The Department of Veterans Affairs is investigating allegations of predatory lending practices in its mortgage refinancing program, a top official told American Banker.
The investigation centers on complaints that at least three companies - in Florida, Texas, and California - are luring veterans to refinance their mortgages by offering hefty savings on monthly payments, then socking them with exorbitant loan fees.
Several customers and former employees of one of the companies confirmed by the department to be under investigation - Mortgage Investors Corp., St. Petersburg, Fla. - said it was charging 6.5% to 7.5% of the loan amount to refinance. By contrast, a number of major mortgage companies, when presented with the details of the transactions, said they would charge 1% to 2% for the same refinancings.
Though the probe is only a few weeks old, it is already spurring a clampdown. The agency is expected in the next few days to limit the points that lenders can charge for refinancings, according to R. Keith Pedigo, director of loan guarantee service for the VA program. He declined to give details, but another source at the agency said the limit was likely to be 2%.
The lenders under investigation make only a small percentage of VA loans, but their practices may have a serious impact on VA lending.
"These programs are successful because of the combination of review by the government and work done by the private sector," said Robert O'Toole, senior vice president with the Mortgage Bankers Association of America. If lenders cannot be relied on to act ethically, he said, the program would have to be run completely by the government and considerably reduced.
Bill Edwards, president of Mortgage Investors, defended the company's fees, saying, "I love people that aren't in the mortgage business telling me how to run mine. People don't understand what it costs to buy money. I've got to pay my loan officers."
He also denied assertions by customers and former employees of his company that loan officers routinely passed themselves off as representing the Department of Veterans Affairs.
Mr. Edwards said he was unaware of any investigation by the agency, but added, "We're open to any scrutiny that may come along."
The practices of Mortgage Investors, though not in clear violation of the law, raise questions about the adequacy of the agency's scrutiny and regulation of its refinancing program. The identities of the other companies being investigated could not be learned.
"There needs to be greater policing of the people doing these transactions," said Daniel Edelman, a Chicago-based lawyer who specializes in consumer loan fraud cases.
The Department of Veterans Affairs is now in the awkward position of imposing limits on a program that has always relied, in Mr. Pedigo's words, "on the good business judgment of lenders."
The agency's streamlined rate-reduction program allows any lender to refinance a VA loan without checking the borrower's credit or performing an appraisal. It also permits lenders to set "reasonable" fees.
Department of Veterans Affairs offices formerly reviewed all loans that carry the agency's guarantee, but now look at only one in 10 because they so rarely found defects, according to Judith Caden, assistant director for loan policy.
Several weeks ago, when the American Banker first got in touch with the agency for comments on the unfolding developments involving the high-cost refinancings, it said it could not confirm any abuses by particular companies. Since then, it has confirmed the key points and initiated a review of its policies.
Currently, the VA program guarantees more than 3.3 billion loans. Almost 10% of the 263,000 loans made last year were streamlined refinancings, said Ms. Caden. In 1994, the number of rate reductions reached more than 30% of volume, sparked in part by an announcement in 1993 that encouraged veterans to refinance.
The news release generated "tons of requests" for lists of these homeowners from mortgage companies, said Ms. Caden,
While the department does not provide these lists, many lenders purchase the information from companies that collect details from local tax records, according to veterans' associations.
According to the department, there are still slightly more than a million veterans in the country who hold mortgages with interest rates of more than 9%, a substantial pool ripe for refinancing.
Mortgage Investors now has 10 branch offices in Florida and about 140 employees. In 1995, the company made 3,500 loans, for a total of $250 million. Volume should be boosted to $1.6 billion over the next few years, according to Mr. Edwards. Former employees say he has filed for licenses in Missouri and Illinois.
After refinancing veteran's loans, Mortgage Investors typically sells them within a month, borrowers say. American Banker has verified that some loans have been bought by Prudential Home Mortgage Corp., Clayton, Mo.
Herb Janssen, a senior vice president at Pru, said company policy forbids him from discussing its relationship with its clients.
Mr. Janssen did say Prudential typically reviews a mortgage banking company's reputation. However, the company doesn't review every originator's practices directly.
"If we found out that a company was in violation of origination procedures, then we would sever those relationships," Mr. Janssen added. "If you are gouging people, your delinquencies will get out of line."
Sources from the Department of Veterans Affairs said that borrowers who had refinanced for high points were unlikely to get reimbursement. But Mr. Edelman, the Chicago attorney, said he was planning to file a suit within a week, citing violations of the Real Estate Settlement Procedures Act.
Restitution for all the borrowers who were overcharged should be simple, he added. "If the VA approached all the lenders who had made loans with high points and asked them to refund them - or they would be out of the program - I'm sure they would," he said.