan Guaranty Service

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CHEIF EXECUTIVE OFFICER

Alan Jaffa

Alan Jaffa is the chief executive officer for Safeguard, 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® finalist in 2013.

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Chief Operating Officer

Michael Greenbaum

Michael Greenbaum is the chief operating officer for Safeguard. Mike has been instrumental in aligning operations to become more efficient, effective, and compliant with our ever-changing industry requirements. Mike has a proven track record of excellence, partnership and collaboration at Safeguard. Under Mike’s leadership, all operational departments of Safeguard have reviewed, updated and enhanced their business processes to maximize efficiency and improve quality control.

Mike joined Safeguard in July 2010 as vice president of REO and has continued to take on additional duties and responsibilities within the organization, including the role of vice president of operations in 2013 and then COO in 2015.

Mike built his business career in supply-chain management, operations, finance and marketing. He has held senior management and executive positions with Erico, a manufacturing company in Solon, Ohio; Accel, Inc., a packaging company in Lewis Center, Ohio; and McMaster-Carr, an industrial supply company in Aurora, Ohio.

Before entering the business world, Mike served in the U.S. Army, Ordinance Branch, and specialized in supply chain management. He is a distinguished graduate of West Point (U.S. Military Academy), where he majored in quantitative economics.

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CHEIF INFORMATION OFFICER

George Mehok

George Mehok is the chief information officer for Safeguard. He is responsible for all strategic technology decisions, new systems deployments and data center operations supporting a national network of more than 10,000 mobile workers.

George has more than 20 years of leadership experience dedicated to high-growth companies in the mobile telecommunications and financial services industries, spanning startups to global industry leaders.

George played a senior role in the formation of Verizon Wireless, leading the IT product development and strategic planning team. He led the integration planning for the Verizon merger including: GTE, Vodafone-AirTouch, Bell Atlantic Mobile and PrimeCo.

As chief information officer at Revol Wireless, a VC-backed CDMA wireless communications network operator, George’s team implemented an integrated technology infrastructure and award-winning business intelligence platform.

George holds a bachelor’s degree in political science and economics from Eastern Michigan University and an M.B.A. from The Ohio State University. He is a board member of Akron University’s School of Business Center for Information Technology, in addition to an advisory board member for OHTec.

In 2013, George won the Crain’s Cleveland Business CIO of the Year award for his team’s work in completing a major acquisition and technology transformation at Safeguard. In 2015, George’s team was recognized by InformationWeek’s annual Elite 100 ranking of the most innovative U.S.-based users of business technology. The mobile inspection technology developed at Safeguard was selected as InformationWeek’s “One of the top 20 ideas to steal in 2015”.

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General Counsel and Executive Vice President

Linda Erkkila, Esq.

Linda Erkkila is the general counsel and executive vice president for Safeguard, with oversight responsibilities for the legal, human resources, training, compliance and audit departments. Linda’s broad scope of oversight covers regulatory issues that impact Safeguard’s operations, pro-active risk mitigation, enterprise strategic planning, human capital and training initiatives, compliance and audit services, litigation and claims management, and counsel related to mergers, acquisition and joint ventures.

Linda’s oversight of the legal department along with multiple compliance and human capital focused departments assures that Safeguard’s strategic initiatives align with its resources, leverage opportunities across the company, and contemplate compliance mandates. Her practice spans almost 20 years, and Linda’s experience, both as outside and in-house counsel, covers a wide range of corporate matters, including regulatory disclosure, corporate governance compliance, risk assessment, executive compensation, litigation management, and merger and acquisition activity. Her experience at a former Fortune 500 financial institution during the subprime crisis helped develop Linda’s pro-active approach to change management during periods of heightened regulatory scrutiny.

Linda previously served as vice president and attorney for National City Corporation, as securities and corporate governance counsel for Agilysys Inc., and as an associate at Thompson Hine LLP. She earned her JD at Cleveland-Marshall College of Law. Linda holds a degree in economics from Miami University and an MBA. In 2017, Linda was named as both a “Woman of Influence” by HousingWire and as a “Leading Lady” by MReport.

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VP, Finance

Joe Iafigliola

Joe Iafigliola is the vice president of finance for Safeguard. Joe leads the accounting and information security departments, and is a key leader in the management of SCG Partners, a middle-market private equity fund focused on diversifying and expanding Safeguard Properties’ business model into complimentary markets. He also leads the service supply chain including vendor sourcing, field quality control, and delivery, in addition to the quality assurance function for the company.

Joe has been in a wide variety of roles in finance, supply chain management, information systems development, and sales and marketing. His career includes senior positions with McMaster-Carr Supply Company, Newell/Rubbermaid, and Procter and Gamble.

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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AVP, High Risk and Investor Compliance

Steve Meyer

Steve Meyer is the assistant vice president of high risk and investor compliance for Safeguard. In this role, Steve is responsible for managing our clients’ conveyance processes, Safeguard’s investor compliance team and developing our working relationships with cities and municipalities around the country. He also works directly with our clients in our many outreach efforts and he represents Safeguard at a number of industry conferences each year.

Steve joined Safeguard in 1998 as manager over the hazard claims team. He was instrumental in the development and creation of policies, procedures and operating protocol. Under Steve’s leadership, the department became one of the largest within Safeguard. In 2002, he assumed responsibility for the newly-formed high risk department, once again building its success. Steve was promoted to director over these two areas in 2007, and he was promoted to assistant vice president in 2012.

Prior to joining Safeguard, Steve spent 10 years within the insurance industry, holding a number of positions including multi-line property adjuster, branch claims supervisor, and multi-line and subrogation/litigation supervisor. Steve is a graduate of Grove City College.

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AVP, Operations

Jennifer Jozity

Jennifer Jozity is the assistant vice president of operations, overseeing inspections, REO and property preservation for Safeguard. Jen ensures quality work is performed in the field and internally, to meet and exceed our clients’ expectations. Jen has demonstrated the ability to deliver consistent results in order audit and order management.  She will build upon these strengths in order to deliver this level of excellence in both REO and property preservation operations.

Jen joined Safeguard in 1997 and was promoted to director of inspections operations in 2009 and assistant vice president of inspections operations in 2012.

She graduated from Cleveland State University with a degree in business.

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AVP, Finance

Jennifer Anspach

Jennifer Anspach is the assistant vice president of finance for Safeguard. She is responsible for the company’s national workforce of approximately 1,000 employees. She manages recruitment strategies, employee relations, training, personnel policies, retention, payroll and benefits programs. Additionally, Jennifer has oversight of the accounts receivable and loss functions formerly within the accounting department.

Jennifer joined the company in April 2009 as a manager of accounting and finance and a year later was promoted to director. She was named AVP of human capital in 2014. Prior to joining Safeguard, she held several management positions at OfficeMax and InkStop in both operations and finance.

Jennifer is a graduate of Youngstown State University. She was named a Crain’s Cleveland Business Archer Award finalist for HR Executive of the Year in 2017.

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AVP, Application Architecture

Rick Moran

Rick Moran is the assistant vice president of application architecture for Safeguard. Rick is responsible for evolving the Safeguard IT systems. He leads the design of Safeguard’s enterprise application architecture. This includes Safeguard’s real-time integration with other systems, vendors and clients; the future upgrade roadmap for systems; and standards designed to meet availability, security, performance and goals.

Rick has been with Safeguard since 2011. During that time, he has led the system upgrades necessary to support Safeguard’s growth. In addition, Rick’s team has designed and implemented several innovative systems.

Prior to joining Safeguard, Rick was director of enterprise architecture at Revol Wireless, a privately held CDMA Wireless provider in Ohio and Indiana, and operated his own consulting firm providing services to the manufacturing, telecommunications, and energy sectors.

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AVP, Technology Infrastructure and Cloud Services

Steve Machovina

Steve Machovina is the assistant vice president of technology infrastructure and cloud services for Safeguard. He is responsible for the overall management and design of Safeguard’s hybrid cloud infrastructure. He manages all technology engineering staff who support data centers, telecommunications, network, servers, storage, service monitoring, and disaster recovery.

Steve joined Safeguard in November 2013 as director of information technology operations.

Prior to joining Safeguard, Steve was vice president of information technology at Revol Wireless, a privately held wireless provider in Ohio and Indiana. He also held management positions with Northcoast PCS and Corecomm Communications, and spent nine years as a Coast Guard officer and pilot.

Steve holds a BBA in management information systems from Kent State University in Ohio and an MBA from Wayne State University in Michigan.

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AVP, Mobile and Analytics

Jason Heckman

Jason Heckman is the assistant vice president of mobile and analytics for Safeguard. He is responsible for both Safeguard’s mobile development and strategy as well as the company’s data warehousing and business intelligence. Jason oversees the design, development and release of all Safeguard’s internally developed mobile applications. He also oversees the development and delivery of operational and analytical data technologies throughout the organization.

Jason joined Safeguard as manager of mobile in 2012. During that time he led the development and integration of Safeguard’s mobile applications across the company’s vendor network to provide real-time data from the field. In 2014, he was promoted to director of mobile applications and named assistant vice president in 2017.

Prior to joining Safeguard, Jason was the director of application development and business intelligence for Revol Wireless, a privately held wireless provider in Ohio and Indiana.

Jason holds a bachelor’s degree in business management from Case Western Reserve University in Ohio.

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AVP, Business Development

Tim Rath

Tim Rath is the AVP of business development for Safeguard. He is responsible for developing innovative growth strategies for Safeguard and developing and overseeing potential partnerships, mergers and acquisitions.

Tim joined Safeguard in 2011 as project director and has filled numerous roles within Vendor Management, most recently serving as director of vendor management, a role he assumed in 2011.

Prior to Safeguard, Tim worked as director of supply chain at PartsSource Inc. in Aurora, Ohio, a provider of medical replacement parts, procurement solutions and healthcare supply chain management technology services. He also has held sales positions with Rexel, ComDoc, and Pier Associates, all based in Ohio.

Tim holds a degree in marketing and sales from The University of Akron in Akron, Ohio. He also earned his FAA Certified Commercial UAS (Drone) Pilot license in 2017.