By John I. VongOriginating mortgages today can be an expensive business for banks—no matter what size. According to the June 2019 Stratmor Group Insights Report, last year, large banks spent $13,628 in expenses per loan in 2018, while smaller regional banks spent 66 percent less, or $8,985 per loan. With production revenue estimated to be $8,411 per loan in Q4 2018 according to Mortgage Banker Association research, many banks are struggling to turn a profit and cannot afford to turn away any opportunities.
Although they only represent approximately 10 percent of the home mortgage market, loans backed by the VA have become a critical part of many bankers’ origination mixes. And soon these loans may be an even bigger part of the mix. In June, Congress passed, and President Trump signed, a bill that eliminates the conforming loan limit cap on VA loans, allowing veterans to borrow more than the 2019 conforming limit of $484,350 for most counties without any down payment.
When originating VA loans, however, bankers must strictly adhere to the limitations on the fees and charges that the veteran borrower pays or face the consequences. A couple of years ago, the New York Department of Financial Services ordered a large mortgage lender $1.1 million for overcharging on VA loans. And in May 2019, the VA inspector general, in cooperation with the U.S. attorney in the Eastern District of New York, subpoenaed at least eight lenders, asking them to turn over hundreds of files on VA loans made between 2013 and 2017 to investigate if they overcharged borrowers.
Under VA guidelines, a borrower can pay a maximum of “reasonable and customary amounts for any or all of the ‘itemized fees and charges’ designated by VA.” This includes allowable third-party charges such as 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 fee.
In addition, bankers may charge a borrower a flat fee equal to one percent of the loan to cover origination, processing and underwriting costs that are not reimbursable as itemized fees and charges. Fees and charges that the VA believes should be covered in the flat fee include lender’s appraisals; lender’s 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 one percent fee is common, bankers can also choose to itemize these costs—but the total of all unallowable fees and charges still cannot exceed one percent of the loan amount.
According to the VA’s “Policy Clarification on Unallowable Fees,” dated May 7, 2014:
If the lender charges a $1,000 loan origination fee on a $100,000 loan, they have charged the maximum allowable origination fee, and cannot charge additional unallowable fees, such as a document preparation fee or pest inspection fee. However, if the lender charged an $800 loan origination fee on a $100,000 loan, the lender may charge up to $200 in unallowable fees, such as a document preparation fee or pest inspection fee. In all cases, the aggregate of the loan origination fee and unallowable fees cannot exceed the one percent threshold.
Since charging the flat one percent fee is so easy, why would any banker itemize unallowable fees and charges if they still cannot exceed the one percent threshold? Well, depending on the state the loan originates, some of those “unallowable” fees could be allowable, and would not count against the one percent threshold.
Today, the VA permits bankers to charge certain fees that would otherwise be included in the one percent cap on loans in 31 states. Take, for example, Texas. This state allows 11 exceptions—the most out of any state. Bankers that lend in Texas can recover costs from the participation fee on Texas Veterans Housing Assistance Program 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.
Arkansas has the second most exceptions with eight. New York comes in third with six exceptions. Other states with exceptions 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.
As you would expect, many bankers have been reluctant to take advantage of state exceptions on VA loans because itemizing and then auditing the loan estimates and closing documents for compliance was a painstaking manual process—one that added time and cost and was fraught with the risk of miscalculating and exceeding the maximum amount allowed.
What is the role of compliance with these exceptions to the VA rule? We should be aware of these unique state changes and fee deviations published by the VA, particularly when reviewing loan closing documents. It is important to ensure that banks are not only compliant when charging fees to veterans and active-duty service members, but that they are also able to recover their allowable costs in each jurisdiction. Innovative technology solutions can assist with making sense of all the data, helping compliance professionals mitigate regulatory risk and improving efficiency and profitability in VA lending.
John I. Vong is executive chairman and co-founder of ComplianceEase, whose automated home mortgage compliance solutions are endorsed by ABA.