CUNA Regulatory Comment Call
January 4, 2010
Agencies Issue Proposed Guidance for Reverse Mortgages
- The Federal Financial Institutions Examination Council (FFIEC) has issued proposed guidance for reverse mortgages titled Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks (Guidance). The National Credit Union Administration (NCUA), along with other federal financial institution regulators, is a member of the FFIEC and the guidance will apply to federally-insured credit unions.
- After reviewing the comments received, the Guidance will be finalized and the Federal financial institution regulators will then issue it as supervisory guidance. State regulators will also be encouraged to issues similar guidance. The goal is to help ensure that a financial institutions risk management and consumer protection practices adequately address the compliance and reputation risks associated with reverse mortgage loans.
- Comments are due by February 16, 2010 and are due to CUNA by February 9, 2010. If commenting directly to the FFIEC, you must include FFIEC as the agency name, reference Docket Number FFIEC-2009-0001, and title the comments as Reverse Mortgage Comments.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org and to Senior Assistant General Counsel Jeff Bloch at email@example.com; or mail them to Mary and Jeff in c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. You may also contact us if you would like a copy of the proposed Guidance or you may access it here.
Reverse mortgages enable eligible borrowers to remain in their home while accessing their home equity in order to meet their financial means in a manner so as not to subject borrowers to ongoing repayment obligations during the life of the loan. Funds may be accessed either as a lump sum, credit line, or monthly cash advances.
Reverse mortgages are geared towards those over the age of 62 and repayment is generally not required until the borrower dies, moves, or if there is default, such as failure to pay taxes, insurance, or to properly maintain the property. There are two types of reverse mortgages. These include the lenders own proprietary reverse mortgage products and reverse mortgages offered under the Home Equity Conversion Mortgage (HECM) program. Loans issued under the HECM program are subject to a range of consumer protection, counseling, and other requirements.
Reverse mortgages are often geared to elderly individuals who may need to access their homes equity in order to meet expenses during retirement. These products are very complex and are expected to grow substantially in the future as the population ages.
As a result, the FFIEC is proposing the Guidance at this time to help financial institutions ensure that their risk management and consumer protection practices adequately address the compliance and reputations risks associated with reverse mortgages. When finalized, the Federal financial institution regulators will issue the Guidance as supervisory guidance for the institutions they supervise and the FFIEC is also expected to issue sample disclosures at that time. State regulators will also be encouraged to issue similar guidance.
DESCRIPTION OF THE PROPOSED GUIDANCE
In addition to the proposed Guidance, financial institutions are subject to other statutes and rules that may apply to reverse mortgages. These include the Federal Trade Commission Act prohibition of unfair or deceptive acts or practices provisions; the Truth in Lending Act; the Real Estate Settlement Procedures Act; the Equal Credit Opportunity Act; the Fair Housing Act; the National Flood Insurance Act; State laws and rules; and rules issued under the HECM Program, such as those that address mandatory counseling for borrowers, disclosures, fee restrictions, and conflicts of interest. The regulators also expect that financial institutions will determine whether the borrower will be able to make the required taxes and insurance payments, which are generally not escrowed when there is a reverse mortgage.
Communications with Consumers
Financial institutions should provide consumers with information designed to help them make informed decisions when selecting financial products, including reverse mortgages, and the options for receiving advances from them. Advertisements and marketing materials should ensure that important information is disclosed clearly and conspicuously and that borrowers are not misled or deceived about the features, terms, risks, or about the borrowers continuing obligation with regard to taxes, insurance and home maintenance.
Financial institutions should give attention to the timing, content, and clarity of the information presented to borrowers. This includes developing clear and balanced product descriptions and making them available when the consumer is shopping for a mortgage, not just when an application is submitted or when the loan is consummated. This should describe how disbursements may be received, as well as include the following information:
- Borrower and property eligibility.
- For proprietary loans, the fact that reverse mortgages are not government insured and the resulting risk for consumers.
- Determination of principal limits, based on home values, borrowers age, and expected interest rates.
- Lump sum and other disbursement options, and their possible implications.
- The requirement to make tax and insurance payments when these are not escrowed.
- The circumstances in which the loan must be repaid.
- Actions the borrower must take to prevent the loan from going into default, and therefore due and payable, including the need to continue to pay taxes and insurance.
- Fees and charges associated with the loan.
- Alternatives to reverse mortgages that may also address the borrowers needs.
- The importance of counseling, as well as information on how to find a qualified, independent counselor so that the borrower is as informed as possible about reverse mortgages, including alternatives, the consequences, and the effect that such a loan will have on eligibility for needs-based public benefits.
Qualified Independent Counseling
Financial institutions offering proprietary reverse mortgage loans should require counseling from qualified, independent counselors before the consumer submits the application or pays an application fee. (This is already required under the HECM Program). Policies should be adopted to prevent the steering of a consumer to a specific counseling agency and prohibit the lender from contacting the counselor on the consumers behalf, unless the consumer is involved. Borrowers should be encouraged to attend counseling in person, as opposed to by telephone or otherwise, and to attend with other family members.
Counselors should be able to inform borrowers about the following:
- The availability of other housing, social service, health, and financial options.
- Financing options other than reverse mortgages, such as other mortgage products, sale-leaseback financing, and deferred payment loans.
- The difference between HECM Program loans and the lenders proprietary loans.
- The financial implications and tax consequences.
- The impact of a reverse mortgage loan on eligibility for federal and state needs-based assistance programs, including Supplemental Security Income.
- The impact on the estate and heirs.
Avoidance of Potential Conflicts
Financial institutions should take all reasonably necessary steps to avoid any appearance of a conflict of interest, which would include adopting:
- Clear written policy and internal controls stating that neither the lender nor broker will require the borrower to purchase any other product or service in order to obtain the reverse mortgage loan.
- Clear policies so lenders do not have an inappropriate incentive to sell other products that may be linked to the granting of the reverse mortgage loan. This may include the policy stating that neither the lender nor broker will offer the borrower or refer the borrower to a provider of an annuity or other product or service prior to closing or before the expiration of the right to rescind the loan.
- Clear compensation policies to prevent other inappropriate incentives for loan officers or third parties to make reverse mortgage loans.
Policies, Procedures, and Internal Controls
Financial institutions should have policies and procedures to address the issues outlined in the Guidance, including those involving conflicts of interest and consumer information. Institutions should also have effective internal controls to monitor whether actual practices are consistent with their policies and procedures.
Training should be designed so that lending personnel are able to convey information to consumers about the product terms and risks in a timely, accurate, and balanced manner. Legal and compliance reviews should include oversight of compensation programs to ensure lending personnel are not improperly encouraged to direct consumers to certain products. Institutions should also review consumer complaints.
Third Party Risk Management
When making, purchasing, or servicing reverse mortgage loans through a third party, such as a broker or correspondent, institutions should take steps to manage the compliance and reputation risks presented by such relationships.
QUESTIONS TO CONSIDER REGARDING THE
REVERSE MORTGAGE GUIDANCE
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com