As previously reported, in November 2022 the Department of Veterans Affairs (VA) issued a proposal to update its rules for interest rate reduction refinancing loans (often referred to as “IRRRLs”) to conform with VA loan refinance provisions in the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was enacted in 2018, and the Protecting Affordable Mortgages for Veterans Act of 2019. The VA recently issued a supplemental proposal to change the start date of the maximum 36-month period for the veteran to recoup the cost of the refinancing. Comments are due by May 6, 2024.

The U.S. Code section that sets forth the cost recoup requirement (38 USC § 3709(a)(2)), and related VA loan refinancing requirements, provide that “all of the fees and incurred costs are scheduled to be recouped on or before the date that is 36 months after the date of loan issuance.” The statute does not define the term “date of loan issuance,” and the VA notes in the preamble to the supplemental proposal that “[b]efore 38 U.S.C. 3709 was signed into law, the term ‘‘loan issuance’’ was not mentioned within chapter 37 or commonly used by VA in the VA home loan program.” The VA also notes that the legislative history of the Public Law that imposed new VA loan refinance requirements “does not include a definition of the term or provide sufficient context from which to infer the intended meaning.”

In the November 2022 proposal, the VA proposed to use the note date as the date of loan issuance. The VA is now proposing that the date of loan issuance be the first payment due date of the refinance loan. Thus, the 36 month maximum recoupment period would be measured from a later point than as originally proposed. The VA was not prompted to make the change based on public comments, as the VA notes in the preamble to the supplemental proposal that it did not receive comments specific to what “date of loan issuance” means. Rather, the VA advises that in preparation for the final rule it “re-examined the text of [U.S. Code] section 3709, VA’s proposed recoupment formula, comments of internal VA staff, potential outcomes for Veterans, ongoing industry implementation of the statutory recoupment standard, and a range of other sources, and identified reasons why the initial proposal may not have reflected the best interpretation.” (Footnote omitted.)

The VA focuses on the section 3709 requirement that the recoupment be calculated through lower monthly payments, and addresses potential adverse consequences of using the note date as the date of issuance. One such consequence is that because after a refinance a VA borrower may not make one or two monthly payments, using the note date as the date of issuance could mean that only 34 or 35 monthly payments are used to calculated the recoupment, and not a full 36 monthly payments. The VA also noted a concern that any interest in advance payments that a veteran may need to make at closing with regard to any missed payments could be an additional cost that would need to be recouped.

The VA advises that the date of the first payment due on the note would be the date of issuance regardless of whether the veteran actually makes the payment. The VA does not propose a change in the recoupment calculation set forth in the original proposed rule. Under the original proposal the sum of the fees, closing costs and expenses incurred by the veteran to refinance the existing loan, whether paid in cash or financed, is divided by the dollar reduction in the monthly principal and interest payment, with the result reflecting the number of months it will take to recoup the refinancing costs. For example, if the applicable costs are $3,600 and the monthly principal and interest payment is reduced by $100, the result would be 36, and the maximum recoupment period would be satisfied. The costs to refinance would not include (1) the VA funding fee, (2) prepaid interest and amounts held in escrow, and (3) taxes and assessments on the property, even when paid outside of their normal schedule, that are not incurred solely due to the refinance transaction, such as property taxes and special assessments.

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