Should Veterans’ Refinanced Mortgages Be Protected From ‘Loan Churning’? (H.R. 1988)

What is H.R. 1988?

(Updated August 8, 2019)

This bill — the Protect Affordable Mortgages for Veterans Act of 2019 — would clarify seasoning requirements for certain refinanced mortgages loans to veterans by specifying that except under certain circumstances, loans made to veterans cannot be subject to rapid refinancing (frequently known as “loan churning”) until the later of 1) the date on which the borrower has made at least six consecutive monthly payments on the loan or 2) 210 days after the loan’s first payment due date.

This bill wouldn’t affect the authority of the Government National Mortgage Association (Ginnie Mae).    

Argument in favor

Veterans’ mortgages were intended to be protected from loan churning under the Economic Growth, Regulatory Relief, and Consumer Protection Act last Congress. However, due to a technical error, that bill didn’t achieve that goal -- so this bill is needed to correct that oversight.

Argument opposed

While the language in the Economic Growth, Regulatory Relief, and Consumer Protection Act bill may be a bit unclear, its intent -- to include veterans in the group of people protected from loan churning -- was clear, so this bill isn’t needed.

Impact

Veterans; veteran homebuyers; veterans who hold home mortgages; Ginnie Mae; National Housing Act; Economic Growth, Regulatory Relief, and Consumer Protection Act; and loan churning.

Cost of H.R. 1988

The CBO estimates that implementing this bill would have the net effect of reducing the deficit by $3 million over the FY 2019-2029 period.

Additional Info

In-Depth: Rep. David Scott (D-GA) introduced this bill to correct a technical error in the Economic Growth, Regulatory Relief, and Consumer Protection Act from the 115th Congress. This fix will maintain liquidity in the veteran home market and ensure veterans have access to affordable VA mortgages:

“Though this legislation simply corrects a technical error, the impact it will have will be significant for the 2,500 veteran homeowners whose VA home loans were placed in limbo last May. I am pleased to introduce this bipartisan legislation with my colleagues, Reps. Zeldin, Levin, and ­­­Barr, to establish certainty in the market and protect affordability for our nation’s veterans.  We are grateful every day for the sacrifice our veterans have made, and this bill is a small but important effort to show that Congress is keeping faith with our commitment to them.”

Original cosponsor Rep. Lee Zeldin (R-NY) adds: 

“Our nation’s service members, veterans and their families have made a tremendous sacrifice in service to our great nation and the freedoms and liberties that make this country the greatest in the world. They have earned nothing less than our unwavering support when transitioning back into civilian life, and such a critical part of living out the American dream they fought so hard to protect is the dream of homeownership. Ensuring certainty in the market and access to affordable mortgages for our nation’s veterans is the least we can do as they transition into civilian life and should always be a bipartisan initiative. I thank Congressman Scott for his partnership and leadership on this issue and look forward to continuing to work with him in championing our nation’s veterans on this legislation and more.”

The Mortgage Bankers Association (MBA) supports this bill. In a letter, the organization writes: 

“[T]he Economic Growth, Regulatory Relief, and Consumer Protection Act (Public Law 115-174) was signed by President Trump last May. Among the many provisions contained within the legislation as enacted, Section 309, entitled 'Protecting Veterans from Predatory Lending,' sought to address the problem of loan churning targeted at service members and veterans. This section instituted new requirements that refinanced loans must meet in order to be eligible for the VA guaranty and for Ginnie Mae pooling. MBA has consistently supported the purpose of Section 309(a) of Public Law 115-174, which provides the new requirements that must be met for a refinanced loan to obtain a VA guaranty. The three requirements are: 1) Fee recoupment within 36 months; 2) Net tangible benefits to the borrower, measured as a decrease of at least 50 basis points in the interest rate in the case of a fixed-to-fixed refinance, and at least 200 basis points in the interest rate in the case of a fixed-to-floating refinance; and 3) Seasoning of the initial loan for at least 210 days, combined with at least six monthly payments by the borrower. The calculation of the 210-day seasoning period in Section 309(a), however, deviated from well- understood seasoning requirements already in place through directives issued by Ginnie Mae. The new requirements of Section 309(a) begin the seasoning period on the date on which the first payment is made by the borrower. In many situations, the lender offering the refinance cannot know this date with certainty—particularly if the lender is not the servicer of the initial loan. H.R. 1988 fixes this problem by beginning the 210-day seasoning period on the first payment due date of the initial loan, which will allow lenders greater compliance certainty and better ensure that loans are not erroneously pooled into Ginnie Mae securities.”

This bill passed the House Financial Services Committee by a voice vote with the support of four bipartisan cosponsors, including four Republicans and one Democrat. Its Senate companion bill, sponsored by Sen. Kyrsten Sinema (D-AZ), passed the Senate by voice vote with the support of one cosponsor, Sen. Thom Tillis (R-NC).

Last Congress, Rep. Lee Zeldin (R-NY) introduced the House version of this bill with three bipartisan cosponsors’ support (two Democrats and one Republican) and it passed the House by vote vote. The Senate companion bill, sponsored by Sen. Amy Klobuchar (D-MN), had one cosponsor, Sen. Tillis, and didn’t receive a committee vote.

Of Note: The Economic Growth, Regulatory Relief, and Consumer Protection Act, which was enacted in the 115th Congress, contained several bipartisan reforms intended to protect veteran homeowners from rapid refinancing. However, Rep. Scott’s office notes, “a mismatch between the timing dictated in [the bill] and the implementation of the new rules left approximately 2,500 VA-guaranteed loans ineligible for Ginnie Mae pooling.” 

In 2018, House sponsor Rep. Zeldin’s office observed that this could significantly raise closing costs and rates for qualified veteran borrowers. Rep. Zeldin’s office added that “[t]he ability to pool these mortgages, which are comparatively low risk and boast a very low default or delinquency rate, maintains important liquidity in the VA home loan market while helping to lower rates and increase cost savings for veteran borrowers. Furthermore, the inability to pool VA loans could cut off liquidity to the VA home loan market and stifle future refinancing opportunities.”

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