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.
Open Recommendations
| Recommendation Number | Significant Recommendation | Recommended Questioned Costs | Recommended Funds for Better Use | Additional Details | |
|---|---|---|---|---|---|
| 08 | Yes | $0 | $0 | ||
| The OIG recommended the under secretary for benefits modify policies and procedures for full-file loan reviews to include detailed steps for loan specialists to conduct reviews, as well as the risk factors and methodology for loan selection. | |||||
| 03 | No | $0 | $0 | ||
| The OIG recommended the under secretary for benefits develop and update policies and procedures to ensure invoices or bills are obtained for all third-party charges and lenders report itemized closing costs at the lowest level of detail. | |||||
| 04 | No | $0 | $0 | ||
| The OIG recommended the under secretary for benefits develop and update policies and procedures for the state deviation process and requirements, assess the extent of missing VA authorizations on the schedule of state deviations and obtain the necessary documentation, and obtain a legal opinion from the VA’s Office of General Counsel on the allowability of state deviation charges in excess of the state-published amounts, and then review the potential overcharges identified in the audit sample to determine if action is needed to make the borrowers whole. | |||||
| 08 | No | $0 | $0 | ||
| The OIG recommended the under secretary for benefits modify policies and procedures for full-file loan reviews to include detailed steps for loan specialists to conduct reviews, as well as the risk factors and methodology for loan selection. 9. Update policies and procedures to ensure the borrower is reimbursed for any overcharges identified during regional loan center quality reviews. | |||||
