Additional Measures Would Better Protect Borrowers from Risks Associated with Interest Rate Reduction Refinance Loans

As a streamlined way to reduce interest rates on VA-guaranteed mortgages, interest rate reduction refinance loans (IRRRLs) are popular with veterans, especially when interest rates are low. In fiscal year (FY) 2020, VA reported a 598 percent increase in the number of these loans from the previous year—from 94,861 to 662,065, with IRRRLs totaling about $199 billion. Given the considerable increase in the use of IRRRLs and the large number of borrowers at risk for overcharges, the VA Office of Inspector General (OIG) conducted this audit to determine whether oversight of IRRRLs by the Veterans Benefits Administration’s (VBA) Loan Guaranty Service (LGY) ensures veterans are protected from unfavorable refinancing and unallowable or unreasonable refinance charges. The OIG found VBA made meaningful improvements in May 2020 regarding borrowers’ fee recoupment (recovering closing costs within three years), net tangible benefit (an interest rate reduction of at least one-half percent), and protections against serial refinances. However, some FY 2020 borrowers were still potentially overcharged through unsupported, unallowable, or unreasonable closing costs. Estimates totaled roughly $3 million for approximately 18,400 borrowers based on the FY 2020 audit sample. Also, borrowers did not always receive the loan comparison documents they needed to make informed decisions about whether to refinance. The OIG estimated that lenders did not provide the required statements at the time of application for at least 3 percent of the IRRRLs in FY 2020. This omission may have affected some 2,900 borrowers. LGY also lacked controls and sufficiently detailed guidance to fully perform loan oversight and quality assurance. Despite differences in some legal interpretations, VBA concurred with the OIG’s nine recommendations to strengthen LGY controls and quality assurance policies and procedures that would more effectively protect borrowers from unfavorable IRRRLs and guarantee loans that comply with program requirements.