[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]



   HOME LOAN CHURNING PRACTICES AND HOW VETERAN HOMEBUYERS ARE BEING 
                                AFFECTED

=======================================================================

                                HEARING

                               before the

                  SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

                                 of the

                     COMMITTEE ON VETERANS' AFFAIRS
                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                      WEDNESDAY, JANUARY 10, 2018

                               __________

                           Serial No. 115-43

                               __________

       Printed for the use of the Committee on Veterans' Affairs
       
       
             [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


        Available via the World Wide Web: http://www.govinfo.gov
        
        
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	            U.S. GOVERNMENT PUBLISHING OFFICE
	             
35-371                       WASHINGTON: 2019

        
        
        
        
                     COMMITTEE ON VETERANS' AFFAIRS

                   DAVID P. ROE, Tennessee, Chairman

GUS M. BILIRAKIS, Florida, Vice-     TIM WALZ, Minnesota, Ranking 
    Chairman                             Member
MIKE COFFMAN, Colorado               MARK TAKANO, California
BRAD R. WENSTRUP, Ohio               JULIA BROWNLEY, California
AMATA COLEMAN RADEWAGEN, American    ANN M. KUSTER, New Hampshire
    Samoa                            BETO O'ROURKE, Texas
MIKE BOST, Illinois                  KATHLEEN RICE, New York
BRUCE POLIQUIN, Maine                J. LUIS CORREA, California
NEAL DUNN, Florida                   KILILI SABLAN, Northern Mariana 
JODEY ARRINGTON, Texas                   Islands
JOHN RUTHERFORD, Florida             ELIZABETH ESTY, Connecticut
CLAY HIGGINS, Louisiana              SCOTT PETERS, California
JACK BERGMAN, Michigan
JIM BANKS, Indiana
JENNIFFER GONZALEZ-COLON, Puerto 
    Rico
                       Jon Towers, Staff Director
                 Ray Kelley, Democratic Staff Director

                  SUBCOMMITTEE ON ECONOMIC OPPORTUNITY

                    JODEY ARRINGTON, Texas, Chairman

GUS BILIRAKIS, Florida               BETO O'ROURKE, Texas, Ranking 
BRAD WENSTRUP, Ohio                      Member
JOHN RUTHERFORD, Florida             MARK TAKANO, California
JIM BANKS, Indiana                   LUIS CORREA, California
                                     KATHLEEN RICE, New York

Pursuant to clause 2(e)(4) of rule XI of the Rules of the House, public 
hearing records of the Committee on Veterans' Affairs are also 
published in electronic form. The printed hearing record remains the 
official version. Because electronic submissions are used to prepare 
both printed and electronic versions of the hearing record, the process 
of converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.





                            C O N T E N T S

                              ----------                              

                      Wednesday, January 10, 2018

                                                                   Page

Home Loan Churning Practices And How Veteran Homebuyers Are Being 
  Affected.......................................................     1

                           OPENING STATEMENTS

Honorable Jodey Arrington, Chairman..............................     1
Honorable Beto O'Rourke, Ranking Member..........................     2

                               WITNESSES

Mr. Jeffrey London, Director, Loan Guaranty Service, Veterans 
  Benefits Administration, U.S. Department of Veterans Affairs...     3
    Prepared Statement...........................................    26

        Accompanied by:

    Mr. John Bell, Deputy Director, Loan Guaranty Service, 
        Veterans Benefits Administration, U.S. Department of 
        Veterans Affairs

Mr. Michael R. Bright, Executive Vice President and Chief 
  Operating Officer, Government National Mortgage Association....     5
    Prepared Statement...........................................    29

Mr. J. David Motley, CMB, President, Colonial Savings, F.A., On 
  behalf of the Mortgage Bankers Association.....................     7
    Prepared Statement...........................................    33

Mr. Brock Cooper, General Counsel, Veterans United Home Loans....     8
    Prepared Statement...........................................    36

                   QUESTIONS & ANSWERS FOR THE RECORD

Ginnie Mae.......................................................    39


   HOME LOAN CHURNING PRACTICES AND HOW VETERAN HOMEBUYERS ARE BEING 
                                AFFECTED

                              ----------                              


                      Wednesday, January 10, 2018

            Committee on Veterans' Affairs,
                    U. S. House of Representatives,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 10:02 a.m., in 
Room 334, Cannon House Office Building, Hon. Jodey Arrington 
[Chairman of the Subcommittee] presiding.

         OPENING STATEMENT OF JODEY ARRINGTON, CHAIRMAN

    Mr. Arrington. The Subcommittee will come to order.
    Good morning, everyone, and welcome to today's Subcommittee 
on Economic Opportunity and our oversight hearing entitled 
``Home Loan Churning Practices and How Veteran Homebuyers are 
Being Affected,'' and additionally, how taxpayers could be 
affected. This is the second oversight hearing that we have 
held this Congress related to VA's Loan Guaranty Program and 
the benefits that are provided to our American servicemembers 
and veterans on account of this program.
    As Mr. London with the Department of Veterans Affairs 
discusses in his testimony, VA has guaranteed over 23 million 
loans in excessive of $2 trillion since the 1940s. That 
represents millions of veterans, servicemembers, and their 
families who may not have otherwise been able to achieve the 
American Dream.
    And while this program is one of the more well-run programs 
at the VA--and I have some thoughts about why it is. Mainly 
because they guarantee it. But the lenders are involved, and 
they underwrite it, there are more people involved in 
administering it in the private sector.
    But they have recently had some concerns about certain 
activities being conducted by some lenders, potentially 
unscrupulous lenders, which have the potential for harmful 
outcomes for veteran home buyers. But not only for the home 
buyers, but for more the mortgage industry and for, again, the 
taxpayer who in guaranteed programs like this are ultimately on 
the hook.
    We have seen reports of what may be deceptive practices 
that seem to be, in some cases, misleading veterans to 
refinance their homes with the idea that they will have lower 
interest rates or be able to skip a mortgage payment or take 
cash out of their homes that will, quote, unquote, save them 
money down the road. And as our dads taught us, if something 
sounds too good to be true, oftentimes it is too good to be 
true.
    So we have heard stories of individual veterans receiving 
dozens, dozens of solicitations from certain lenders in the 
immediate week after closing on their homes, leading some of 
them to believe that they will pay less cash each month if they 
just refinance their homes with these lenders. However, due to 
the realities of hidden fees, adjustable interest rates, and 
other products like that, the veteran can end up paying much 
more than they ultimately can afford or even remove all their 
equity in the home, such that they end up upside down on their 
mortgage.
    These practices are troubling. They don't seem to have the 
best interests of the veteran in mind. They can have a negative 
impact on financial institutions and the investors that support 
them. And then, most disconcerting to me, they are depreciating 
the value of the VA guaranteed loans and the integrity of the 
program, and they are exposing--potentially exposing taxpayers 
to greater risk.
    I understand that many households do experience instances 
where refinancing through an Interest Rate Reduction 
Refinancing Loan, or an IRRRL, is necessary and appropriate for 
their own financial circumstances. However, we must ensure that 
there are appropriate standards in place to prevent unfair and 
deceptive practices, number one; and, number two, that these 
products are being offered consistent with safe and sound 
practices to protect the integrity of the Home Loan Program.
    I look forward to discussing these solutions with our 
witnesses today to ensure that we are appropriately protecting 
the veteran consumer, the integrity of the program, the 
taxpayer, who, by the way, has agreed to make this investment 
and be a guarantor for this program so that we can serve our 
veterans in this way.
    I again thank the witnesses for being here this morning, 
and I look forward to your testimony.
    And I now want to yield time to my friend, Ranking Member 
Beto O'Rourke.

       OPENING STATEMENT OF BETO O'ROURKE, RANKING MEMBER

    Mr. O'Rourke. Mr. Chairman, thank you for helping to 
organize this meeting, to your staff and the minority staff for 
ensuring that we are prepared for it. I am looking forward to 
hearing from those who are here today to testify and answer our 
questions.
    And as always, you have done such an excellent job of 
describing the benefit of the program that we seek to enhance, 
some of the challenges that face that program right now, and 
specifically the veterans for whom it is set up and 
administered and intended to benefit.
    And as we have often done in this Subcommittee, which I 
think really distinguishes it from so much of the other work in 
Congress, I would love to see us, perhaps by the end of this 
meeting, suggest some commonsense solutions that the VA could 
either adopt administratively or that we will work on as, 
literally, an act of Congress, if necessary. I think that is 
something that we have been able to do in many of our meetings 
together with the participation of the Members, input from VSOs 
and veterans, and the wisdom that we gain from the panel here.
    And so I have come in with some ideas. I want to listen to 
yours. I want to hear what the experts have to say. And then, 
perhaps, in summary at the end of this, we could hopefully get 
on the same page about how we could correct this in a way that 
is not burdensome or onerous but protects veterans from fraud 
or duplicity or decisions that they may not be making in an 
informed way.
    So I am looking forward to the conversation and grateful 
that you brought us all together today on this important issue. 
And with that, I will yield back.
    Mr. Arrington. Thank you, Ranking Member O'Rourke. And I 
share your sentiments and the desired outcome to find out where 
the problem lies and what tools the folks here, the 
stakeholders need to solve the problem, and then move forward 
with just a better environment altogether for our veterans and 
taxpayers.
    So with that, let's make introductions of those who are 
here to testify with us.
    We have Mr. Jeffrey London, Director of VA's Loan Guaranty 
Service. And he is accompanied by Mr. John Bell, Deputy 
Director of VA's Loan Guaranty Service.
    Mr. Michael Bright, Executive Vice President, Chief 
Operating Officer of the Government National Mortgage 
Association, better known as Ginnie Mae.
    Glad to have you here with us.
    Mr. J. David Motley, President of Colonial Savings, who is 
testifying on behalf of the Mortgage Bankers Association, an 
important stakeholder, no doubt, in this discussion.
    And finally, Mr. Brock Cooper, General Counsel for Veterans 
United Home Loans.
    Thanks, everybody, for being here, and certainly look 
forward to hearing from you.
    Let's start with Mr. London. You have 5 minutes for your 
opening statement.

                  STATEMENT OF JEFFREY LONDON

    Mr. London. Good morning, Chairman Arrington, Ranking 
Member O'Rourke, and other Members of the Subcommittee. Thank 
you for the opportunity to appear before you today to discuss 
the Department of Veterans Affairs Home Loan Guaranty Program 
and the issue of serial refinancing and the impact it can have 
on veteran borrowers.
    Making sure refinance loans provide veterans with a benefit 
and not future financial harm is a very important matter. No 
one is helped when a refinance loan ends in a foreclosure.
    It is also very important to ensure that VA loans 
facilitate healthy mortgage-backed securities and continue 
investment in our Nation's housing market.
    Today I am pleased to share with you our assessment of the 
situation, the activities to assist veterans that we have 
undertaken in collaboration with our colleagues thus far, and a 
sensible, impactful approach we have crafted to ensure program 
success.
    First, I would like to give a sense of the scope and nature 
of the situation in our program. The vast majority of 
refinanced loans are providing veterans with benefits. For 
example, one disabled veteran living on Social Security income 
and VA disability was able to reduce the interest rate and 
change terms to save over $500 a month. Another veteran who was 
a police officer with two children was able to reduce the 
interest rate and save over $400 a month.
    Data from the last 2 fiscal years also show positive 
trends. Not only did the number of veterans who obtained two or 
more streamlined refinances in a given fiscal year decline 
significantly, approximately 80 percent year over year, the 
number of lenders engaging in notable habitual refinancing also 
declined from approximately a dozen in fiscal year 2016 down to 
only a handful in fiscal year 2017.
    So, yes, there have been instances of lenders not using the 
streamlined refinance program for its intended purpose. 
Although we believe those instances are not indicative of a 
systematic problem, VA's steadily high loan volume reverberates 
to Ginnie Mae's investors. And, of course, one veteran being 
misled or taken advantage of is one veteran too many. So we are 
compelled to act and make an impactful change.
    Our program's success is built on a longstanding history of 
employing policy actions that are appropriate for the given 
situation. We take measured approaches to policy interventions 
and complex situations.
    A regulation has been drafted with due care. Our 
overarching concern in developing the rule was to ensure that 
our veteran borrowers receive a net tangible benefit.
    In addition to analyzing seasoning requirements appropriate 
for streamlined and regular/cash-out refinance loans, we 
examined the long-term cost veteran borrowers could face in 
obtaining them. Meanwhile, we also collaborated with our 
colleagues at Ginnie Mae and the Consumer Financial Protection 
Bureau to employ non-regulatory actions that could quickly 
serve veterans, taxpayers in general, and mortgage investors 
alike.
    The VA team has focused a great amount of time and energy 
in working with Ginnie Mae in a joint task force which has 
resulted in two all-purpose memorandums aimed at the frequency 
of refinance loans. We collaborated with the CFPB on a warning 
order which provided veterans with important consumer and 
financial information to consider when deciding whether to 
refinance an existing mortgage. We have held a number of 
meetings with the Mortgage Bankers Association and their 
members to discuss program policy and data as they relate to 
the underwriting, origination, and performance of VA guaranteed 
loans.
    As the draft regulation makes its way to publication for 
comment, we have turned that eye to examining the impacts that 
recent market conditions may have on other segments of our 
business, more particularly, the Regular/Cash-out refinance 
program. We anticipate that, in response to market conditions, 
lenders will shift their business models to originating more 
purchase loans or more regular/cash-out refinance loans.
    As a result, we will be keeping a close eye on trends in 
these programs to ensure they are being stringently 
underwritten to our established standards and the loans provide 
the intended benefit to our veteran borrowers.
    Members, despite the concern that others may have expressed 
about the heading we have followed and the speed at which we 
have traveled, I am confident that the road we have engineered 
is a sensible one and that it will have a net positive impact 
for our veterans, for lenders, and for the broader origination 
and secondary markets.
    Thank you again for the opportunity to speak to you today. 
And as always, I thank you for your unwavering commitment to 
serving our Nation's veterans and servicemembers. I look 
forward to entertaining any questions you may have.

    [The prepared statement of Jeffrey London appears in the 
Appendix]

    Mr. Arrington. Thank you, Mr. London.
    Now, from Ginnie Mae, Mr. Michael Bright. We yield 5 
minutes for your introductory statement.

                 STATEMENT OF MICHAEL R. BRIGHT

    Mr. Bright. Chairman Arrington, Ranking Member O'Rourke, 
and Members of the Subcommittee, good morning, and thank you 
for inviting me here today.
    My name is Michael Bright, and I am the executive vice 
president and chief operating officer of the Government 
National Mortgage Association, or Ginnie Mae. I thank you very 
much for inviting me here to testify on this critical issue.
    For background, Ginnie Mae is a Federal agency, chartered 
by Congress in 1968, responsible for providing liquidity to the 
market for mortgages in the Veterans Affairs, Federal Housing 
Administration, and USDA rural housing programs. We do this by 
applying a full faith and credit government guarantee to loans 
that qualify for delivery into our security.
    Qualifying loans are those guaranteed by the USDA, VA, and 
FHA under their respective program guides. These loans are then 
pulled into our mortgage-backed securities, or MBS.
    The Ginnie Mae guarantee and the Ginnie Mae brand is 
globally recognized and trusted. The strong value of our brand 
leads to investment in the U.S. housing market from large asset 
managers, pension funds, and central banks across the globe, 
all of which makes lending to low-income, first-time, rural, 
and veteran borrowers possible.
    It would be very difficult for me to overstate the 
consequences for the U.S. housing market if Ginnie Mae and our 
partner Federal agencies, the USDA, VA, and FHA, did not 
successfully police our programs. Global capital is drawn to 
our market in part because of the strength of the United States 
and its credit worthiness. But if our program is abused or 
taken advantage of, this capital can and will find other 
investment vehicles. That would drive up interest rates and 
make mortgage credit less available for millions of Americans.
    As such, it is imperative that we all work together, those 
of us here on this panel as well as Congress, to solve the 
issue we are here to discuss today.
    We believe we are seeing abusive practices by some lenders 
in the VA program, namely the rapid refinancing of borrowers 
multiple times without significant economic benefit. We 
believe, and our data shows, that this practice is the result 
of a relatively small percentage of lenders. But, importantly, 
it has become endemic enough in the market that it threatens 
the health of our security, and so action to curb this behavior 
is imperative.
    Abusive lending practices in the VA market are alarming on 
so many levels. First, as I mentioned before, if this behavior 
persists, we run the risk of losing the capital needed to fund 
critically important home ownership programs.
    Second, to watch behavior that is borderline predatory in 
nature return to our country is terrifying. Much of this 
behavior is too reminiscent of the lending practices used by 
many in the industry prior to the 2008 financial crisis. And 
finally, the fact that this behavior is targeted at veterans 
should be sickening to all of us.
    The best way to stop this behavior is to put in place more 
stringent rules and to say that it will not be tolerated.
    For Ginnie Mae's part, we have already announced that we 
are putting in place the following new requirements.
    One, no loan can be refinanced and delivered into a Ginnie 
Mae multi-issuer security within 6 months of the first payment 
due date of the original loan.
    Two, no loan that is more than 150 basis points or 1.5 
percentage points above what we define as par will be eligible 
for delivery into a Ginnie Mae multi-issuer security.
    And, three, lenders who are clearly and demonstrably 
abusing our program will be put on notice.
    Ultimately, under forthcoming rules, some pools will no 
longer enjoy the benefits of delivery into our flagship 
security and instead will be forced into what we call custom 
pools. This is a powerful tool that Ginnie Mae can and will 
use.
    Let me repeat: Issuers who produce pools of loans that 
perform materially different than our average will need to find 
their own investors. This action will help prevent the bad 
actions of some issuers from filtering into poor security 
pricing for those who use our program in a responsible manner.
    I believe that 2018 will be a critical year for this issue. 
If we cannot get a handle on this behavior, abusive lending 
will continue to infect our market and our program. That could 
drive away important sources of capital and may create an 
environment where veterans are viewed as suitable prey for 
aggressive lending.
    I would like to take a moment and also say to veterans that 
you have the right to make unwanted calls or solicitation stop. 
Refinancing your loan multiple times likely has consequences 
that you may not be aware of. And if you see terms on a loan 
that appear too good to be true, they probably are. Veterans 
should feel free to contact me or any other official at Ginnie 
Mae at any time if they feel they are being harmed.
    In conclusion, let me thank you all once again for bringing 
attention to this issue. At Ginnie ae, we are here to work with 
all of you in doing everything that is needed to root out 
abusive behavior from this important loan program.
    Thank you, and I am happy to answer any questions that you 
have.

    [The prepared statement of Michael R. Bright appears in the 
Appendix]

    Mr. Arrington. Thank you, Mr. Bright.
    Mr. Motley, you now have 5 minutes.

                  STATEMENT OF J. DAVID MOTLEY

    Mr. Motley. Thank you.
    Chairman Arrington, Ranking Member O'Rourke, and Members of 
the Subcommittee, I appreciate the opportunity to testify this 
morning on behalf of the Mortgage Bankers Association.
    My name is Dave Motley, and I am president of Colonial 
Savings, a privately held, federally charted thrift 
headquartered in Fort Worth, Texas.
    For over 65 years, we have been originating loans for 
veterans. In fact, our founder, a veteran himself, saw the 
opportunity to serve veterans returning from World War II.
    Today, roughly 10 percent of our origination volume is to 
veterans, and we service over 6,000 loans for VA borrowers.
    I am also Chairman this year of the MBA. I am a certified 
mortgage banker, and I previously served as a board member of 
the Texas MBA and a member of the Community Bank Advisory 
Council for the Consumer Financial Protection Bureau.
    I would like to begin by applauding this Subcommittee for 
its efforts to better understand problematic practices with 
respect to certain mortgage refinances marketed to 
servicemembers and veterans of the U.S. military. The VA's 
mortgage loan program plays an important role in increasing the 
availability of mortgage credit for servicemembers, veterans, 
and surviving spouses. By guaranteeing a portion of the loan 
balance, the VA enables lenders to offer loans with more 
favorable terms, such as no required down payment.
    While those borrowers seeking to refinance their VA loan 
may apply and be evaluated by their lender's full underwriting 
process, the VA Interest Rate Reduction Refinance Loan, IRRRLs, 
allows for a streamline refinance process that is often faster 
and entails lower costs.
    Generally, refinancing with an IRRRL allows the borrower to 
lower the interest rate on the mortgage. And in doing so, the 
borrower incurs fees from the lender which are either paid by 
the borrower at origination or rolled into the principal 
balance of the new loan.
    Recently a small number of lenders have undertaken 
aggressive and potentially misleading advertising campaigns to 
generate increased IRRRL volumes and fees. In some cases, this 
advertising targets VA borrowers who have just recently engaged 
in an IRRRL, convincing them to refinance yet again to lower 
their interest rate by a modest amount while adding even more 
fees to the principal balance on the loan.
    Such serial refinance refinancing, or churning, strips 
borrowers' equity and often further extends the time period it 
takes for the cost to be recouped through lower payments. Some 
lenders also use the IRRRL to lower the rate, but only by 
moving the veteran from a 30-year fixed rate to a 3-year 
adjustable rate mortgage.
    Many borrowers may not fully comprehend the net economic 
impact of their decision to refinance, leaving them vulnerable 
to situations in which they add substantial amounts to their 
overall loan balance while achieving only small reductions in 
their monthly payments. This is not what the program was 
intended to do, and these practices should be put to an end.
    Aggressive use of IRRRLs by some lenders also threatens to 
weaken investor demand for Ginnie Mae securities that are 
partially backed by VA loans. This outcome increases costs and 
negatively impacts access to credit for a wide range of 
borrowers.
    It is worth noting that IRRRL churning is not a widespread 
problem among the mortgage lending community, but rather an 
activity that is confined to a small subset of lenders. MBA 
fully supports supervisory efforts to improve the policing of 
the market as well as new rules to remove the ability or 
incentive for any lenders to engage in churning.
    We applaud Ginnie Mae for taking important steps to both 
study and address this issue. However, the problem of loan 
churning cannot be solved by Ginnie Mae alone.
    Fortunately, many practical options fall within the 
existing authority of VA to implement. For example, instituting 
a maximum recoupment period would inhibit lenders from charging 
substantial fees in exchange for minor reductions in mortgage 
interest rates.
    Similarly, requiring a net tangible benefit test, which is 
already required for FHA streamline refinances, could more 
effectively ensure that the terms of the refinance produce real 
benefits for borrowers. Limits on the amounts that can be added 
to the principal balance would reduce equity stripping. And 
finally, targeted consumer financial education about churning 
can better inform borrowers about the potential for abuse.
    It is important to focus on options that target churning 
while not impeding the ability of servicemembers and veterans 
to obtain a beneficial refinancing. We recognize that the VA 
program is a unique program: an entitlement program for 
veterans who have served our country. As such, while we support 
quick action to limit abuses, it needs to be done thoughtfully 
to ensure that legitimate low-cost refinancing options for 
veterans are retained.
    MBA is committed to the promotion of best practices and 
standards that generate a healthy and responsible mortgage 
market, and we stand ready to assist in developing and 
implementing solutions to the problems we have discussed today.
    [The prepared statement of R. David Motley appears in the 
Appendix]

    Mr. Arrington. Thank you, Mr. Motley.
    I yield 5 minutes now to Mr. Cooper for his opening 
remarks.

                   STATEMENT OF BROCK COOPER

    Mr. Cooper. Good morning, Chairman Arrington, Ranking 
Member O'Rourke, and other Members of the Committee. My name is 
Brock Cooper, and I am general counsel of Veterans United Home 
Loans. I would also like to thank the rest of the Members of 
the panel for being here today to address this issue.
    Thank you for allowing me the opportunity to come here 
before you today to discuss lending practices that impact our 
Nation's servicemembers and veterans.
    I have worked for Veterans United for nearly 10 years and 
have headed VU's legal department for that entire time. I am a 
veteran myself and have used the VA loan several times, 
including an IRRRL. I have a VA loan today, and I have seen 
firsthand the aggressive and misleading refinance practices 
employed by some in the industry.
    Veterans United is a full-service family-owned lender. We 
are headquartered in Columbia, Missouri, and we make VA loans 
in all 50 States and the District of Columbia.
    Our primary mission is helping veterans, servicemembers, 
and their families achieve the American Dream of home 
ownership. We have been the Nation's number one VA purchase 
lender the past 2 years, closing more than 37,000 purchase 
loans in 2017. Veterans United now represents approximately one 
out of every seven VA purchase loans made in the country among 
the top 100 VA purchase lenders.
    If I could impress one thing upon you today, it is that the 
VA loan is not like other mortgages. It differs from FHA loans 
and all other mortgage programs because it is an earned service 
benefit to our veterans and our Active Duty personnel and 
surviving spouses. It is part of a deep bond between those who 
serve and the Nation these veterans pledged to defend.
    As we work to find solutions to the issues discussed here 
today, I implore the Committee to examine whether or not 
particular solutions may result in fewer earned benefits for 
veterans.
    The VA loan program stands out as a true success story. 
Before the mortgage crisis, the VA loan was a little-used 
product. But due to unique underwriting, VA loans were the only 
shining light through the mortgage crisis, performing better 
than any other program.
    Today, VA loans represent about 10 percent of the mortgage 
market. The program has featured the lowest average interest 
rates for more than 3 years, along with the lowest foreclosure 
rates for about 10 years. In particular, the IRRRL program has 
helped hundreds of thousands of veterans save money in their 
monthly mortgage payments.
    Unfortunately, as the Members of the panel stated before, 
some IRRRLs fail to live up to the spirit and intent of this 
program. The idea behind the IRRRL is to put veterans in a 
better financial position today than they were yesterday. We 
are here today to discuss improvements to this program that 
will ensure this spirit is carried out in every IRRRL.
    We have seen many, many veterans harmed by this activity. 
And in many situations, the veteran is left so far underwater, 
they may have difficulty selling their home in the future. 
Still others are left with adjustable rate loans that they 
don't understand and could result in higher payments down the 
road. And others have costs that could just never be recouped.
    We commend the VA and Ginnie Mae for their active 
engagement on this issue, and we salute their commitment to 
protecting veterans.
    We are here to talk about next steps. Going forward, the VA 
is in the best position to solve this issue without 
compromising veterans' benefits. However, the VA inhibited from 
moving with solutions due to administrative requirements that 
are part of the VA program.
    Unlike VA, other agencies, such as Ginnie Mae, Fannie Mae, 
Freddie Mac, and FHA, can make changes more quickly. We support 
legislation that would empower the VA to make program changes 
in a similarly expeditious manner, potentially including 
seasoning and recoupment periods for IRRRLs. Additionally, 
policymakers should ensure that non-cost-saving reasons are 
considered through the process to protect benefits of our 
deserving veterans.
    Thank you again, Mr. Chairman and Ranking Member and the 
Committee, for allowing me to come before you today, and I look 
forward to questions.

    [The prepared statement of Brock Cooper appears in the 
Appendix]

    Mr. Arrington. Thank you, Mr. Cooper.
    I now recognize and yield myself 5 minutes. I may have to 
leave early. I would rather yield to my colleagues, but in the 
event I have to leave, I wanted to go ahead and put my thoughts 
out there and ask you guys some questions.
    I spent 4 years as a regulator here in Washington during 
the Bush administration, George W, at the FDIC, and my 
philosophical view of regulation is that the best way to 
regulate in a private market is to have full transparency and 
robust competition so that people know what they are getting 
and they have choices.
    Because, presumably, if people are buying things, if they 
are choosing to enter into these transactions, there must be a 
need. There is no market if there is no need. And I think that 
Mr. Motley would understand that being in the industry.
    But this isn't a private market. This is a government 
market. Explain that to me more, Mr. Bright, explain the 
difference between the sort of light touch, limited 
intervention with the sort of transparent, robust competition 
that free marketeers like me believe in and rely on as the best 
way to weed out the riffraff. Now we got a government market. 
What is different about it? What is skewed in that dynamic?
    Mr. Bright. Yes, sir. Thank you for the question.
    It is true that in the mortgage finance base, in particular 
in FHA, VA, and USDA lending, the term ``market'' we use a 
little bit loosely, because you have originators who are 
originating a loan and they are purchasing government insurance 
on that loan, in this case, in terms of the VA, and then they 
are purchasing another form of government insurance to wrap the 
mortgage-backed securities. So you have actually two taxpayer 
layers of involvement to ensure that there is no credit risk at 
the end product.
    Mr. Arrington. So the full faith and credit of the United 
States Government is now brought to bear in this.
    Mr. Bright. Absolutely.
    Mr. Arrington. We created this market with the full faith 
and credit of the taxpayer backing up not just once with the 
guarantee--
    Mr. Bright. Yes.
    Mr. Arrington [continued].--from the VA program but--
    Mr. Bright. Twice.
    Mr. Arrington.--with Ginnie Mae.
    Mr. Bright. Yes. So, absolutely, a policy decision was made 
that we want to as a country make sure that, in this case 
veterans, but in the FHA's case low-income Americans, have 
access to loans on terms that they otherwise would not have. In 
order for that to be successful, we have to police our program. 
So we have created, as you say, a double-layered government 
market.
    Mr. Arrington. So in the absence of robust market forces, 
we have to play a greater role to protect those stakeholders, 
but namely the veteran and the taxpayer as the backstop here.
    So I am curious, is this an issue of safety and soundness 
for the program, for the taxpayer ultimately, or is this an 
issue of consumer protection or what we might refer to as an 
unfair and deceptive practice?
    So let me ask Mr. Cooper, are they disclosing, these folks 
that we are talking about as churners, are they disclosing that 
they are churning? Are they disclosing everything that they are 
going to do? Or are they being deceptive and unfair, in your 
opinion?
    Mr. Cooper. Thank you.
    I personally don't know if these things are deceptive 
initially. But I can tell you that we see disclosures that come 
through that don't put the veteran in a better financial 
position. So they may be disclosing it, but we feel like that 
they are being pressured to make these loans in certain 
situations.
    Mr. Arrington. So here is my problem with that. And, I 
mean, I feel like our veterans are some of the toughest, 
mentally strong, mentally competent, mature, wise. These folks 
have borne tremendous responsibility. And now all of a sudden, 
if somebody is disclosing things to them, I have a hard time 
believing that they are being necessarily taken advantage of. 
They may, but I struggle with that.
    Now, if they are being deceived and folks are putting out, 
holding out to do one thing, and then they are doing another, 
that is a problem. And if you can't stop that at the VA and 
Ginnie Mae, let's figure out how we can have an act of Congress 
to do that. But to suggest that they can't fend for themselves 
when reading about what they are getting into, I struggle with 
that.
    My last question, then I am going to yield to my colleagues 
that is on the consumer protection side. So if there is not the 
disclosure, if there is not transparency, we need to know that 
and if you don't have the tools to deal with that.
    The other issue is the safety and soundness. So whether 
they are disclosed fully and they are completely transparent or 
not and know what they are getting into or not, if it puts 
greater risk to Ginnie Mae and to the VA and the taxpayer, that 
is a real problem for me regardless.
    So would the panel just kind of opine on that? I would ask 
Mr. London and Mr. Bright to just make some comments on that. 
And then I am going to yield to the Ranking Member for his 
remarks. And thanks for being a little generous here on my 
time.
    Mr. London. Yes, Mr. Chairman. Thank you for the 
opportunity to respond to your question.
    Mr. Arrington. And, by the way, if you want to also comment 
on what I said about the veteran reading and understanding 
versus deceptive, I think there is a real difference there. So 
feel free to opine on any of what I said.
    Mr. London. Sure. And I have to start by saying, like, you 
spent 4 years at the FDIC. Four or 5 years of my time with the 
VA was in oversight and compliance. So I share your sentiments 
about making sure that there is safety and soundness in a 
program. That is just built in my DNA.
    And if you look at the outcomes that our program has, the 
numbers do not lie. The VA program is a sound program. Mr. 
Cooper mentioned that for the last 10 years we have had the 
lowest foreclosure rate and the lowest series delinquency rate. 
That is an indicator of the safety and soundness of our 
program.
    And as I mentioned in my opening statement, the actions 
that we have taken over the years to ensure that we continue to 
have those type of performances is exactly what we need to do 
for the issues that are brought out today.
    So I do believe that VA has the statutory authority to 
address the issues. I agree with you about consumer education. 
And our veterans can make sound decisions on their own. It is 
our job in the VA to make sure that we give them the tools to 
make those decisions.
    Mr. Bright. I agree. I would add it is entirely true that 
the VA loan program has low delinquencies, and I think that is 
a testament to the VA, I think it is a testament to the deal 
that officers and enlisted folks make with themselves when they 
apply for this program. There is a very strong sense that, 
``Hey, this is an earned benefit, but we have to continue to 
earn this benefit by performing on our loan,'' and that is a 
great pact. The problem is we have some lenders who don't seem 
to be living up to that pact as well.
    Absolutely this type of behavior puts taxpayers at risk in 
a couple of very concrete ways. The first is that at Ginnie Mae 
we wrap the mortgage-backed security. Our recourse, meaning if 
a lender fails to remit principal and interest on time, we have 
to make that payment for them. Whether the borrower makes it or 
not, if a lender fails to make on time, we have to make that 
for them. That is what our guarantee is.
    Our asset, the asset that we have recourse to, and you, as 
a former chief of staff of the FDIC understand you go in and 
you pull out an asset in the case that an institution fails to 
live up to its obligations, our asset is the MSR, the mortgage 
servicing rate.
    When we have prepayment speeds that are inexplicable by any 
economic measure whatsoever, what that does is that drives down 
the value of the mortgage servicing rate or the MSR, which 
means the collateral that the taxpayer has, has access to and 
has recourse to in the event that our counterparty fails to 
live up to their obligations, that asset is declining rapidly 
in value because we have issuers who have prepayment speeds 
where their entire book turns over in 6 months.
    And so it is a technical issue, and I don't mean to get too 
weedy on it. But absolutely 100 percent the asset that Ginnie 
Mae has recourse to falls in value because of this behavior.
    And then the final small point would be, if you have 
lenders who are solely in the refi business and that goes away, 
those lenders face insolvency. And when they go insolvent, that 
is when Ginnie Mae's wrap kicks in, and we have to go in there 
and take their book. And as I just explained, the asset that we 
are taking has just fallen in value.
    So this is a full ecosystem degeneration thing that we have 
got going that is separate and apart from the veterans who are 
doing a very admirable job of paying their loans on time.
    Mr. Arrington. I yield now 5 minutes, as much time as you 
may need, actually, to ask any questions and make any comments, 
Ranking Member O'Rourke.
    Mr. O'Rourke. Yeah. I thank the Chairman and take his point 
about ensuring that there is transparency and adequate 
information for the consumer, in this case the veteran, to make 
an informed decision.
    As someone who has purchased a home with my wife, and I am 
not a veteran nor is she, and we have refinanced our home, I do 
have to say you are battling a mountain of that transparency 
and information. And I would be lying to you if I told you that 
I read every single page that I signed. I didn't. We trusted 
those who had helped us to facilitate the sale and the 
mortgage.
    And so when you pit the veteran against those who would 
practice churning, serial refinancing, abusive lending, and 
they have got their marketing teams, they have got the folks in 
the call rooms who are calling these veterans within days, 
maybe hours, after they have already refinanced a loan, I think 
we need to do more than just ensuring that they have 
information.
    And I wonder if there is a way to prioritize this 
information. And, Kathy, if you don't mind, I will disclose you 
and I were talking about this yesterday and talking about 
whether--there is just one page with four bullets on it in 16-
point type that says this is your principal right now, this 
will be your principal with the refinancing costs that you will 
incur if you move forward in this process. This is the 
consequence.
    I mean, no more than those four, not in 9-point type, not 
in addition to everything else, especially if this is your 
second or third or fourth refinancing, here is how your 
principal has grown over that time.
    And then if you want to make that very bluntly informed 
decision to proceed, so be it. You have assumed the risk with 
the taxpayer backing that up.
    And so I wonder if that might make it a little bit more of 
a fairer engagement between the veteran borrower and the 
originator of the mortgage.
    Mr. Motley, you said the net economic impact, which is what 
I am trying to get at, may not be understood by the borrower, 
and you said perhaps some more targeted consumer information. 
Are we getting at the same thing in terms of this prioritizing? 
Like, look, this is what you are about to take on. I want to 
make sure you are good with it because it may not be clear from 
what the person trying to sell you on this originally told you.
    Mr. Motley. Yeah. Thank you, Congressman.
    I think we are moving in the right--in the same direction 
there. I believe that some sort of a net tangible benefit test 
that is shown to the veteran is the way to go, because it is 
going to show him what the actual costs associated with that 
new refinance are going to be against the timeframe it is going 
to take to recoup those costs through lower payments.
    And so if that time horizon is outside of his time horizon, 
then that deal makes no sense for that veteran. It is a 
decision, though, that he can make or she can make.
    So I think that there is definitely a need to establish 
some kind of a net tangible benefit test, similar to what the 
FHA has, to demonstrate to the borrower that this refinancing 
makes some sense.
    And if we have that in place, then you either abide by it 
or you don't abide by it. And if you don't abide by it, then 
you, as the lender, are subject to sanctions or maybe getting 
out of the program.
    But at least you have provided that disclosure to the 
borrower and he has been able to make that decision himself 
based on his circumstances, his terms, and his expected term of 
living in that house.
    Mr. O'Rourke. Yeah. And so Mr. Motley is talking about 
consequences to bad actors in the system.
    Mr. London, can you talk a little bit about that and how we 
hold people accountable for churning and taking advantage of 
veterans who may not be told in the clearest or necessary terms 
just what they are taking on?
    Mr. London. Sure. Before I answer that question 
specifically, I do want to touch base on what you were talking 
about, about the disclosure, and share some good news with you.
    Mr. O'Rourke. Great.
    Mr. London. Today in our program we have a requirement that 
lenders do exactly what you described. We call that the IRRRL 
worksheet where, on the company's letterhead, they have to 
disclose the terms of the loan to include the recoupment of 
that new transaction. So we do that today.
    Unfortunately, what happens is the veteran gets that at the 
closing table, like you described, with a mountain of paperwork 
that they don't read.
    Mr. O'Rourke. Right.
    Mr. London. So a decision that I have already made is to 
ensure that that disclosure is provided up front to the 
veteran. VA will also get a copy the same time the veteran gets 
a copy so that we can be that partner with the veteran, if he 
or she has questions about those terms that we can advise him 
or her, and they can make their own informed decision.
    That is something I can do today administratively without 
any regulation or statutory changes.
    Mr. O'Rourke. When does that start?
    Mr. London. We have to make some system changes. And, 
obviously, we have to put out some guidance to lenders on what 
information we need to make that happen. And my goal is to have 
that happen this year, this calendar year.
    Mr. O'Rourke. Okay. It seems like--again, you know this far 
better than I do--seems like a relatively easy fix to make. 
And, first of all, thank you for doing it. And I love that it 
wouldn't require an act of Congress to get that done. So first 
and foremost, thank you.
    Secondary, the sooner the better, obviously, right?
    Mr. London. Absolutely.
    Mr. O'Rourke. And we would love to be kept appraised of 
your progress on that. And maybe just to the staff, if we could 
have something that triggers a request to see what the progress 
made on this is within the next few months, I think that would 
be helpful.
    And then lastly, again, and sorry to be so specific on 
this, but the larger that information is made and the less 
surrounding information within which it is buried, the better 
chance that the consumer is going to understand exactly what 
those consequences are.
    But I love the idea that you are going to move this up to 
the front of the process. And I think, to the Chairman's point, 
you are going to have a much more informed, much more 
transparent transaction. So I think that is good news.
    I am going to yield back to the Chairman, but I do hope 
that in the questions from the other Members we get to hear 
from Mr. Cooper. He said that he had some specific program 
changes in mind, and I would love to know what those are as 
well.
    But thank you, Mr. London.
    Mr. Arrington. Great line of questions. And now we will 
yield 5 minutes to Mr. Banks for any questions he has.
    Mr. Banks. Thank you, Mr. Chairman.
    Mr. London, my wife and I's experience with our VA loan has 
been tremendous, and we appreciate the service that we have 
received through the process as we have taken advantage of that 
opportunity for us as a family.
    But I wonder, could you tell us what level of attention 
have some of these problems been raised to the higher levels of 
your organization's leadership? Has Secretary Shulkin been 
briefed? Is he well aware of these issues? Is he in tune with 
your strategies to combat them?
    Mr. London. Absolutely. And myself, along with the 
actingacting undersecretary, have spoken to the Secretary about 
this very issue, so he is personally aware. Also, our deputy 
secretary is well versed on this issue and, in fact, couple 
weeks ago met with Mr. Bright and others to discuss this issue. 
So this issue has the attention at the highest levels of VA, 
and they are extremely supportive of what we are doing.
    Mr. Banks. Very good. I appreciate Secretary Shulkin's 
leadership more and more every day. And that testament of his 
interest in issues like these is a great compliment even more 
so of his leadership.
    Mr. Cooper, I wonder if you could talk about your company's 
ethics, how you arrived at a place to be an ethical company, 
not to take advantage of some of these predatory examples we 
have heard about in the testimony.
    Mr. Cooper. Sure. Thank you, Mr. Banks. That is a great 
question.
    We, as a company, are based on a set of values that we 
worked really hard on as a group, as all of our employees, to 
set how we wanted to act as a company. And we carry that out 
every day. And it is something that we believe strongly in.
    And we came up with a mission as well, that we want to help 
get veterans into homes, and we are very focused on that. We 
offer IRRRL refinances. We offer traditional cash-out 
refinances.
    But our marketing practices don't focus on bringing those 
people right after closing to churn through them. And that is 
just something we felt is always in the best interest of--we 
are looking out for the best interest of the veteran in what we 
are doing, we feel like, is we want to educate veterans on the 
VA loan and how they can best make use of the program.
    Mr. Banks. Have you seen a decline in those values among 
your competitors during your time in the industry?
    Mr. Cooper. I wouldn't say that I have seen a decline. I 
think the other Members of the panel have said that there are a 
few actors out there, and this is not something really new. It 
just becomes more prevalent when certain market factors change, 
interest rates tick up slightly or tick back down. It is very 
interest-rate dependent.
    Mr. Banks. So what would be your advice to us how do we 
model those ethics and values that your company has taken so 
seriously in your business in hopes that other companies will 
adopt those values as well?
    Mr. Cooper. I mean, I think that in and of itself is very 
difficult from a congressional standpoint to model. I like what 
the Chairman has said about the veteran being able to make 
decisions for themselves. I like the idea of disclosures, being 
as transparent as we can be. There is always room for 
improvement in that area.
    I really like what Mr. London was saying about the VA being 
able to step in. They have been very successful with that kind 
of process on early intervention for servicing. And so if they 
implement a similar process there, I think that can be very 
helpful to kind of rein this activity in.
    Mr. Banks. Okay. Thank you. You give me great hope that 
other companies will emulate the same values and principles 
that your company does as well. And at the very least, our 
hearing today will publicize that, give a public hearing to 
those thoughts, and hopefully some of your competitors will 
raise that threshold as well.
    So thank you very much, Mr. Chairman. I yield back.
    Mr. Arrington. Thank you, Mr. Banks.
    I now yield 5 minutes to the gentleman from California, Mr. 
Takano.
    Mr. Takano. Thank you, Chairman Arrington.
    Chairman Arrington, I just want to express my gratitude for 
this hearing. I am impressed that you are focusing on an area 
of consumer protection and that you have made this distinction 
between an absolute free marketplace and a government 
marketplace and that the government marketplace is defined by 
money that is backed by the taxpayers or subsidized by the 
taxpayers.
    And, therefore, the question of the veteran being able to 
make a complete decision all by himself is a bit modified here, 
because that veteran is not making a decision that only solely 
affects his or her assets. It is also the assets of the 
taxpayer that are at stake.
    So we have a duty to make sure that the program is set up 
properly and that there isn't--I am forgetting the term when 
there is a moral liability, that there is a lack of--a moral 
hazard. There is a moral hazard here because the risk has been 
reduced greatly on the person benefiting from the decision.
    I hope, Mr. Chairman, we can hold some hearings into 
another area where I think the government marketplace 
distinction applies, and that is in our educational benefits. I 
am disturbed that in another Committee forum there is a 
proposal to do completely away with 90/10 and allow educational 
institutions to take 100 percent, 100 percent of the revenue 
from the Federal Government, including federally backed student 
loans. So I hope we can delve into that area.
    But I want to ask this question of--I can't see the name 
back there, but the guy at the end.
    Mr. Cooper, as we approach the situation, I want to be 
careful that any action we take does not have any unforeseen 
consequences. And one proposal that has been discussed is 
capping lender fees and tying the cap to the benefit of the 
loan for the veteran so that the lender would not be able to 
collect fees in excess of what the veteran saves over a period 
of time.
    Now, would such a proposal or others like it, to cap 
origination fees, somehow help this problem of loan churning, 
or do you think that as long as there are any fees permitted, 
lenders will still seek to churn?
    Mr. Cooper. Thank you for the question.
    I believe personally that there are already restrictions in 
place in the amount of fees that can be charged. The difficulty 
becomes when you are buying down the interest rate in the form 
of discount points that can then be rolled into the loan, those 
things become another disclosure issue. It is how far down did 
your rate go when you purchased these points, so to speak.
    And so I think it does fall in line with the other pieces 
that we have talked about already, is that there may be other 
ways to handle it. I don't know specifics of what the caps 
might look like in addition to what is already there. But it 
could be one solution.
    Mr. Takano. Mr. London, have there been financial service 
organizations that have been fined by the VA for predatory 
behavior? Is there an ability to do that? And have they been 
fined at all?
    Mr. London. We do have some ability. We have civil 
penalties that we can apply. But that is in reference to 
lenders who actually try to defraud the veteran or to mislead 
the government through forgery, so it is very specific.
    Mr. Takano. Very specific.
    Mr. London. Yes.
    Mr. Takano. But does Ginnie Mae--can someone answer about 
Ginnie Mae being able to have this capacity in this, an 
analogous circumstance?
    Mr. Bright. We do have a decent amount of authority at 
Ginnie Mae in terms of policing access to our security. And 
that is authority that we have been using and are going to 
continue in the next weeks to expand.
    Mr. Takano. Can you tell me whether or not you have 
actually fined companies for this analogous--
    Mr. Bright. We have. We have fined companies for violation 
of our program in this space, yes.
    Mr. Takano. And do you publish the names of those companies 
that you have fined?
    Mr. Bright. No.
    Mr. Takano. Why not?
    Mr. Bright. I don't know, but I will find out. And I am 
happy to speak with you offline with that specific information.
    Mr. Takano. Mr. London, would this sort of authority be 
useful to the VA if we were able to provide that authority?
    Mr. London. We will be happy to meet with you and your 
staff and provide technical assistance for any type of 
legislation that you think may be helpful in this regard. We 
are ready to assist you.
    Mr. Takano. I would be interested in meeting with both of 
you offline and to discuss this matter further.
    Mr. Arrington. Thank you, Mr. Takano.
    And now yet another gentleman from California, Mr. Correa, 
we yield 5 minutes.
    Mr. Correa. Thank you, Mr. Chairman, for having this most 
important hearing. I want to thank the folks here as well.
    Just a little bit about my background. I am a licensed 
realtor and a former loan broker. And, gentlemen, as you know, 
this can be one of the dirtiest businesses that there is out 
there, real estate, real estate loans.
    And, Mr. Cooper, have you ever had to fire anybody?
    Mr. Cooper. I have not personally had to fire anyone, no.
    Mr. Correa. That is impressive, because most of time there 
are a lot of bad apples out there, and you end up firing folks 
out there because sometimes it doesn't matter what your mission 
statement is, the interest of making a buck sometimes outweighs 
the interest of following your mission statement.
    In reference to what my colleague Mr. Takano brought up, 
which is do you put this online, the State of California, if 
you have a doctor that is civilly fined, that goes online. The 
Bureau of Automotive Repairs, any violations go online. So you 
as a consumer have any issues, you immediately go online, see 
who the heck it is that you are dealing with, and that 
information is disclosed to the world. It is not rocket 
science, folks. We can do this very easy.
    You know, it is very hard also to try to second guess the 
economic motives, the financial motives, for a veteran to 
refinance. You know, buy-downs, interest loan, fees, points. 
And as you know, sir, sometimes what with these folks do is 
they will give you discount on the points but they will jack 
you up on the fees. And at the end of the day, you get hit one 
way or the other.
    It would be interesting if you come up, not rocket science, 
but an application, an app somewhere so a veteran consumer can 
punch in a couple of numbers and come up whether this is good 
or bad.
    And another question I would have, Mr. London, is do you 
keep records of the folks, the loan originators, and how many 
loans that they are originating so that you can detect whether 
there is a pattern there of churning or not?
    Mr. London. We do keep a record of every loan that is 
originated, but I am glad that you asked that question, so 
thank you for asking, because one of the things that Mr. Cooper 
mentioned was that we have, on the back end, if you will, for 
servicing of loans, when a veteran goes into default, we have a 
comprehensive system where on every single defaulted loan we 
have tremendous amounts of data so that we can see exactly what 
the servicer is doing and we can intervene on the veteran's 
behalf if we need to.
    Unfortunately, we don't have a system like that on the 
front end. However, we have recently let a contract where we 
reengineering the entire system that I just described and we 
are building the capability on the front end to get information 
on every single loan origination to have the same type of 
intervention and monitoring that we have in servicing a loan. 
So we are very close to having that.
    Mr. Correa. And I am glad to hear that, and I am hoping you 
put as much of that information online and you direct our 
veterans to that Web site so that they can be a better educated 
consumer.
    Good faith estimates, don't we still have those out there, 
that when you originate a loan you give people something that 
says what that loan is going to cost them? Do we still have 
that?
    Mr. London. Yes. The borrower will get what is called a 
loan estimate with that type of information.
    Mr. Correa. And, again, I hope that you keep some kind of a 
database, work on it up front, so that if any of these folks 
are out there originating loans and begin to see a pattern that 
every 2 or 3 months they are churning a loan, and if you can 
look at it then, whether they are doing it for their own 
benefit or the consumer actually benefits.
    Mr. London. Absolutely.
    Mr. Correa. A lot of neat stuff we can do here to protect 
our veterans.
    Mr. Chair, I yield.
    Mr. Arrington. Thank you, Mr. Correa.
    I will yield myself another 5 minutes. I think this already 
proved to be a very productive discussion. I think we should 
continue it.
    Most of my thoughts and comments and questions were 
philosophical. I mean, I just truly believe that choice for the 
consumer and disclosure is generally the best way to regulate.
    Mr. Arrington. Again, and Mr. Takano articulated it better 
than I could, the market is skewed because government is 
intervening. In fact, without government or the taxpayer there 
wouldn't be this market, presumably, because if there would, we 
shouldn't do it.
    So now comes the question of so we should regulate and 
engage more readily in this on behalf of the taxpayer. And 
certainly if there are ways to have better disclosure and a 
simpler, easier way to digest what product and transaction that 
they are about to engage in, by all means, I am hoping you guys 
are reviewing that and constantly thinking of ways to do that, 
although oftentimes more regulation to protect the consumer 
ends up with more paperwork for the consumer and I think makes 
it more difficult and burdensome.
    But I would like to see that new disclosure product that 
you guys are working on. And as the Ranking Member suggested, 
if you all could submit that, it would be good for us all to 
look at it.
    But trying to regulate in this space a way those products 
that we deem bad for the veteran, because they are churning, 
because of some definition that we agree is bad, versus--and 
doing that without diminishing the opportunity for products 
that they may need, real products that are good, safe, sound, 
useful to the veteran so that they can maybe lower their 
payments. Maybe they need to lower their payments. Maybe they 
know exactly what they are doing and they need that.
    Help me, Mr. Motley and Mr. Cooper, tell me where the line 
is, where it is a good product, it is useful, it is safe, it is 
sound. I mean, there is always a transaction cost for the 
institution. And if there is more risk, then the institution 
has to charge commensurate with the risk. We see that in payday 
loans all the time. I know folks that without a payday loan 
couldn't fix their car and go to work again because a bank 
won't finance them.
    Anyway, what are your thoughts about the line between the 
appropriate and sound versus the not-so-sound churning? Where 
is that? Define that for me.
    Mr. Motley. Well, it is really not that easy to define 
because every situation is different. I think, as Mr. Cooper 
said earlier, we try to look at all of our borrowers in terms 
of what is best for them, what is the best outcome for them, 
for their particular situation. You have to take a lot of 
things into account.
    And so I think that you want to have guardrails put in 
place on any program to avoid abuse, and you want to have 
transparency. So your point about proper disclosure is a good 
one, and having it done up front is also a very good one. But I 
think that we have to balance additional regulation with the 
benefit of that and the onerousness and the extra cost of 
providing additional disclosures.
    But I think that the main point is, is that if we are sure 
that the veteran is benefiting from the refinance transaction, 
and we can do that by showing what the costs are, what the 
payment reductions, are how long it is going to take him to 
break even on that transaction, and if that makes sense in his 
situation, then we should have satisfied the net tangible 
benefit test and satisfied VA that we have done the right thing 
for that veteran.
    Mr. Arrington. So let's assume that we can define a 
reasonable, useful, sound product or transaction that allows 
the veteran to benefit, and the costs are commensurate, they 
are built in, the fee is commensurate with transaction costs. 
So let's say we can define that. Do you all, VA and Ginnie Mae, 
have the authority, legal authority, to define that and to 
regulate in this space in that regard? Do you have the legal 
authority? And cite for me the legal authority.
    Because here is my thing. I want you to appropriately, 
because of the taxpayer, and I think it is sometimes necessary 
and appropriate, but I don't want you to make it up. I don't 
want you to just create it out of the ether. And so if we as 
Congress do need to act to give you that legal authority, that 
is the way this thing works, as you know.
    So do you have the legal authority? Cite the legal 
authority for me, both you and Ginnie Mae, please.
    Mr. London. Yes, sir. Thank you for the question.
    As I mentioned, we have a draft regulation that we believe 
is a measured approach to address this issue. And the specific 
statutory authority that we used, there are several, 38 U.S.C. 
3710 is one, specifically subsection (e), you also have 37O3(c) 
and 38 U.S.C. 501, are the three specific statutory references 
that we believe gives us the authority to regulate this issue.
    Mr. Arrington. And summarize for me, if you would, what 
that legal authority is if you can. I mean, I can go back and 
look it up, and everybody here can. But give me one of the 
three, the best nexus to that authority from which you would 
promulgate a rule to define this net tangible benefit.
    Mr. London. Sir, I will be happy to provide you more detail 
for the Record, but the one that I will choose that gives the 
agency the broadest authority is 38 U.S.C. 501. And that 
specific reference gives the Secretary the authority to 
regulate VA programs across the board, and the other two 
references that I gave you were specific to the Loan Guaranty 
Program.
    Again, I will be happy to provide you those details.
    Mr. Arrington. I have taken too much time already. Thank 
you for the answer.
    Mr. Ranking Member, 5 minutes.
    Mr. O'Rourke. I think Mr. Motley made a really good point 
about ensuring that we do the right thing for the consumer 
without overburdening the lender. And I have heard from many 
lenders in El Paso about how really well-intended legislation 
to rein in the too-big-to-fail institutions inadvertently hurt 
the smaller independent originators.
    They make a really good compelling case about, look, we 
know the community best, Beto, and when you make it more 
expensive and harder for us to originate, then those who don't 
know the community are left with those choices and you see less 
capital coming into the community.
    So your point is very well taken.
    I will say just in the example that we discussed and that 
Mr. London has committed to in terms of prioritizing the net 
economic impact disclosure at the outset and the O'Rourke 
addendum to that, that it be in 16-point type so that it is, 
like, really easy to see and you know what you are getting 
into, doesn't seem incredibly burdensome or onerous. It seems 
fair and seems very workable, again, from my perspective, not 
knowing your all's business as well as you do so.
    So I hope that you could agree with that or that the 
industry would see that as well. But your point is well taken 
that we want to make sure that we don't in any way undermine 
the ability to get these loans made or these refinancing 
transactions completed for those who would benefit from them.
    One of the last things, I think, Mr. Chairman, that we need 
to do is make sure that we are hearing from veterans on these 
proposals and the veteran service organizations who advocate 
for them. I want to make sure that there are no additional 
suggestions or ideas or proposals that have gone unheard or 
unimplemented.
    Because in Texas alone we see just last year 60,000 total 
home loans, 21,000 of those were refinances, and we want to 
make sure that we are advocating and protecting those veterans 
who have done everything we have asked them to do and have 
earned this, and that we are able to follow through on it.
    And lastly I want to say this, Mr. London. You really are a 
breath of fresh air. I just left the GAO High Risk List 
roundtable about VHA being able to implement corrections that 
will improve access to care, and some of the responses we got: 
Well, we are going to have a conference call on this. You can 
see something later this year. And in some cases, we have seen 
to progress on any of these.
    So the fact that you came to this meeting with action 
already undertaken and specific proposals about what you are 
going to change, for example, moving up this information to the 
outset of the transaction instead of the moment when you sign 
and you are under all that pressure, very refreshing. I love 
seeing that, and I hope that you will follow up on that by 
keeping us informed of your progress on implementing this, I 
think we all agree, sooner better than later. And then would 
certainly love to hear back from the industry, and most 
importantly, veterans on the efficacy of those efforts.
    So thank you all for what you are doing and your testimony 
today.
    And I will yield back to the chair.
    Mr. Arrington. Mr. Takano, 5 minutes.
    Mr. Takano. Let me just look at my notes here.
    Mr. Bright, when we say that Ginnie Mae is able to fine 
companies in this space, does that space include the VA? I 
mean, am I misunderstanding that the VA and Ginnie Mae operate 
in partnership and together to operate this program?
    Mr. Bright. So Ginnie Mae has the authority to issue rules 
that pertain to lenders' ability to access our security. So we 
have broad statutory authority to write rules for access to our 
security as we need to protect it.
    So if you actually look at Ginnie Mae's charter, of our top 
five mandates, the first four relate to making sure that there 
is liquidity in the mortgage market and the ability to 
promulgate regulations to ensure that liquidity maintains in 
the mortgage market.
    Once we issue a rule to our issuers or the lending 
community and say, ``Here are the rules that you need to abide 
by,'' we have about an 800-hundred page issuer guide, if there 
are violations of that guide, we can issue civil money 
penalties.
    So our rulemaking ability is pretty much restricted to the 
ability to access the Ginnie Mae security and under what terms. 
We really can't issue civil money penalties for violations of 
the VA program itself. That would be the VA. Nor could we issue 
civil money penalties for violation of consumer protection 
laws. That would be CFPB or the FCC.
    So what we have been doing in those cases is when we see 
instances where we think it is possible that some of those laws 
are being violated, we are making referrals to those relative 
agencies.
    So our CMPs, they pertain to violations of the rules that 
we put in place for access to our security.
    Mr. Takano. Mr. Cooper, you said earlier that during the 
financial crisis that overall the VA home loans held up the 
best. To what do you attribute that?
    Mr. Cooper. Thank you for the question.
    We attribute that to the underwriting that was in place 
from the VA from well before the crisis. And specifically the 
way the VA looks at it is not just at how much, what is their 
payment, what is their DTI. They are also looking at the back 
end of, like, how much money do you have left over, their 
residual income.
    And so that is a really essential part of the program. 
Residual income, it protects the person from--at the end of the 
day, they still have money to live their daily life, and then 
they are still able to, hopefully, then they are still able to 
make their mortgage payments. That has been a really big part 
of the VA program. It is different from any other program that 
is out there. No one else requires that.
    Mr. Takano. Mr. London, again, do you have any other 
thoughts on appropriate regulation or appropriate authority 
that you might need to police the bad actors that we are 
talking about today more effectively?
    Mr. London. Sure. As I mentioned in my testimony, we have a 
draft regulation that we believe will take into account the 
very recommendations that you have heard from other panelists 
today. We evaluated things like the net tangible benefit, 
seasoning requirements, and recoupment requirements, and many 
other actions to see what will best handle the issue.
    But I definitely have to get one point on the table. All 
the panelists agree that we are talking about a relatively 
small number of lenders who are involved in this.
    Mr. Takano. Very small. I realize that.
    Mr. London. And the fact that we have drafted a rule very 
carefully that is going to not only impact those small number 
of actors, it is also going to impact every single veteran's, 
potentially, their access to his or her earned benefit. It is 
going to have an impact potentially on every single lender and 
servicer that participates in the program. And as Mr. Bright 
and others say, it is also going to have a downstream effect on 
mortgage investors.
    So there is not just one answer or one thing that can be 
done. We looked at it holistically. And as I stated to the 
Chairman, we believe we have the statutory authority to 
regulate in those areas.
    Mr. Takano. And you haven't published it yet because it is 
a draft, and so is there a kind of a comment period from the 
public that has to be undergone before it is implemented?
    Mr. London. Yes. The rule is currently drafted as a 
proposed rule, and there will be an opportunity for public 
comment.
    Mr. Takano. And you don't have any idea--I mean, you have 
been taking input from the industry in crafting the rule?
    Mr. London. Absolutely. The good news is in analyzing and 
thinking about the rule, we met, as I mentioned in my 
testimony, we met with the Mortgage Bankers Association and 
their members and many other stakeholders as we were 
contemplating and evaluating what policy actions we needed to 
take under this draft regulation. And obviously we will welcome 
additional comments that anyone has to offer once the rule is 
published.
    Mr. Takano. And when do you anticipate the rule being 
published?
    Mr. London. Unfortunately, I don't have a specific timeline 
for you today, but I am happy to report that the rule, as I 
say, is in final draft, and that is a good indication that we 
are very close to having it publicized in a relatively short 
timeframe, but I don't have a specific timeframe for you today.
    Mr. Takano. All right. Well, thank you very much.
    And I yield back, Mr. Chairman.
    Mr. Arrington. Mr. Takano, I will give you more time if you 
have any follow-up questions or comments.
    Mr. Takano. Mr. Chairman, just thank you very much for the 
spirit of this hearing, and I congratulate you on that. And I 
hope we can continue to work in this vein.
    I really do respect your free market views. I actually do 
entertain the thought that some of these products could be 
useful to some veterans, and we don't want to be overly 
aggressive in regulation. But, again, we are talking about 
taxpayer resources that we have to protect.
    Mr. Arrington. That is right. That is right. And it is good 
that we can agree like this, huh? Somebody get a picture. Is 
somebody recording this?
    No, it is true. I mean, this is a space where we need to 
engage on behalf of the taxpayer because of the full faith and 
credit, and we need to strike that balance.
    And that is why I asked the question of defining it. You 
know, how do you define this? Because if somebody was charged 
any fee, they may say, ``Hey, I shouldn't be charged for 
this.'' But there is a cost to the institution for that 
transaction.
    So what is that threshold that is unreasonable and abusive 
and not a tangible benefit. Well, I feel like I have heard 
enough to know that the stakeholders, including the industry, 
can strike that and in fact have. And I give you credit and 
join the Ranking Member in his praising you and your team for 
the way you have conducted your business.
    It is best that a regulator engages the stakeholders prior 
to public comment. I mean, you are going to have agreement 
here, it seems like. And we are talking about a few potentially 
bad actors, potentially, and maybe not bad actors, maybe they 
are just playing with the rules that exist. We just need to 
tighten them up so that we raise the bar of what we expect for 
safe and sound practices and the protection, if you will, and 
minimal standards for fair practices.
    In this space, I am curious, because the FTC should be able 
to regulate unfair and deceptive practices. Have there been any 
cases referred to the FTC where there has been unfair and 
deceptive--and I understand there are lots of things going on 
here--they could disclose better, so let's do that? There is 
safety and soundness for the taxpayer and the program, but then 
there is real deception and unscrupulousness by offering one 
thing and it be really another thing.
    Have those been referred to the FTC and have they acted 
upon those, Mr. London?
    Mr. London. I am not personally aware of any referrals that 
have been made.
    Mr. Arrington. Mr. Bright?
    Mr. Bright. Yeah. What we have been doing is collecting 
solicitation materials that are generally from actually 
brokers, not lenders themselves, but then what they do is they 
originate these loans and then sell them to a lender.
    And what I would love to do is we have got a pile of them, 
so I have asked all the veterans at Ginnie Mae to sort of 
collect these solicitation materials they get. I will share 
them with you.
    They are not lies, they are just--we will sit down and talk 
to them.
    Mr. Arrington. So I am trying to be real careful even in 
this hearing to not say ``predatory'' and ``deceptive.''
    Mr. Bright. Right. Right.
    Mr. Arrington. Because the FTC ought to pursue that and 
bring the full force of the law against people that are doing 
that.
    And then where we need to tighten it up, where there is 
some fastness and looseness, that is what you guys can do. And 
then again for me ultimately, the safety and soundness of the 
program. This is offered because the taxpayers allowed this to 
happen, because they love their veterans and they want them to 
have this benefit, but they want it done in a safe and sound 
and a fiscally responsible way.
    Mr. London. Mr. Chairman, if I may, can I amend my comment 
that I made?
    Mr. Arrington. Yeah, please.
    Mr. London. Because your question was specific to the FTC.
    Mr. Arrington. Yes.
    Mr. Arrington. Okay. Thank you.
    Thank you, colleagues. Great discussion.
    Let's continue in your efforts as you described to tighten 
up in this space, and let us see whatever draft documents just 
for our information, as the Ranking Member requested, if you 
would, and continue to notify us if you need the authority 
where you don't and don't regulate where you don't have the 
authority. That is not your job. That is the United States 
Congress' job, Article I. But I feel good about what I have 
heard today. So good hearing.
    This now concludes our hearing. And I ask unanimous consent 
that all Members have 5 legislative days in which to revise and 
extend their remarks and include any extraneous material on 
today's hearing.
    Without objection, so ordered.
    Thank you all again being here today. Great hearing. God 
bless.

    [Whereupon, at 11:23 a.m., the Subcommittee was adjourned.]



 
                            A P P E N D I X

                              ----------                              

                  Prepared Statement of Jeffrey London
    Good morning Chairman Arrington, Ranking Member O'Rourke, and other 
Members of the Subcommittee. Thank you for the opportunity to appear 
before you today to discuss the Department of Veterans Affairs (VA) 
Home Loan Guaranty Service, certain lenders' home loan churning 
practices, and the effects of those practices on Servicemembers and 
Veterans. I am accompanied by Mr. John Bell, Deputy Director, Loan 
Guaranty Service.

Overview

    The mission of VA's Home Loan Guaranty Service is to maximize 
opportunities for Servicemembers and Veterans to obtain, retain, and 
adapt their homes by providing viable and fiscally responsible benefits 
in recognition of their service to our country.
    We empower Servicemembers and Veterans with information and access 
to innovative, high-quality products and services, and we engage 
industry partners to make loans in an efficient and effective manner. 
Through our focus on Servicemembers and Veterans, the partnerships we 
have developed, and our continuous drive to innovate in areas of 
operations and performance, we have built a high-performing program 
that has provided guaranties for more than 23 million loans totaling in 
excess of $2 trillion over the last 70-plus years. Last fiscal year 
alone, VA guaranteed an all-time record of over 740,000 loans, totaling 
more than $189 billion. Of those loans, over 380,000 were purchase 
loans (an annual record for purchase loans), nearly 191,000 were 
interest rate reduction refinancing loans (IRRRL), and about 167,000 
were cash-out refinancing loans. Over the past four fiscal years, the 
vast majority of VA-guaranteed loans have been purchase and cash-out 
refinance loans; not IRRRLs. VA's purchase loan volume has ranged from 
about 62 percent of all guaranteed loans in Fiscal Year (FY) 2014 to 
just over 51 percent last fiscal year. Cash-out loans have ranged from 
roughly 16 percent of guaranteed loans in FY 2014 to just shy of 23 
percent last fiscal year. IRRRLs were roughly 21 percent of guaranteed 
loan volume in FY 2014 and roughly 26 percent last fiscal year. VA has 
provided more loan guaranties over the past 5 fiscal years 
(approximately 3.1 million) than it did in the 10 years prior 
(approximately 2.9 million).
    The overwhelming majority of VA-guaranteed loans (upwards of 98 
percent) are sold in the secondary mortgage market with a full faith 
and credit guaranty from the Government National Mortgage Association 
(GNMA or Ginnie Mae). GNMA's role in the secondary market provides the 
necessary liquidity of capital so that lenders can then fund additional 
mortgage loans (e.g., additional VA-guaranteed loans to Servicemembers 
and Veterans).

Program Success

    The VA-guaranteed home loan benefit helps provide Servicemembers 
and Veterans with access to a low-cost mortgage option. VA-guaranteed 
loans require low or no down payment, require no private mortgage 
insurance, and often have lower interest rates than other products. 
According to industry data, interest rates for VA-guaranteed loans have 
been the lowest in the marketplace for over 2 years.
    VA loans perform very well compared to other government loan 
programs and conventional loans. During the worst housing-market crash 
since the Great Depression, VA helped almost 700,000 Servicemembers, 
Veterans, and their families retain their homes or otherwise avoid 
foreclosure. Cumulatively, for the period between fiscal years 2009 and 
2017, VA worked with private sector loan servicers to avoid foreclosure 
for over 80 percent of Servicemembers and/or Veteran borrowers who 
defaulted on their home loans. This equates to the government avoiding 
over $22 billion in foreclosure claim payments. Further, VA's 
foreclosure inventory rate (the percentage of loans in foreclosure) 
outperformed that of even prime loans during, and immediately 
following, the market crash.
    VA's portfolio of about 2.9 million active home loans outperforms 
or is on-par with other loan types. According to the most recently 
available Mortgage Bankers Association National Delinquency Survey data 
(Q3 2017), VA's overall delinquency rate of 4.24 percent is just 
slightly higher than the 3.97 rate for Conventional loans. This 
compares favorably to the 9.4 percent delinquency rate for the Federal 
Housing Authority's (FHA) loan program. In terms of serious 
delinquencies and foreclosure inventory, VA outperforms all other loan 
types. According to the most recently available Mortgage Bankers 
Association National Delinquency Survey data (2017 third quarter), VA 
has the lowest foreclosure inventory rate in the industry: 0.95 percent 
compared to 1.15 percent for Conventional loans and 1.76 percent for 
FHA loans. VA also has the lowest seriously delinquent rate: 2.08 
percent compared to 2.28 percent for Conventional loans and 3.86 
percent for FHA loans. This means that of the over 2.9 million active 
VA loans, only 2.08 percent are 90-days or more past-due and less than 
one percent are in foreclosure.

Refinance Loan Program Overview

    There are two types of VA refinance loans. The first, an IRRRL, is 
generally used by Servicemembers or Veterans to obtain a lower interest 
rate than the current rate the Servicemember or Veteran is paying on 
his or her existing home loan. IRRRLs are sometimes called streamlined 
refinances because they have fewer underwriting requirements than other 
types of refinance loans. The purpose of an IRRRL is to place a 
Servicemember or Veteran in a better financial position than he or she 
is in on an existing mortgage, typically by reducing the interest rate 
on the existing loan, which lowers the monthly mortgage payments. An 
IRRRL may also be used in order to (i) reduce the term of the loan, 
thereby reducing the total of payments on the loan, (ii) to convert an 
adjustable rate mortgage to a loan with a fixed interest rate, or (iii) 
to make energy efficient improvements to the home. A Servicemember or 
Veteran may not use an IRRRL to obtain cash for the equity he or she 
may have in the property securing the loan.
    A second type of VA refinance loan is one in which a Servicemember 
or Veteran may also use the home loan benefit to refinance an existing 
loan or other lien (not necessarily a VA-guaranteed loan) and borrow 
against the value of the property that is the security for the existing 
loan. In other words, a Veteran may ``pull cash'' out of the home's 
equity using a ``regular,'' non-IRRRL, refinancing loan.

Refinance Loan Challenges

    While the overwhelming majority of lenders (more than 1,500) who 
originate IRRRLs are conducting business with Servicemembers and 
Veterans in a responsible manner, we have in recent months identified a 
very small number of lenders (arguably less than 10) that appear to 
regularly close loans in a manner inconsistent with the program's 
intent. Instead of offering loan products that provide a tangible 
benefit to borrowers, these lenders appear to be targeting 
Servicemembers and Veterans who have made less than six payments on 
their original loan.
    The practice of refinancing a mortgage multiple times within short 
timeframes is called ``serial refinancing'' or ``loan churning,'' and 
it may cause Servicemembers and Veterans to prolong debt repayment by 
adding more payments and interest to the new loan. Serial refinancing 
of VA-guaranteed loans may also strip equity, increase the principal 
balance, and increase the loan-to-value ratio, which potentially raises 
the risk of loan default. In addition, the unpredictability of when and 
how often these refinances take place is causing investors to be 
pessimistic about purchasing GNMA-backed loan pools, due to the 
perceived risk associated with buying debt that will be paid off in a 
shorter time frame than the investors anticipated at the time of 
pricing. This risk of prepayment affects pricing, which could cause 
lenders to offset the difference by charging higher interest rates for 
VA-guaranteed loans.
    In order to entice Veterans to refinance their mortgages, a small 
number of lenders have also implemented aggressive and often misleading 
marketing practices, such as phone solicitations or frequently mailed 
print materials. It is concerning that such loans can have terms that 
may not be in the Servicemember's or Veteran's best financial interest.
    Our colleagues at GNMA have frequently espoused in recent months 
that the impacts felt by investors in the secondary markets have been 
acute. Lenders who systematically engage in serial refinancing, or 
``churning,'' VA loans have focused almost exclusively on IRRRLs, 
which, unlike VA origination and cash-out loans, do not require 
underwriting or valuation determinations. These lenders have focused 
their efforts on targeting Servicemembers and Veterans who have VA-
guaranteed loans precisely because IRRRLs are relatively inexpensive 
and quickly completed. It is important to note that although VA's 
overall loan volume has been historically high over the past four 
fiscal years, on average, IRRRLs have represented about only a third of 
VA's overall volume for FY 2015 and FY 2016. VA notes, however, that 
only a small number of lenders are systematically engaging in churning 
practices, and a relatively small number of Veterans have been 
affected. VA estimates that approximately 8,000 Veterans obtained two 
or more IRRRLs (or about 4 percent of the IRRRL volume) in FY 2016. 
That number declined significantly in FY 2017 to approximately 1,600 
Veterans who obtained two or more IRRRLs (or about 0.8 percent of the 
IRRRL volume). .

VA Focus on Serial Refinancing

    Even though the serial refinancing issue is not systemic to our 
overall portfolio, VA has over the past several years been very 
concerned about serial refinancing or ``churning,'' in the IRRRL 
program. In fact, when VA published an Interim Final Rule (IFR) on May 
9, 2014, implementing provisions of the Dodd-Frank Act, VA defined the 
types of VA loans that are ``qualified mortgages,'' and addressed this 
very issue. Pursuant to the Ability-to-Repay provisions of the Truth in 
Lending Act, qualified mortgages have either safe harbor protection or 
the presumption that the borrower is able to repay a loan. In the IFR, 
VA established that in order for an IRRRL to be considered a safe 
harbor qualified mortgage, the loan being refinanced must meet certain 
seasoning and recoupment requirements to prevent serial refinancing and 
equity skimming.
    VA believed that the IFR would eliminate the demand for loans that 
did not receive the safe harbor protections. In other words, VA 
intended for the market to use pricing differentials to deter churning 
practices. However, this did not occur. Despite VA's intention to 
prevent serial refinancing, some lenders ignored the seasoning and 
recoupment guidelines because VA would still guarantee the loan if 
other requirements were met. In response, VA has been evaluating 
program and industry data related to IRRRLs to ascertain the overall 
impact on the VA Home Loan Guaranty Program and to determine what 
policy changes could be made to curb serial refinancing.
    While VA's focus has been on serial refinancing of IRRRLs, we 
realize that some lenders may be shifting their business models in 
response to current market conditions. Although credit underwriting and 
appraisal requirements provide guard against affordability and 
valuation concerns, VA has been examining VA and other industry data to 
ensure that our Regular/Cash-out refinance programs are also serving 
their intended purpose as loans that benefit our Veteran borrowers. 
There are multiple factors that VA believes will contribute to the 
reduction of serial refinancing practices. In addition to longer-term 
measures like regulatory action, VA has also focused attention on 
policy changes that can be implemented rather quickly. For example, VA 
has worked closely with GNMA to curb some serial refinancing practices. 
This effort resulted in the issuance of an October 2016 GNMA All 
Participants Memorandum (APM). The APM established a 6-month seasoning 
requirement for streamlined refinance loans, which includes IRRRLs, to 
be eligible for certain GNMA issuer pools. Since the GNMA policy became 
effective in February 2017, VA's overall IRRRL volume has declined from 
over 35,000 loans per month to approximately 8,000 loans per month. VA 
also saw a decline in the number of potential serial refinance actions 
between FY 2016 and FY 2017. As mentioned previously, VA estimates that 
the number of Veterans affected by serial refinances is much smaller 
than the overall IRRRL portfolio, declining from approximately 8,000 in 
fiscal year 2016 to approximately 1,600 in fiscal year 2017. In short, 
there was a significant decline in the number of multiple loans by the 
same Servicemember or Veteran for the same property in a given year.
    In October 2017, VA and GNMA established a ``Joint Ginnie Mae - VA 
Refinance Loan Task Force.'' As stated in the press release announcing 
the partnership, ``The task force will focus on examining critical 
issues, important data and lender behaviors related to refinancing 
loans, and will determine what program and policy changes should be 
made by the agencies to ensure these loans do not pose an undue risk or 
burden to Veterans or the American taxpayer.'' On December 7, 2017, the 
taskforce issued a GNMA APM, which established a 6-month seasoning 
requirement for streamlined and cash-out refinancing loans to be 
eligible for certain GNMA securities.
    In addition to VA's work with GNMA, VA has worked with the Consumer 
Financial Protection Bureau (CFPB) over the last several years to 
address complaints from Servicemembers and Veterans about misleading 
solicitations to refinance VA-guaranteed loans. VA and CFPB's Office of 
Military Affairs have monthly meetings to discuss issues and establish 
plans to educate the Servicemember and Veteran communities about issues 
regarding VA-guaranteed loans. In November 2017, VA and CFPB issued our 
first Warning Order to Servicemembers and Veterans who currently have a 
VA-guaranteed loan. The Warning Order provided information on what to 
consider when receiving advertisements and when thinking about 
refinancing an existing VA-guaranteed loan. Specifically, the Warning 
Order advised Servicemembers and Veterans of the dangers associated 
with solicitations that promise extremely low interest rates, thousands 
of dollars in cash back, and skipped mortgage payments.
    While the collaboration with GNMA and CFPB has helped to address 
the serial refinancing problem, VA plans to further address churning 
practices by issuing a proposed rulemaking. In determining what policy 
actions to take, VA is evaluating a range of possible measures - such 
as net tangible benefit tests, seasoning requirements, recoupment 
requirements, and others - and the effects that the measures might have 
on Servicemembers' or Veterans' access to their earned benefits, as 
well as, the impact on lenders, servicers, and mortgage investors.

Conclusion

    Mr. Chairman, with the continued high volume of loans in the VA 
Home Loan Guaranty Program, the coming months at VA will continue to be 
busy and challenging, but I know we will continue to provide our 
country's Servicemembers and Veterans with a safe and viable loan 
guaranty option. Thank you for your continued support of our programs 
and for this opportunity to speak today.
    This concludes my testimony, and I welcome any questions that you 
or other Members of the Subcommittee may have.

                                 
                Prepared Statement of Michael R. Bright
Introduction

    Chairman Arrington, Ranking Member O'Rourke, and Members of the 
Subcommittee, thank you for inviting me to appear today to discuss the 
important issues regarding aggressive practices by some lenders in the 
VA market, and the impact this is having on veteran borrowers.

Role of Ginnie Mae in the Market

    For background, the Government National Mortgage Association, or 
``Ginnie Mae,'' was established in 1968 with the mission of bringing 
global capital into the U.S. housing market while at the same time 
minimizing risk to the American taxpayer. Ginnie Mae does this by 
guaranteeing the timely payment of principal and interest to our bond 
holders on behalf of borrowers who qualify for our program. By allowing 
these investors the opportunity to lend capital into the U.S. housing 
finance system with the knowledge that the federal government stands 
behind the credit risk of our mortgage-backed securities (``MBS''), 
Ginnie Mae provides access to global capital for lenders of all sizes 
and supports the federal mortgage insurance programs at the Federal 
Housing Administration, the Department of Veterans Affairs, the 
Department of Agriculture, and HUD's Public and Indian Housing. 
Ultimately, more than 98 percent of the loans insured by the FHA, VA, 
and USDA are financed through Ginnie Mae MBS.
    Ginnie Mae provides this government backstop on qualifying MBS to 
protect against losses in catastrophic situations, and our securities 
are the only MBS to carry the explicit full faith and credit guaranty 
of the U.S. government. We are also responsible for policing our 
program to protect against loss. Our statutory mission is to provide 
liquidity to the U.S. housing market and to protect taxpayers.
    Since 1968, Ginnie Mae has performed these twin missions 
successfully, growing to almost $2 trillion in outstanding principal 
balance guaranteed today. This has helped millions of low-and-moderate 
income, veteran, and rural Americans obtain financing that otherwise 
would not be available to them. Just as important, Ginnie Mae has never 
needed an emergency infusion of funds to do its job, even during the 
2008 financial crisis. The design features of the Ginnie Mae model 
significantly limit taxpayer exposure to risks typically associated 
with secondary market transactions while still providing liquidity for 
the overall housing finance system.
    The easiest way to understand Ginnie Mae's mission is that we 
oversee a process for ensuring the success of the government's MBS 
guarantee. To accomplish this, Ginnie Mae manages technology and 
infrastructure designed to track the payment of principal and interest, 
made by borrowers to their lenders, making sure it ultimately gets into 
our common security and to investors on time and in full every single 
month. When a low-income borrower in an FHA loan, a rural borrower in a 
USDA loan, or a veteran borrower in a VA loan makes a mortgage payment, 
we make sure the servicer of the mortgage submits that payment to the 
investor who owns the MBS. If we do our job well, veterans gain access 
to more affordable home financing terms, and the capital necessary to 
make these loans remain reliably available through all economic cycles.

VA Loan Churn Background

    The issue we are here to talk about today - the rapid refinance of 
VA loans held in Ginnie Mae securities - has had a significant impact 
on Ginnie Mae MBS market trading and pricing dynamics over the past few 
years. I thank you very much for bringing attention to this issue. 
Hopefully increased Congressional and federal agency oversight can help 
effectuate some needed changes in behavior.
    At times what we are here to discuss may seem like a technical 
issue, but the consequences are anything but. Without proper policing 
by Ginnie Mae or the VA, every single veteran who relies on our program 
will pay a higher rate than they should. If we take for granted the 
capital that makes our program work, it may not continue to flow into 
our market. That is not a risk we should take.
    It is difficult to describe what is transpiring without using 
jargon or technical terms like ``prepayment speeds,'' ``loan 
seasoning,'' and ``premium MBS pricing.'' But ultimately what we care 
about is the following: if our security is not functioning well, 
veterans will have difficulty getting a home loan, and if they do get a 
loan they will pay a higher rate. Since this ``loan churn'' problem 
began, Ginnie has recognized that failure to curtail these practices 
could ultimately harm borrowers in the form of higher interest rates. 
That is why we take this issue incredibly seriously, and why we pledge 
to you today that we are working hard to put an end to it once and for 
all.
    In early 2016, Ginnie Mae and our investors first began to identify 
early loan repayments and serial refinancing as a problem with much 
greater incidence in the VA mortgages in our securities than loans 
insured by other agencies. Mortgage loans often prepay, especially when 
interest rates drop. But Ginnie Mae began to notice prepayments at 
speeds that could in no way be justified by economic factors.
    Some strange pricing dynamics in our security - specifically a 
weakening of Ginnie MBS prices versus other MBS - further alerted us to 
the growth of anomalous refinancing behaviors. Clearly, Ginnie Mae 
investors had begun to take note as well. After some initial internal 
analysis, it became more obvious that some lenders had apparently found 
an opportunity to take advantage of service members and veterans to 
make a quick profit for themselves by aggressively pushing a series of 
loan refinance offers. These are done without any regard for the 
consequences for our security, other veterans, or other borrowers who 
rely on our program.
    It seems that the core issue stems from two fundamental, underlying 
dynamics. First, we have an increasing number of veterans in the United 
States, and many of them fall prey to advertising schemes that give the 
appearance of coming from reputable sources. Second, the Ginnie Mae 
security trades at a premium price, and this incentivizes lenders to 
pull loans from pools at ``par \1\ '' and deliver them into a security 
at a premium, booking a profit each time this occurs. We believe it may 
be the confluence of these factors that has enabled this new, 
unacceptable and dangerous market behavior.
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    \1\ Par simply means a bond that trades at 100 cents on the dollar, 
often denoted as ``100-00.'' Most Ginnie MBS trade above this price 
today. Specifically, prices closer to 105. This means every time a 
lender pulls a loan from a pool at par and redelivers it into a new 
security at 105, it books 5 points (or 5% of the loan balance) as 
profit.
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    Upon further investigation, we believe that some lenders have 
capitalized on these dynamics by employing two patterns of note. The 
first is the origination of a loan substantially above prevailing 
market interest rates, sometimes called a ``premium loan.'' At times 
these loans may include debt consolidation, and at times they are 
provided to borrowers with very low credit scores, which explains some 
of the reasons that they carry high interest rates. But often our 
analysis has found that premium VA loans simply represent a business 
model of using aggressive marketing tactics to originate a loan at an 
interest rate higher than the veteran borrower should otherwise be 
paying, as proven by the rapid refinance that occurs almost immediately 
thereafter.
    These loans are profitable for the company originating the loan and 
issuing the loan into a Ginnie Mae security because they can 
immediately sell the loan into a Ginnie Mae MBS pool at a high dollar 
price because of the high accompanying interest rate, and pocket the 
so-called ``cash gain on sale.'' This essentially means those lenders 
who originate high interest rate loans charge veterans too much and 
book a large profit right up front, knowing that the veteran has a rate 
that is above market and knowing that the veteran will likely refinance 
in the future to obtain a true market rate. These loans not only give 
the borrower an interest rate half of one percentage point or more 
above what they could be paying, but they are ripe to be cherry-picked 
out of a Ginnie security by that same lender or another lender looking 
to profit on a quick refinance.
    And this is when we see another tactic used by many lenders - a 
quick refinance, or sometimes multiple refinances, of a premium loan. 
Soon after a veteran's first loan closes, veterans begin to immediately 
receive a constant stream of solicitations for refinance offers from 
other companies using the data from the first loan closing. These 
offers promise anything from skipping a few monthly payments to taking 
cash out to lowering a rate by getting into an adjustable rate 
mortgage. Many of the solicitations appear misleading, but many also 
prove successful, as we see veteran borrowers being convinced to 
refinance their loans multiple times in a year without much tangible 
benefit.
    This entire scheme relies on a steady stream of veterans who may 
not be exceptionally financially savvy, or may be having financial 
difficulties making them desperate for some cash, which these offers 
often promise to help fix.
    In many cases, a single veteran is refinanced multiple times in 
less than a one-year period, sometimes, according to our data, with 
very limited benefit to the veteran. Sometimes, in fact, with each 
refinance the veteran is seeing his or her loan balance grow. According 
to many of the flyers and advertisements we've collected, quite often 
the fees to refinance are buried or hidden. The refinances, advertised 
with teaser rates and no money down, are in many cases leaving veteran 
borrowers further and further in debt, while providing minimal monthly 
cost savings.
    In reviewing recent months' data on VA refinances, we have found 
the average cost of doing a fixed rate to fixed rate refinance is 
approximately $6,000 in fees, for an average payment savings of $90 per 
month. That means it will take the veteran five and a half years to 
break even on the fees incurred for the refinance.
    Another alarming development that you need to be aware of is that, 
with interest rates having bottomed out and opportunities to refinance 
from a fixed rate loan into a new fixed rate loan having been 
exhausted, we are now seeing a trend of brokers and lenders marketing 
the refinancing from a fixed rate loan into an adjustable rate 
mortgage. When veterans do this, the new loan may result in a short-
term teaser rate that lowers the borrowers' monthly payment, but could 
also result in higher monthly payments for the borrower in the future. 
For refinances from fixed rate to adjustable rate loans, the average is 
$12,000 in fees for a monthly payment savings of $140 and seven years 
to break even, assuming the mortgage rate doesn't adjust upward.
    Additionally, as home prices have risen in recent years, some 
lenders have come to specialize in the ``cash out refinance'' business. 
There is nothing wrong with helping veterans take advantage of this 
benefit. But our data raises some pretty serious questions, for example 
we see loans where borrower credit characteristics appear to change 
inexplicably from one month to another. And, we are seeing the creation 
of a large group of veterans who once had equity in their home but no 
longer do after the cash out refinance. In these instances, if a 
veteran borrower someday chooses to move, he or she might need to bring 
a check to the closing to do so. In our view, this is an area of 
concern.
    Finally, we now also see offers by refinance lenders to refund the 
tax and insurance escrows normally maintained by the servicer and 
accumulated as part of the monthly ``PITI'' (principal and interest, 
taxes and insurance) mortgage payment. In these cases, the veteran is 
lured in by a scheme to skip a mortgage payment while the new loan is 
initiated, get an escrow refund, and look at the monthly payment 
without an escrow charge, with the closing costs folded into the loan. 
This tactic can lead to larger mortgages, more debt and the veteran 
paying a lot of money in fees for a riskier mortgage without sufficient 
escrows.
    The bottom line is that marketing and promotional materials being 
received by many veterans today often include misleading terms that are 
too good to be true. These mailers are also frequently disguised as 
checks or documents appearing to be official correspondence from the 
Department(s) of Defense or Veterans Affairs, or the IRS, instructing 
the veteran to call the number listed to discuss their VA benefits, or 
a similar ploy.

Investors and the MBS Market

    Beyond the problems created for individual veteran borrowers 
targeted for high rates or rapid refinancing, loan churning has serious 
implications for the broader mortgage market as well. In recent years, 
investors have priced Ginnie Mae bonds at a premium to the conventional 
market due to the explicit government guaranty. This premium directly 
translates into lower interest rates enjoyed by veterans as well as 
borrowers from the other government loan programs. As the VA loan 
program has grown as a percentage of the Ginnie Mae portfolio, the 
increase in loan churning activity has also become more apparent and an 
increasing area of concern.
    Loan churning is a problem for investors because, as loans are 
refinanced, they are removed from MBS pools and with them, the return 
expected from the monthly principal and interest payments. Because of 
this increased prepayment risk, investors are today less willing to 
price Ginnie Mae bonds at a premium (or, as noted above, a price above 
``par''). A reduction in investor demand puts downward pressure on the 
prices of Ginnie Mae securities, which ultimately harms veterans by 
increasing borrowing costs, since as bond prices fall, interest rates 
offered to borrowers increase. And, because loans from the other 
government loan programs are comingled in Ginnie Mae securities, 
borrowers in the other government loan programs are paying the 
increased costs as well. This represents a direct wealth transfer from 
VA, FHA, USDA, and PIH borrows to a relatively small number of VA 
lenders who abuse our program. \2\
---------------------------------------------------------------------------
    \2\ Because the loan churning problem has been most pronounced in 
the VA loans in our pools, this testimony focuses on the veteran loan 
experience as we have observed it. However, Ginnie Mae single-family 
MBS pools comingle VA, FHA, RD and PIH loans in the pools. The 
consequence is that a detracting feature of one agency's program that 
results in a loss of value for that agency's mortgage loans, will have 
an effect on the price of the overall MBS and, therefore, all of the 
government loans will suffer a loss in value at the risk of entailing 
higher interest rates.
---------------------------------------------------------------------------
    These challenges are not theoretical. They very much exist today 
and impact the rates that all FHA, VA, and USDA borrowers pay every 
month. As recently as December of last year, Ginnie Mae leadership 
spoke directly with several large foreign institutional investors 
regarding their ongoing investment in Ginnie Mae MBS. A common theme in 
every conversation was concerns about the VA loan churn issue and its 
impact on their investment in Ginnie Mae MBS. The foreign investor 
market, particularly central banks and government pension funds, has 
been a major source of capital for the Ginnie Mae program, and we have 
no choice but to take these concerns very seriously. The inability to 
model and price Ginnie Mae MBS due to the unpredictable nature of the 
rapid prepayment speeds on Ginnie Mae bonds is a serious challenge for 
any securitization program and all who rely on it. If this dynamic 
continues and investors choose to flee the Ginnie Mae market, it could 
very well cause even higher borrowing cost for all veterans and others 
in the coming years.
    To mitigate this problem in the short-term, we have been outlining 
for these investors the additional steps we are taking. We must take 
these risks seriously at all times, and we must deliver on tangible 
solutions this year.

Ginnie Mae Changes, Task Force, and Upcoming Actions

    Broadly, we believe the long-term solution to this issue comes in 
three steps. The first is through Ginnie Mae tightening its 
requirements for access to our security when we see patterns of 
injurious behavior. We have taken some steps here and more will be 
forthcoming throughout 2018, including the elimination of premium loans 
from our securities. The second is by VA establishing a solid framework 
that would ensure veterans are protected from predatory lending 
practices, including excessive fees, thereby ensuring any refinance 
represents a tangible benefit to the veteran. The third is the 
continuous surveillance of data collection and analysis to enforce 
adherence to the first two steps.
    Looking at these steps in more detail, I will begin by outlining 
the actions that Ginnie took in 2016, but more importantly the actions 
we plan for 2018.
    In late 2016, in order to attempt to combat these practices, Ginnie 
made an initial program change to the Ginnie Mae rules in an attempt to 
address the issue within Ginnie Mae's legal and regulatory authority. 
Specifically, we changed rules on how soon after one mortgage loan is 
originated, a streamline refinance transaction of that same loan could 
be pooled into a Ginnie Mae security.
    Those initial measures were successful in stopping the rapid 
refinance practices with many lenders for a short period of time. 
However, after the first required six-month seasoning period lapsed 
following the effective date of the 2016 rule, in mid-2017 Ginnie Mae 
again saw an increase in loan repayments and securitization that 
strongly suggested further steps were needed. Notably, we also saw that 
some lenders had actively worked to evade the new rules Ginnie Mae 
implemented by changing their tactics. For example, some lenders 
starting using ``cash-out'' or other types of refinances, which were 
not addressed by the 2016 rule change.
    As part of our ongoing effort to curtail these practices and to 
protect the health of our security, in December of 2017 Ginnie Mae 
announced a strengthened rule, saying that absolutely no refinances, 
including both streamline and cash-out refinance loans, will be 
permitted into Ginnie pools for six months after origination of the 
underlying loan, thus eliminating the loophole that some lenders used 
to evade our original 2016 rules. We also announced the outline of the 
additional steps we will be taking in the coming weeks to continue to 
put a stop to this behavior, which I will discuss in more detail below.
    As it has been widely reported, in late 2017 Ginnie Mae and VA 
formed the Ginnie Mae - VA Refinance Loan Task Force to continue and to 
intensify our work on this issue. The task force meets regularly and is 
focused on closely examining the issue as a team, gathering market 
data, and reviewing lender behaviors related to refinancing loans to 
determine the program and policy changes needed to stop detrimental 
market behavior. At its core, the task force is in place to make 
changes that stop bad actors from posing an undue risk or burden to 
veterans or the American taxpayer.
    The first action to come out of the task force is the change Ginnie 
Mae announced early last month - the expansion of the loan seasoning 
requirements for cash-out refinance loans securitized into Ginnie Mae 
securities. But we do not intend to stop there. To help identify market 
outliers, we have also greatly increased the tracking and analysis of 
the prepayment rates of issuer portfolios. An inexplicably fast 
prepayment rate is an indication that the lender is aggressively 
churning borrowers without regard to whether or not a refinance 
actually benefits a veteran. As such, in 2018, any issuer with pool 
performance that appears materially out of step with market peers will 
receive increased attention and engagement from Ginnie Mae, and we will 
be putting such lenders on notice in the coming weeks.
    Furthermore, we recently announced that prepayment information will 
be included in Ginnie Mae's internal Issuer Operational Performance 
Profile (``IOPP'') scorecard. This scorecard is used to evaluate 
issuers against their peers, and it is the first set of data we look to 
in evaluating an issuer on a regular basis. Appropriate action will be 
taken against issuers found to be consistent outliers, potentially 
including removing them from the Ginnie flagship (``Ginnie II'') 
security.
    An additional change we are actively working to address is the 
definition of a premium rate loan as it pertains to their 
permissibility in the Ginnie Mae standard MBS pools. These loans, which 
I discussed earlier in my testimony, are identified as having an 
interest rate spread of more than 150 basis points in rate (or 1.50%) 
above prevailing market interest rates for Ginnie securities. We will 
soon be announcing definition and operational processes that will 
clarify our definition of a premium loan and enable the enforcement of 
this rule. We believe this will help to curtail abusive origination 
practices and slow Ginnie Mae prepayment speeds, lessen investor 
concerns over the health of our security, while at the same time 
helping prevent veterans from paying more on a loan than they otherwise 
should.
    Finally, it is worth noting that we have received whistleblower 
calls from employees who work in firms that they believe are engaging 
in unethical churning of veteran loans. Ginnie Mae does not today have 
sufficient legal authority to offer whistleblower protections to these 
individuals, but, because our securities are traded, the SEC does, and 
so we have connected these individuals with the SEC. At the same time, 
we have been receiving complaints from veteran borrowers about 
aggressive solicitation practices, and we have alerted the Consumer 
Financial Protection Bureau (CFPB).

Conclusion

    In conclusion, I believe that 2018 will be an inflection point for 
this issue. Changes must be made to finally put a stop to bad actors 
abusing the VA home loan program and the Ginnie Mae security, 
delivering harmful loan products to veterans, and jeopardizing the 
efficient borrowing costs for all government borrowers.
    I very much appreciate the opportunity to discuss this critical 
issue and to work with Congress to bring increased attention to lending 
practices that are negatively impacting many Americans. At Ginnie Mae 
we are determined to continue our efforts until concrete solutions have 
been implemented that protect veterans, the Ginnie Mae program, and 
ultimately the American taxpayer. Thank you again, for inviting me to 
testify today. I look forward to answering your questions.

                                 
                 Prepared Statement of J. David Motley
    Chairman Arrington, Ranking Member O'Rourke, and members of the 
subcommittee, thank you for the opportunity to testify on behalf of the 
Mortgage Bankers Association (MBA). My name is Dave Motley, and I am 
President of Colonial Savings, a privately-held, federally-chartered 
thrift headquartered in Fort Worth, Texas. I also currently hold the 
position of Chairman of the MBA. I am a Certified Mortgage Banker 
(CMB), and I have previously served as a Board member of the Texas MBA 
and a member of the Community Bank Advisory Council of the Consumer 
Financial Protection Bureau (CFPB).
    MBA is the national association representing the real estate 
finance industry, an industry that employs more than 280,000 people in 
virtually every community in the country. The association works to 
ensure the continued strength of the nation's residential and 
commercial real estate markets, to expand homeownership, and to extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. MBA's membership of over 2,300 
companies represents all elements of real estate finance, including 
firms serving both the single-family and commercial/multifamily 
markets. Our membership features commercial banks, community banks, 
credit unions, independent mortgage bankers, investors, brokers, 
conduits, and industry vendors, among others.
    I applaud the subcommittee for its efforts to better understand 
problematic practices with respect to certain mortgage refinances 
marketed to servicemembers and veterans of the U.S. military. 
Servicemembers and veterans generally benefit from the streamlined 
process for refinancing mortgages backed by a partial guarantee from 
the U.S. Department of Veterans Affairs (VA). However, recent activity 
in this market appears to be resulting in increased fee income for a 
small group of lenders while leaving some borrowers in a worse economic 
position. Such conduct is unacceptable and should be put to an end.
    The remainder of my testimony will describe the VA mortgage market, 
the mechanics of loan ``churning,'' the harm caused to borrowers by 
such churning, and options for addressing the recent churning we have 
witnessed in the market.

The VA Mortgage Market

    VA mortgage loan programs play an important role in increasing the 
availability of mortgage credit for servicemembers, veterans, and 
surviving spouses. By guaranteeing a portion of the loan balance, VA 
enables lenders to offer loans with more favorable terms, such as no 
required downpayment. The VA share of the mortgage market has grown 
over the past decade, constituting 10.3 percent of total originations 
in 2016 versus 1.2 percent of total originations in 2007. Among 
purchase loans, the VA share has increased from 2.4 percent to 9.2 
percent over this period, while the VA share of refinances increased 
from 0.3 percent to 11.5 percent (see Figure 1).


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    While borrowers seeking to refinance their VA loans may apply and 
be evaluated through their lender's full underwriting process, the VA 
Interest Rate Reduction Refinance Loan (IRRRL) allows for a streamlined 
refinance process that is often faster and entails lower costs. For 
example, IRRRLs do not require a traditional appraisal or credit 
underwriting package and can be originated with no additional funds 
provided by the borrower at the time of closing. IRRRLs are, however, 
limited to VA-to-VA refinances on properties for which the borrower has 
already used his or her VA loan eligibility, and the borrower cannot 
receive cash from the loan proceeds.
    Generally, refinancing via an IRRRL allows the borrower to lower 
the interest rate on the mortgage. In doing so, the lender may charge 
the borrower origination fees, which are sometimes paid by the borrower 
at origination and in other cases are rolled into the principal balance 
of the loan. Depending upon the magnitude of both the fees and the 
interest rate reduction, it may take the borrower a number of years to 
recognize a net economic benefit on the refinance. The period of time 
after which the fees are fully recovered through lower interest 
payments is known as the ``recoupment period.'' The longer the 
recoupment period, the less likely it is for a borrower to ultimately 
recognize a net economic benefit from the refinance.

Loan Churning

    Most lenders with VA loan products offer both purchase and 
refinance loans to their servicemember and veteran customers. However, 
the recent extended period of low interest rates has encouraged some 
lenders to specialize in marketing and originating IRRRLs. A smaller 
subset of these lenders, who in many cases are not the lenders that 
originated the initial purchase loan, have reportedly undertaken 
aggressive-and potentially misleading-advertising and solicitation 
campaigns to generate increased IRRRL volume. In some cases, this 
advertising or soliciting targets VA borrowers who have already 
recently engaged in an IRRRL, convincing them to refinance yet again to 
lower their interest rate by a very small amount while adding even more 
fees to the principal balance on the loan. Some IRRRLs also move the 
borrower from a low, fixed-rate loan to a slightly lower, but now 
adjustable-rate, loan. In other instances, borrowers are promised 
``cash back'' from their escrow account or the ability to effectively 
``skip a payment.'' Such serial refinancing, or churning, provides 
little or no long-term benefit to the borrower while essentially 
stripping their equity and further extending the overall recoupment 
period.
    VA borrowers are particularly susceptible to churning in an 
environment of falling interest rates, as these lower interest rates 
present more opportunities for lenders to offer IRRRLs. And lenders 
engaging in churning target IRRRLs due to their much lower origination 
costs relative to fully-underwritten refinances. Many borrowers may be 
unaware or may not fully comprehend the net economic impact of their 
decision to refinance (or continually refinance), leaving them 
vulnerable to situations in which they add substantial amounts to their 
overall loan balance or lose their fixed interest rate while achieving 
only small reductions in their monthly payments.
    The harm caused by loan churning is not limited to the financial 
condition of the individual borrower, however. Aggressive use of IRRRLs 
by some lenders threatens to weaken investor demand for Government 
National Mortgage Association (Ginnie Mae) securities that are 
partially backed by VA loans. This outcome would negatively impact 
access to credit for a wide range of borrowers.
    The vast majority of VA loans are bundled into mortgage-backed 
securities (MBS) that receive a guaranty of timely payment of principal 
and interest by Ginnie Mae. These Ginnie Mae MBS in turn receive a full 
faith and credit guaranty of the U.S. government. Importantly, however, 
Ginnie Mae MBS are backed not only by VA loans, but also by loans 
originated through the Federal Housing Administration (FHA), the U.S. 
Department of Agriculture's Rural Development (RD), and the Public and 
Indian Housing (PIH) insurance programs.
    And like other mortgage refinances, IRRRLs represent a prepayment 
of the original VA loan along with the origination of a new loan (with 
new terms). Those prepayments flow through to the Ginnie Mae investors. 
While these investors do not assume credit risk on the MBS due to the 
U.S. government guaranty, they are exposed to prepayment risk. More 
specifically, investors take into account the timing of future cash 
flows from a bond when determining the price they are willing to pay 
for that bond. If the rate of actual prepayments increases materially 
and beyond what was reasonably estimated by the investor, the 
anticipated income stream from the MBS will fall short of investor 
expectations. This outcome lowers demand for Ginnie Mae MBS, thereby 
decreasing the price of the bonds and increasing their yields.
    The higher yields on Ginnie Mae MBS directly correspond to higher 
mortgage interest rates for not only VA borrowers, but also FHA, RD, 
and PIH borrowers. These higher interest rates broadly decrease access 
to credit and exacerbate affordability concerns in the housing market, 
particularly for first-time homebuyers and servicemembers and veterans.
    It is worth reiterating that IRRRL churning does not appear to be a 
widespread problem among the mortgage lender community, but rather an 
activity that is confined to a small subset of lenders. Ginnie Mae has 
recently taken steps to meet with lenders that may be engaged in this 
practice, and to modify pooling requirements in order to limit the 
economic benefits of churning. While helpful, these efforts are not 
sufficient to end abusive activity.
    MBA fully supports supervisory efforts to improve the policing of 
the market, as well as appropriate regulatory and legislative efforts 
to remove the ability or incentive for lenders to engage in churning. 
MBA is mindful that any changes must be carefully crafted so as to 
preserve legitimate refinancing options for servicemembers and 
veterans. Among MBA's core objectives is the promotion of best 
practices and standards that generate a healthy and responsible 
mortgage market, and the association stands ready to assist in 
developing and implementing solutions to the problem of churning.

Potential Policy Options

    Many such solutions are available to address the problem. As noted, 
Ginnie Mae has already begun taking positive actions using its limited 
unilateral authority, first by issuing a six-month seasoning and 
payment requirement on all streamlined refinance loans prior to their 
eligibility for pooling, and then extending this requirement to all 
cash-out refinance loans, as well. Ginnie Mae and VA have also 
established a joint task force to analyze data and further develop 
coordinated policies.
    While loan seasoning requirements and joint analysis are important 
steps, more is needed to fully prevent IRRRL churning. Fortunately, 
many other practical options fall within the existing authority of VA 
to implement. The most promising of these options target churning while 
not impeding on the ability of servicemembers and veterans to obtain a 
refinancing that does result in an economic benefit to them. For 
example, a maximum recoupment period would inhibit lenders from 
charging substantial fees in exchange for minor reductions in mortgage 
interest rates. Further, a requirement instituting a net tangible 
benefit test, which is already present for FHA streamlined refinances, 
would more effectively ensure that the terms of the refinance produce 
real benefits for borrowers. Limits on the amounts that can be added to 
the principal balance would reduce equity stripping that can leave 
borrowers worse off as a result of the IRRRL. And finally, targeted 
consumer financial education regarding loan churning would better 
inform borrowers about the potential for abuse. Such efforts should 
focus particularly on servicemembers and veterans who are vulnerable to 
abuses in IRRRL lending. MBA firmly believes that some or all of these 
options-if crafted carefully-can eliminate abusive activities while 
preserving appropriate streamlined refinancing opportunities for VA 
borrowers.
    Once again, I appreciate the opportunity to present this testimony, 
and I look forward to working with the subcommittee to develop 
practical solutions that will curtail VA loan churning and better 
protect mortgage borrowers across the country.

                                 
                   Prepared Statement of Brock Cooper
    Good morning, Chairman Arrington, Ranking Member O'Rourke and 
members of the Committee. My name is Brock Cooper, and I am the general 
counsel for Veterans United Home Loans.
    I would like to thank you for allowing me the opportunity to come 
before you today to discuss this important issue regarding lending 
practices that impact our service members, our Veterans and our 
military families. Before working for Veterans United, I served in the 
Missouri Army National Guard from 2000 to 2006, achieving a rank of 
Sergeant E-5. During my service in the National Guard, I was called to 
active duty for an 18-month period from 2003 to 2005 for stateside 
military police law enforcement duty at Fort Bragg in North Carolina. 
Additionally, I was activated for Hurricane Katrina relief in 2005.
    I purchased my first home in 2008 using the VA Loan, and used the 
VA Interest Rate Reduction Refinance Loan (IRRRL) program to help lower 
my monthly payment and interest rate on that initial home. I have 
subsequently used the VA Loan to finance the purchase of three other 
homes for my family. I have a current VA Loan, and fully understand the 
pressures of the marketing practices employed by some industry 
participants around the IRRRL program.
    Two years after separating from the National Guard, I joined 
Veterans United. We are a full-service, family-owned lender, 
headquartered in Columbia, Missouri. We have nearly 2,400 employees 
nationwide and are licensed in all 50 states and Washington D.C. Our 
primary mission is helping Veterans, service members and their families 
achieve the American dream of homeownership. We have been the nation's 
No. 1 VA purchase lender each of the past two fiscal years, closing 
more than 37,000 purchase loans in VA fiscal year 2017 alone. We have 
now closed more than 165,000 VA purchase loans since originating our 
first VA loan in 2003. Today, Veterans United represents 1 out of every 
10 VA purchase loans originated. These stats are reflective of our 
mission to help Veterans and their families get the most from their 
hard-earned home loan benefit.

The Success of the VA Home Loan Program

    Since our first VA Loan in 2003, we can attest the VA Loan is not 
like other mortgages. It differs from conventional and all other 
federal mortgage programs in that it is an earned service benefit - not 
a federal discretionary program - available to our Veterans, qualified 
active duty personnel and qualified surviving spouses. It is part of a 
deep bond between those who serve and the taxpayers these Veterans 
pledge to defend.
    The VA Loan program stands out as a true success story. In VA 
fiscal 2017, the program had a record 740,000 closings, hitting a 
record $189 billion in volume. \1\ As of today, VA Loans represent 10 
percent of the mortgage market. \2\ The program has featured the lowest 
average interest rate on the market for more than three years, along 
with the lowest foreclosure rate for more than 10 years. \3\ At the 
same time, VA purchase loans are closing within two days of the entire 
market - 47 days. \4\ These statistics are powerful considering VA 
Loans represented about 1 percent of the mortgage market as recently as 
2007. These facts demonstrate that by and large the VA Loan program is 
providing the desired benefit that it was designed to deliver.
---------------------------------------------------------------------------
    \1\ Veterans Benefits Administration's VA Home Loans web page. 
https://www.benefits.va.gov/HOMELOANS/Lender--Statistics.asp
    \2\ EllieMae Origination Insight Report. November 2017. https://
static.elliemae.com/pdf/origination-insight-reports/Ellie--Mae--OIR--
NOVEMBER2017.pdf. Page 3.
    \3\ EllieMae Origination Insight Report. November 2017. https://
static.elliemae.com/pdf/origination-insight-reports/Ellie--Mae--OIR--
NOVEMBER2017.pdf. Page 5 & Mortgage Bankers Association National 
Delinquency Survey.
    \4\ EllieMae Origination Insight Report. November 2017. https://
static.elliemae.com/pdf/origination-insight-reports/Ellie--Mae--OIR--
NOVEMBER2017.pdf. Page 4
---------------------------------------------------------------------------
    This is the story we must protect. All decisions about the VA Loan 
program must be made to ensure we improve this hard-earned service 
benefit, while making sure the program continues to be healthy and 
sustainable as it continues to make homeownership possible for 
America's bravest.

Improvements to the VA IRRRL Program

    Veterans United has been involved in the policy discussion 
surrounding the IRRRL program for many years. Our primary concerns 
remain that in some instances IRRRLs do not represent a true reasonable 
value to Veterans, and that serial abuse of IRRRLs could impact 
interest rates long-term, making it more difficult for Veterans to 
purchase homes.
    At Veterans United, we offer IRRRLs primarily as a way to better 
serve the Veterans and service members who have initially come to us 
for purchase loans, and whose loan we are now servicing. As of the 
beginning of 2018, we service about $8 billion in VA Loans. To provide 
perspective, IRRRLs accounted for a little more than 6 percent of our 
overall loan volume in VA fiscal 2017.
    It is critical to remember that first and foremost, the whole idea 
behind the IRRRL is to put Veterans in a better financial position 
today than they were yesterday. This is what guides our approach - is 
this new loan making the Veteran's life better today and in the future? 
No lender should look only at immediate or long-term benefits. The 
lender must understand how long the Veteran intends to live in the 
home, the consequences of interest rate increases or decreases and the 
overall financial makeup of each customer. It does not matter how much 
a refinance purports to save a Veteran homeowner if it will take them a 
decade to recoup loan costs and fees that swell their loan balance. 
That does not put Veteran homeowners in a stronger financial position 
because they have less equity or may even be upside down on their home 
when they go to sell. The same could be said for convincing someone to 
refinance into an adjustable-rate mortgage without discussing the 
possibility for future rate increases or the potential for additional 
costs and decreased equity when later refinancing back into a fixed-
rate mortgage.
    We believe there is a clear value when Veterans lower their 
mortgage payments or when they can move from adjustable-rate mortgages 
to fixed-rate mortgages, as long as they can recoup the costs and fees 
from that new loan within a reasonable time frame and do so after a 
reasonable time period from the initial close.
    This is an important way we look at refinance loans - there is not 
a strict, one-size-fits-all savings because there is a not a one-size-
fits-all Veteran or military family.
    In addition, an IRRRL serves a valuable function outside of 
reducing interest rates - it accounts for life's changes and 
challenges. Veterans and service members have a unique service benefit 
in using IRRRLs to account for these changes and challenges, such as 
the death of a spouse, marriage or a divorce. These are three common 
reasons to use the IRRRL to clean up a title, and we feel strongly they 
should be maintained.
    We all know of serial refinance companies that are aggressively 
contacting Veterans and their families with misleading mortgage offers. 
Three primary problems are caused by this activity: long-term financial 
harm to the Veteran; increased interest rates for Veterans purchasing a 
home; and long-term harm to the VA Loan program.
    The harm to the Veteran homeowner may be a recoupment period that 
is unjustifiably long, leaving them owing more than their home is worth 
or higher future costs because they've been convinced to refinance 
their fixed-rate loan into an ARM.
    The harm to Veterans purchasing a home is higher interest rates. 
When Veterans with a VA Loan are convinced to refinance again and 
again, the company making the original mortgage must buy it back from 
the secondary market, often paying steep penalties. While hard to 
quantify, this cost is inevitably passed on to Veteran homebuyers in 
the form of higher interest rates.
    These higher interest rates are also a negative to the overall 
program. High interest rates make the program less competitive in the 
marketplace, and that hurts the VA Loan program's ability to invest for 
the future.

Maintaining Strong Service Benefits for Veterans, Service Members and 
    their Families

    We appreciate that the VA Loan Program's leadership and Ginnie 
Mae's leadership are actively engaged on this issue and committed to 
protecting Veterans while ensuring they have full access to their hard-
earned benefits. We support the agencies' joint task force, and we 
believe that Ginnie Mae's recent decision to pool IRRRLs made within 
six months of the original closing differently is a step in the right 
direction. We support the quick call to action Ginnie Mae has made to 
address churning of VA loans, including Ginnie's move this past month 
to incorporate cash-out refinances into their refinance pooling policy. 
These rules would appear to address most of the problems affecting 
Veterans using their IRRRL benefit; the only portion we feel is still 
missing is the recoupment of refinance costs and fees within a set time 
frame.
    We support efforts to empower the VA to make program changes in a 
more expeditious manner. Today, Ginnie Mae, Fannie Mae, Freddie Mac and 
the FHA can make corrective program guidance decisions relatively 
quickly for a wide range of topics pertaining to the programs they 
administer. Alternatively, the VA has to go through a full, formal 
rulemaking process for relatively narrow, technical program changes 
that could be much more easily corrected through these other programs. 
This can prevent needed narrow fixes that would benefit our Veterans 
from ever taking place. While rulemaking should still be required for 
extensive program changes, we support a more expeditious process for 
lesser ones.
    We would urge that any Congressional fixes not become too ``in the 
weeds'' or prescribe specific requirements that could potentially cut 
off the VA Home Loan benefit for some Veterans who have earned it. 
Instead, Congress should empower the VA to quickly implement new 
reasonable guidelines for IRRRLs given the VA's vast experience with 
the program and the Veterans it benefits, and those guidelines can be 
adapted over time. Mortgage markets do change and Congressional 
legislation, once enacted, can be set for 10 or even 20 years. A 
solution must work well this year, next year and 10 years down the 
road. We see instances time and again where rules that consider the 
unique circumstances of each Veteran create real value for our military 
families.

The Next 70 Years of the VA Home Loan Program

    Members of this Committee, the IRRRL is an important aspect of a 
hard-earned service benefit created more than 70 years ago. The entire 
premise of the IRRRL is to provide a no-frills, low-cost loan to help 
Veterans save money, strengthen their overall financial health and 
adjust to life's unforeseen events, while not hurting the ability of 
fellow Veterans to make their own homeownership dreams a reality. 
Unfortunately, loans are being made that fail to live up to the spirit 
and intent of this long-cherished service benefit.
    Veterans United believes reasonable seasoning and recoupment 
periods are essential to protect Veterans and the long-term viability 
of the VA Loan program and to ensure Veterans are clearly benefitting 
from a VA refinance. To date, Ginnie Mae has addressed the seasoning 
requirements, and we believe VA is best suited to address a recoupment 
period. We look forward to helping the VA Loan Guaranty Program, Ginnie 
Mae and other stakeholders in any way we can to best serve those who 
have served us.
    Finally, it's worth noting that those entering the military take an 
oath of office very similar to the oath taken by Members of the House: 
all swear to ``support and defend the Constitution of the United States 
against all enemies, foreign and domestic, bearing true faith and 
allegiance to the same.''
    All serve, of course, but those in the military pledge their very 
lives in the process. We are all here to ensure that those pledging so 
much receive the very best from us in return.
    Thank you again, Mr. Chairman and the Committee, for allowing me to 
come before you today.

                                 
                       Statements For The Record

                   QUESTIONS & ANSWERS FOR THE RECORD
Ginnie Mae Responses

    1. Please explain in detail the reason that Ginnie Mae does not 
publicly publish on its website the names of lenders that it has fined 
in the past, including those it has fined for breaking the 2017 Ginnie 
Mae policy that required VA loans to be at least six months old before 
being refinance.

    Ginnie Mae has the statutory authority to levy Civil Money 
Penalties (CMP) for many types of program violations. Typically, Ginnie 
Mae's use of CMPs focuses on violations that relate to reporting and 
remittance of principal and interest, as those are clear cut program 
violations and are critical to Ginnie Mae operations. As noted in the 
hearing on January 10, 2018, Ginnie Mae has issued CMPs for violations 
of All Participants Memorandum (APM) 16-05, but has not made public the 
list of issuers who received CMPs.
    Ginnie Mae is not statutorily required to publicize CMPs, and 
historically it has chosen not to do so. The two principal reasons for 
this are:

      Most Issuers take program violations seriously, and they 
are usually responsive to Ginnie Mae enforcement actions.
      For publicly traded companies or companies that rely on 
borrowing facilities, the introduction of reputational risk into Ginnie 
Mae enforcement activities could result in market consequences for 
issuers that would be harmful to the overall management of the Ginnie 
Mae MBS program.

    2. Please state whether, in the future, Ginnie Mae would consider 
publicly publishing the names of lenders it has fined for breaking its 
policies.

    There are circumstances where it could be in Ginnie Mae's interest 
to publicize a CMP enforcement action. Ginnie Mae reserves the right to 
do so if it deems such action would be warranted, helpful, and 
appropriate. Ginnie Mae is currently examining the benefits and 
drawbacks of publicizing CMPs in relation to the VA loan churn APM.