Section 309 of Public Law 115-174, The Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), required the Department of Veterans Affairs (VA) to promulgate regulations for cash-out refinancing loans, specifically loans in which the loan amount will exceed the payoff amount of the loan being refinanced. On December 17, 2018, VA published an interim final rule amending VA regulations pertaining to all cash-out refinancing loans, regardless of whether there is a change to the principal loan amount (38 CFR 36.4306).
The interim final rule, as stated in VA Circular 26-18-30, is effective for all VA cash-out refinance loan applications dated on or after February 15, 2019. The new regulations do not apply to Interest Rate Reduction Refinancing Loans (“IRRRL”), which will be addressed in a separate rulemaking at a later time. Guidance provided in VA Circular 26-18-13, dated May 25, 2018, remains in effect for VA IRRLs.
VA identified two types of cash-out refinance loans:
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.
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.
VA Circular 26-18-30 details the requirement of a cash-out refinance loan to qualify for guaranty by VA. Included in the requirements is a new Net Tangible Benefit Test that a lender must provide the borrower(s) no later than 3 business days from the date of the loan application and again at loan closing.
DocMagic will offer the new form VA Net Tangible Benefit Worksheet (DocMagic File Name VANTBW.MSC) in initial and closing loan packages to comply with this requirement.
The new disclosure applies to both Type I and Type II cash-out refinance loans, and must include the following:
Comparison of Loan Features for the loan being refinanced and the new cash-out refinance loan.
- Payoff of refinanced loan and new loan amount
- DocMagic will use payoff of the prior lien and new loan amount
- Loan Type (Fixed or Adjustable)
- DocMagic is creating a new field for the prior loan
- Interest Rate
- DocMagic will use the interest rate of prior loan and the new loan
- Loan Term
- DocMagic is creating a new field for the prior loan term remaining
- Total of Payments
- DocMagic is creating a new field for the prior loan total of payments
- DocMagic is creating a new field for the prior loan LTV
List of Eight Criteria to Demonstrate a Net Tangible Benefit (NTB) to the borrower: (at least one must be satisfied) Each benefit will have a check box with YES/NO option.
Boxes for the following criteria will populate with YES or NO by default based on available data. Option to leave blank will be available upon request.
- Interest rate on new loan is lower than the interest rate on loan being refinanced.
- Payment on the new loan is lower than the payment on the loan being refinanced.
- New loan amount is equal to or less than 90% of the reasonable value of the home.
- New loan refinances an adjustable rate loan to a fixed rate loan.
- Term of new loan is shorter than term of loan being refinanced.
Boxes for the following criteria will be left blank by default but will having programming options available (ie. post-fill, form feature, custom data point).
- New loan eliminates monthly mortgage insurance, whether public or private, or monthly guarantee insurance.
- New loan results in an increase in the borrower’s monthly residual income.
- New loan refinances an interim loan to construct, alter, or repair the home.
Estimated Loss of Home Equity
An estimate of the loss of home equity being removed from the home as a result of the refinance and that the removal may affect the Veteran’s ability to sell the home at a later date. DocMagic will calculate this amount based on available data.
The borrower must certify they received the Net Tangible Benefit information no later than 3 business days from the date of the loan application and at loan closing.
VA Circular 26-18-30 also provides that the recoupment period for Type I cash-out loans refinancing a previous VA-guaranteed loan must not exceed 36 months. The recoupment calculation provides that all fees, closing costs, expenses, and incurred costs (excluding taxes, escrow, insurance, and like assessments) be divided by the reduction of the monthly principal and interest payment as a result of the refinance. Lenders are required to certify the recoupment period to VA to receive a Loan Guaranty Certificate.
DocMagic will provide the new form VA Recoupment and Lender Certification (DocMagic File Name VARLC.MSC) in initial and closing loan packages for applicable Type I cash-out loans to comply with this requirement.
Please note that DocMagic is aware that the Department of Veterans Affairs has created a sample Net Tangible Benefit Worksheet. However, the sample version is still unofficial. DocMagic is going forward with the version we created for this change (VANTBW.MSC), which meets the requirements of 38 C.F.R. 36.43065 and the VA Circular 26-18-30. If an official model form is released in the future, DocMagic will provide the updated model form.
Please review VA Circular 26-18-30 and VA Circular 26-18-30 Change 1 for additional information regarding the new VA policies.
If you have questions about the information in this article, please contact DocMagic’s Compliance Department.