VA guidelines

VA Clarifies Rules On “Unallowable Fees”

January 13, 2019

VA Clarifies Rules On “Unallowable Fees”

001-logoThe Department of Veterans Affairs has issued a Mortgagee Letter clarifying its position on itemized fees, the lender’s flat fee and unallowable fees for VA mortgage loans.

According to VA Circular 26-14-10, “Policy Clarification on Unallowable Fees,” there has been a need to clarify what is permitted when a lender charges a flat fee (the “lender’s fee” for the VA loan) and itemized expenses, versus what is allowed when no flat fee is charged and costs need to be recovered that would otherwise be covered by the flat fee.

According to the statement, “The purpose of this Circular is to clarify the Department of Veterans Affairs (VA) policy on the treatment of unallowable fees when lenders charge a loan origination fee that is less than one percent of the loan amount on purchase and cash-out transactions, and less than one percent of the payoff amount on interest rate reduction refinance loans (IRRRLs).”

As mentioned above, VA loan rules permit the lender to charge a flat fee, not to exceed one percent of the loan amount for new purchase or certain refinance loans. According to the VA, “This flat charge is intended to cover all of the lender’s costs which are not reimbursable as itemized fees. Non-reimbursable fees that are not included in the flat fee are considered unallowable.”

VA policy on unallowable fees has been clarified to state, in part, “If the lender charges the full one percent loan origination fee, they cannot charge unallowable fees. Unallowable fees are those that are not expressly specified in 38 CFR 36.4313. Note: VA treats pest inspection fees the same as any other unallowable fee. Examples of unallowable itemized fees can be found in Chapter 8, Section 2d of the VA Lender’s Handbook.”

The VA provides examples and clarifications — here’s one of them:

“If the lender charges a $1,000 loan origination fee on a $100,000 loan, they have charged the maximum allowable origination fee, and cannot charge additional unallowable fees, such as a document preparation fee or pest inspection fee. However, if the lender charged an $800 loan origination fee on a $100,000 loan, the lender may charge up to $200 in unallowable fees, such as a document preparation fee or pest inspection fee. In all cases, the aggregate of the loan origination fee and unallowable fees cannot exceed the one percent threshold.

“Clarification. Third-party overcharges are not treated the same as unallowable fees for purposes of determining the aggregate one percent limit; third-party charges are limited to the invoice charge, regardless of the amount charged for the loan origination fee. In the case of appraisals, the amount charged cannot exceed VA’s published rates.”

Furthermore, the VA states, “If the lender charges a $1,000 loan origination fee on a $100,000 loan, they have charged the maximum allowable origination fee, and cannot charge additional unallowable fees, such as a document preparation fee or pest inspection fee. However, if the lender charged an $800 loan origination fee on a $100,000 loan, the lender may charge up to $200 in unallowable fees, such as a document preparation fee or pest inspection fee. In all cases, the aggregate of the loan origination fee and unallowable fees cannot exceed the one percent threshold.”

You can view the entire statement on the VA’s official site.

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