Loans backed by the U.S. Department of Veterans Affairs (VA) represent approximately 10 percent of the mortgage market—making them a big part of many lenders’ origination mixes. These loans may become an even bigger part of the mix thanks to a recently signed law that enables veterans to use a VA loan to borrow above the 2019 conforming limit of $484,350 for most counties, without any down payment. The loan limit will be lifted for VA loans that are guaranteed or appraised on or after January 1, 2020.
Of course, other VA loan limitations are still in place and lenders must strictly adhere to them or face the consequences. In 2017, the New York Department of Financial Services ordered a large mortgage lender to pay $1.1 million in penalties and restitution for overcharging on VA loans. And this past May, the Department of Veterans Affairs Office of Inspector General, in cooperation with the U.S. attorney in the Eastern District of New York, subpoenaed at least eight lenders to turn over hundreds of files on VA loans made between 2013 and 2017 to investigate if they overcharged borrowers.
The VA’s One Percent Fee Rule
Under VA guidelines, a lender can charge a borrower a maximum of “reasonable and customary amounts for any or all of the ‘itemized fees and charges’ designated by VA.” Allowable third-party charges include appraisal and compliance inspections; recording fees; credit report; prepaid items, such as taxes and assessments; hazard insurance; flood zone determination; survey, if required by the lender or veteran; title examination and title insurance; special mailing fees for refinancing loans; and a Mortgage Electronic Registration System (MERS) fee.
In addition, a lender may charge a borrower a flat fee equal to one percent of the loan amount. This flat fee is intended to cover all origination, processing and underwriting costs which are not reimbursable as “itemized fees and charges.” Items that should be covered in the flat fee include lender’s appraisals and inspections, except in construction loan cases; loan closing or settlement fees; document preparation fees; attorney’s services other than for title work; interest rate lock-in fees; escrow fees or charges; notary fees; trustee’s fees or charges; loan application or processing fees; and tax service fees. While charging the flat fee is common, lenders also have the option to itemize these fees and charges. If a lender chooses to itemize these costs, the fees and charges still cannot total more than one percent of the loan amount.
What is the benefit of itemizing these unallowable fees and charges if they still cannot exceed the one percent threshold? Well, depending on the state the loan is being originated in, some of those “unallowable” fees might actually be allowable, and would not count against the one percent threshold.
State Exceptions to the Rule
Today, in 31 states, lenders are permitted to charge certain fees that would otherwise be capped at one percent for VA loans. Texas has the most exceptions at 11. Lenders that originate in The Lone Star State can recoup costs from the participation fee on Texas Veterans Housing Assistance Program (VHAP) loans, housing quality standards fee on VHAP loans, attorney fees for refinances, title policy recoupment fees, title policy guaranty fees, escrow fees on refinances, tax certificates, tax deletion fees, elevation certificates, environmental protection lien endorsement, and pest inspection fees.
Texas is followed by Arkansas, with eight exceptions, and New York, with six exceptions. Other states that allow fees and charges normally considered unallowable are: Alabama, Alaska, Arizona, California, Connecticut, Delaware, Florida, Georgia, Hawaii, Iowa, Illinois, Indiana, Louisiana, Massachusetts, Maine, Michigan, Minnesota, Mississippi, New Hampshire, New Jersey, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Virginia, Vermont and West Virginia.
Leveraging Technology for Compliant and Profitable VA Lending
Lenders are often reluctant to take advantage of state exceptions on VA loans because it requires itemizing every fee and charge, as well as auditing the loan estimates and closing documents for compliance. This in itself can be costly and time consuming, and if done incorrectly, can lead to compliance violations, repurchase and reputational risk.
Leveraging automated compliance technology helps lenders quickly and cost-effectively audit their VA loans for all of the unique state charges and fee deviations published by the VA—ensuring lenders do not overcharge veterans and active military, while also recovering the maximum allowable costs under each jurisdiction. This helps to not only mitigate risk of compliance violations, but also make VA lending more efficient and profitable.
John I. Vong, CMB, CMT, is executive chairman and co-founder of ComplianceEase, the nation’s leading provider of automated compliance solutions to the financial services industry. He can be reached at firstname.lastname@example.org.