August 16, 2010
Joint Agency Release Federal Financial Institutions Examination Council
Financial Regulators Adopt Guidance on Reverse Mortgage Products
The Federal Financial Institutions Examination Council (FFIEC) released final guidance today on reverse mortgage products. The guidance, adopted by each of the financial regulators, emphasizes the consumer protection concerns raised by reverse mortgages and the importance of financial institutions mitigating the compliance and reputation risks associated with these products.
The guidance also addresses the general features of reverse mortgage products and relevant legal requirements and consumer protection concerns raised by reverse mortgages. It focuses on the need for banks, thrifts, and credit unions to provide clear and balanced information to consumers about the risks and benefits of these products.
Such information should be provided while consumers are making decisions about these products and should address the specific matters listed in the guidance, including informing consumers of available alternatives to reverse mortgages. The guidance also states that institutions should take steps to avoid any appearance of a conflict of interest and requires that consumers receive qualified independent counseling. The guidance addresses related policies, procedures, internal controls, and third-party risk management.
The guidance will be effective 60 days after publication in the Federal Register.
PERSONAL FINANCIAL PLANNING
The Federal Reserve and other top regulators said on Monday reverse mortgages pose "compliance and reputation risks" for lenders, and offered guidance to financial firms on how to avoid such pitfalls.
The Fed said reverse mortgages, which enable borrowers to get a monthly income stream by surrendering a portion of the equity in their homes, are likely to become increasingly popular given an expected rise in the elderly population.
The guidance puts no limits on fees that can be charged for reverse mortgages.
"Reverse mortgages present substantial risks both to institutions and to consumers, and, as with any type of loan that is secured by a consumer's home, it is crucial that consumers understand the terms of the product and the nature of their obligations," the regulators said in a statement.
"Lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the institutions themselves," they said.
Supervisors said they want to ensure that lenders determine whether or not borrowers are able to continue paying insurance and taxes on the property, and avoid conflicts of interest by lenders trying to bundle the loans with other products.
"Consumers are not always adequately informed that reverse mortgages are loans that must be repaid (and not merely ways to access home equity)," the agencies said.
"In fact, some marketing material has prominently stated that the consumer is not incurring a mortgage, even though the fine print states otherwise."
The Federal Reserve Board proposed enhanced consumer protections and disclosures for reverse mortgages. According to the Fed, the proposal would improve the disclosures consumers receive for reverse mortgages and impose rules to ensure advertisements contain accurate and balanced information.
“Reverse mortgages are complex products available to older consumers, some of whom may be more vulnerable to abusive practices,” the Fed said. “To help consumers understand these complex products, creditors would be required to provide improved disclosures that explain particular features unique to reverse mortgages.”
Under the proposal, lenders must provide a new two-page disclosure that highlights the basic features and risks of reverse mortgages in simple language. Shortly after filling out the application, consumers would also receive transaction-specific disclosures that reflect the actual terms of the reverse mortgage being offered in a tabular format.
Additionally, the Fed proposal protects consumers from unsuitable reverse mortgage practices by prohibiting lenders from requiring the purchase of another financial or insurance product as a condition of obtaining the loan. Consumers are also required to receive reverse mortgage counseling before any nonrefundable fee can be imposed (except a fee for the counseling itself) to “help ensure that consumers understand these complex products before they become obligated on the loan.”
The Fed is seeking public comment for 90 days after publication in the Federal Register.
Reverse Mortgage Guidance Issued
August 19, 2010
Bank, thrifts and credit unions received a new framework for providing clear and balanced information to consumers about the risks and benefits of reverse mortgages under final guidance issued by the Federal Financial Institutions Examination Council (FFIEC). The guidance is of importance to CPAs who may consider reverse mortgages as part of a prudent personal financial planning strategy for their aging clients and CPAs employed with lenders.
Reverse mortgages enable eligible borrowers to remain in their homes while accessing home equity to meet emergency needs, supplement their incomes, or, in some cases, purchase a new home—without subjecting borrowers to ongoing repayment obligations during the life of the loan. To obtain a reverse mortgage, the borrower must occupy the home as a principal residence and generally be at least 62 years old. The guidance notes that the use of reverse mortgages could expand significantly in coming years as the U.S. population ages and more homeowners become eligible for reverse mortgages.
The guidance focuses on ways a financial institution may provide adequate information about reverse mortgages and qualified independent counseling to consumers and on ways to avoid potential conflicts of interest. It also addresses related policies, procedures, internal controls, and third-party risk management for institutions.
The guidance notes that proprietary reverse mortgages (in contrast to reverse mortgages insured by the federal Home Equity Conversion Mortgage (HECM) program) present the risk that lenders will be unable to meet their obligations to make payments owed to consumers. FHA-insured reverse mortgages offered under the HECM program account for approximately 90% of all reverse mortgages.
The guidance notes the numerous federal and state laws that apply to reverse mortgages, including:
- Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices.
- Truth in Lending Act (TILA) and the Federal Reserve’s implementing Regulation Z, which contain rules governing disclosures that institutions must provide for mortgages in advertisements, with an application, before loan consummation, and when interest rates change.
- Real Estate Settlement Procedures Act (RESPA) and HUD’s implementing Regulation X, which contain rules that, among other things, require disclosure of early estimated and final settlement costs and prohibit referral fees and other charges that are not for services actually performed.
- Equal Credit Opportunity Act.
- Fair Housing Act.
- National Flood Insurance Act.
- State laws prohibiting unfair or deceptive practices.
- Rules of state financial institution regulators that have the authority to supervise the mortgage-related activities of entities within their respective jurisdictions, including activities related to reverse mortgages.
The guidance is also aimed at addressing concerns that:
(1) Consumers may enter into reverse mortgage loans without understanding the costs, terms, risks and other consequences of these products, or may be misled by marketing and advertisements promoting reverse mortgage products;
(2) Counseling may not be provided to borrowers or may not be adequate to remedy any misunderstandings;
(3) Appropriate steps may not be taken to determine and to assure that consumers will be able to pay required property taxes and insurance; and
(4) Potential conflicts of interest and abusive practices may arise in connection with reverse mortgage transactions, including with the use of loan proceeds and the sale of ancillary investment and insurance products.
The adopting financial regulators expect institutions to use this guidance to ensure that risk management practices adequately address compliance and reputation risks associated with reverse mortgages. A failure to address these risks could significantly affect the overall effectiveness of an institution’s compliance and risk management efforts with respect to reverse mortgages.
The guidance, which is effective Oct. 16, has been adopted by the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration.
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