I. INTRODUCTION
The federal banking agencies (Agencies) have released final guidance that emphasizes the consumer protection concerns raised by reverse mortgages. The guidance indicates that financial institutions should provide clear and balanced information to consumers about the risks and benefits of these products. It also requires that consumers receive qualified independent counseling. The guidance became effective on October 18, 2010.
II. BACKGROUND
Institutions currently provide two basic types of reverse mortgage products: lenders’ own proprietary reverse mortgage products and reverse mortgages offered under the Home Equity Conversion Mortgage (HECM) program.
Reverse mortgages enable eligible borrowers to remain in their homes while accessing their home equity in order 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. Reverse mortgages can be highly complex loan products, and it is particularly important to provide adequate information and other consumer protections. For these reasons, it is critical that institutions manage the compliance and reputation risks associated with reverse mortgages.
Reverse mortgages generally are non-recourse, home-secured loans that provide one or more cash advances to borrowers and require no repayments until a future time. Both HECMs and proprietary reverse mortgages generally must be repaid only when the last surviving borrower dies, all borrowers permanently move to a new principal residence, or the loan is in default. For example, repayment would be required when the borrower sells the home or has not resided in the home for a year. A borrower may be in default on a reverse mortgage when the borrower fails to pay property taxes, fails to maintain hazard insurance, or lets the property fall into unreasonable disrepair. When a reverse mortgage becomes due, the home must be sold or the borrower (or surviving heirs) must repay the full amount of the loan (including accrued interest), even if the balance is greater than the property value. If the home is sold, the borrower or estate generally would not be liable to the lender for any amounts in excess of the value of the home.
To obtain a reverse mortgage, the borrower must occupy the home as a principal residence and generally be at least 62 years of age. Reverse mortgages are typically structured as first lien mortgages, and generally require that any prior mortgage be paid off either before obtaining the reverse mortgage or with the funds from the reverse mortgage.
The funds from a reverse mortgage may be disbursed in several different ways:
Generally, the size of the loan will be larger when the borrower is older, the home is more valuable, or interest rates are lower. Interest rates on a reverse mortgage may be fixed or variable.
The Guidance focuses on the need to provide adequate information to consumers about reverse mortgage products; to provide qualified independent counseling to consumers considering these products; and to avoid potential conflicts of interest and also addresses related policies, procedures, and internal controls and third party risk management.
The Agencies expect institutions to use this guidance to ensure that risk management practices adequately address compliance and reputation risks associated with reverse mortgages. Failure to address the risks discussed in this guidance could significantly affect the overall effectiveness of an institution’s compliance and risk management efforts with respect to reverse mortgages. The Agencies will review risk management processes in this area during examinations of regulated institutions and will request remedial actions if institutions do not adequately manage these risks.
III. CONSUMER PROTECTION CONCERNS
The Agencies are concerned 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 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.
A. Consumer Information and Understanding
Borrowers do not consistently understand the terms, features, and risks of their loans. Consumers are not always adequately informed that reverse mortgages are loans that must be repaid (and not merely ways to access home equity). In fact, some marketing material has prominently stated that the consumer is not incurring a mortgage, even though the fine print states otherwise. Consumer misunderstanding about these matters also may be the result of advertisements declaring that reverse mortgage borrowers have no risk of losing their homes or are guaranteed to retain ownership of their homes for life. These advertisements do not clearly indicate the circumstances in which the reverse mortgage becomes immediately due and payable or in which borrowers may lose their homes.
Consumers may not be provided sufficient information about alternatives to reverse mortgages that may be more appropriate for their circumstances. Such alternative products include home equity lines of credit, sale-leaseback financing (under which the consumer sells the home and then leases it from the purchaser), and deferred payment loans. Consumers may not be aware that the fees for both HECMs and proprietary reverse mortgages – particularly up-front costs – may be higher than those for other types of mortgages, such as home equity lines of credit, that can be used to access a consumer’s home equity. Borrowers also may not receive sufficient information about other potential alternatives to reverse mortgages that may meet their financial needs, including state property tax relief programs, other public benefits, and community service programs.
The complex structure of reverse mortgages may prevent a borrower from fully understanding the products. For example, the ability to access the loan proceeds in a variety of ways may provide flexibility for a borrower. However, some payment options may adversely affect a borrower’s ability to qualify for needs-based public benefits, such as Supplemental Security Income.
In addition, reverse mortgages are not typically structured with a requirement to escrow for taxes and hazard insurance (or for the lender to pay these amounts and add them to the loan balance). If the borrower does not pay taxes and insurance, the reverse mortgage itself may become due, which could result in the borrower losing the home. Without adequate analysis of the borrower’s ability to make these required payments through available assets or loan proceeds, or the establishment of a set-aside or an escrow, in compliance with applicable laws, both the borrower and the lender can face substantial risks. To ensure consumer understanding, institutions offering reverse mortgages should clearly advise consumers about their obligation to make direct payments for taxes and insurance if there is no provision for an escrow or set aside to pay these obligations.
B. Existence and Effectiveness of Consumer Counseling
Another risk to the consumer is that consumer counseling may not be effective. Further, while counseling is considered an integral part of the reverse mortgage process and is mandatory for HECM transactions, it may not be required for proprietary products, depending on applicable state law (counseling is not required by Nebraska law). Even when provided, consumer counseling may not be fully effective in helping borrowers make informed decisions about reverse mortgage products. Counseling conducted over the telephone, in particular, may not be adequate in all cases, in part because it may be more difficult for counselors to assess a borrower’s understanding of the product over the telephone. More generally, counseling may not always provide all the relevant information or answer all questions and concerns raised by homeowners.
C. Conflicts of Interest and Abusive Practices
The potential for inappropriate sales tactics and other abusive practices in connection with reverse mortgages is greater where the lender or another party involved in the transaction has conflicts of interest, or has an incentive to market other products and services. For example, when a consumer obtains funds through a reverse mortgage, the consumer could also be offered financial products, such as annuities, or non-financial products, such as home repair services. Such products and services may be inconsistent with consumers’ needs, and, on occasion, have been known to be associated with fraud. The risk is especially strong where, for example: (1) the lender or its affiliate engages in cross-marketing of another financial product; (2) the other product is sold at the same time as the reverse mortgage product; (3) a significant portion of the proceeds of the reverse mortgage is used to purchase another product; or (4) in contrast to the reverse mortgage itself, the other product would not provide the consumer with funds to meet emergency needs or to pay ordinary living expenses.
IV. GUIDANCE FOR MANAGING COMPLIANCE AND REPUTATION RISKS
The consumer protection concerns discussed above raise compliance and reputation risks for institutions offering reverse mortgages. The Agencies have developed the guidance set forth below to assist institutions in managing these risks effectively. Lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the institutions themselves. These concerns and risks are especially pronounced with respect to proprietary products that are not subject to the core consumer protection provisions of the HECM program.
Institutions should manage the compliance and reputation risks raised by reverse mortgage lending through implementation of communication, disclosure, and counseling practices such as those discussed below and by taking actions to avoid potential conflicts of interest.
Lenders offering proprietary products should be especially diligent regarding effective compliance risk management since proprietary reverse mortgages are not subject to the consumer protection requirements applicable to HECM reverse mortgages. Institutions offering proprietary reverse mortgage products should follow or adopt as appropriate, relevant HECM requirements, as amended from time to time, in the general areas of mandatory counseling, disclosures, restrictions on cross-selling of other products, and reliable appraisals. In addition, the Agencies expect institutions offering proprietary reverse mortgages to reasonably price such products, including with respect to origination fees, consistent with safe and sound banking practices, and appropriate consideration of costs, risks, and returns. Taking these steps would help to ensure that institutions are addressing the full range of consumer protection concerns raised by reverse mortgages. Moreover, the Agencies expect institutions to take appropriate steps to determine or ensure that consumers will be able to pay required taxes and insurance.
A. Communications with Consumers
Institutions offering reverse mortgage products should take steps to manage compliance and reputation risks by providing consumers with information designed to help them make informed decisions when selecting financial products, including reverse mortgages and the options for receiving loan advances from them.
To promote effective risk management, institutions should review advertisements and other marketing materials to ensure that important information is disclosed clearly and prominently. For example, institutions should review the prominence of marketing claims and any related clarifying statements to ensure that potential borrowers are not misled or deceived. Institutions also are responsible for ensuring that marketing materials do not provide misleading information about product features, loan terms, or product risks, or about the borrower’s obligations with respect to taxes, insurance, and home maintenance. The Agencies will evaluate potentially misleading marketing materials and take appropriate action to address any marketing that violates the FTC Act prohibition on deception or any other applicable law.
Institutions also should be attentive to the timing, content, and clarity of all information presented to consumers, from the moment a consumer begins shopping for a loan to the time a loan is closed. For example, institutions should develop clear and balanced product descriptions and make them available when a consumer is shopping for a mortgage–such as when the consumer makes an inquiry to the institution about a reverse mortgage and receives information about reverse mortgages, or when marketing materials relating to reverse mortgage are provided by the institution to the consumer–not just upon the submission of an application or at consummation. Information is balanced when it fairly presents the risks and costs as well as the potential benefits of the product. The provision of timely and descriptive information would serve as an important supplement to the disclosures required by specific laws and regulations. The Agencies will review any information provided to consumers and take appropriate action to address any marketing that violates the FTC Act prohibition on deception or any other applicable law.
In order to assist consumers in their product selection decisions, an institution should use promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgage products. This information would normally include but need not be limited to:
The Agencies recognize that institutions may not be able to incorporate all of the practices recommended in this guidance when advertising reverse mortgages through certain forms of media, such as radio, television, or billboards. Nevertheless, institutions should seek to provide clear and balanced information about the risks and costs as well as the benefits of these products in all forms of advertising. An advertisement that says “We offer reverse mortgages to borrowers who are 62 or older. Call us for more information” is clear and balanced because it does not make any representations about the benefits or risks of the product, and is not deceptive or misleading.
B. Qualified Independent Counseling
To further promote consumer understanding and manage compliance risks, reverse mortgage lenders offering proprietary products should require that the consumer obtain counseling from qualified independent counselors before an institution processes an application for a reverse mortgage loan or charges an application fee. Before counseling, institutions may provide information to consumers that both consumers and counselors may find useful in evaluating proprietary and HECM reverse mortgages. For example, the institution may explain the difference between proprietary and HECM products; discuss whether the borrower is eligible; provide information on fees; and provide a copy of a sample mortgage, note, and loan agreement. In addition, if an institution does not charge a fee to the consumer, it may use an automated valuation model to perform a preliminary assessment of the value of the consumer’s property.
To ensure the independence of counselors, institutions should adopt policies that prohibit steering a consumer to any one particular counseling agency and that prohibit contacting a counselor on the consumer’s behalf. For example, institutions could provide a list of counseling agencies that provide reverse mortgage counseling. Similarly, an institution’s policies should prohibit the institution from contacting a counselor to discuss a particular consumer, a particular transaction, or the timing or content of a counseling session unless the consumer is involved. Institutions should also strongly encourage borrowers to obtain counseling in person, whenever possible, and to attend counseling sessions with family members. Family members or other trusted individuals may be able to help explain the transaction and its consequences to the consumer.
Institutions should be aware that the purpose of the counseling session is to provide adequate time to discuss these matters in detail and to address questions and concerns raised by homeowners, and to inform the consumer about the following and other relevant matters:
C. Avoidance of Potential Conflicts
To manage the compliance and reputation risks associated with reverse mortgages, institutions should take all reasonably necessary steps to avoid any appearance of a conflict of interest and violation of applicable laws and rules. For example, an institution should:
D. Policies, Procedures, and Internal Controls
Institutions should have policies and procedures to address the concerns expressed in this guidance, including those involving conflicts of interest and the provision of consumer information. In addition, institutions should have effective internal controls to monitor whether actual practices are consistent with their policies and operating procedures relating to reverse mortgages. To achieve these objectives, training should be designed so that relevant lending personnel are able to convey information to consumers about product terms and risks in a timely, accurate, and balanced manner. Furthermore, institutions’ independent monitoring should assess how well lending personnel are following internal policies and procedures and evaluate the nature and extent of policy exceptions. Findings should be reported to relevant management. In addition, institutions’ legal and compliance reviews should include oversight of compensation programs to ensure that lending personnel are not improperly encouraged to direct consumers to particular products. Finally, institutions should also review consumer complaints to identify potential compliance and reputation risks.
E. Third Party Risk Management
When making, purchasing, or servicing reverse mortgages through a third party, such as a mortgage broker or correspondent, institutions should take steps to manage the compliance and reputation risks presented by such relationships. These steps would include:
(1) Conducting due diligence and establishing criteria for entering into and maintaining relationships with such third parties;
(2) Establishing criteria for third-party compensation that are designed to avoid providing incentives for originations inconsistent with the institution’s policies and procedures;
(3) Setting requirements for agreements with such third parties;
(4) Establishing internal procedures and systems to monitor ongoing compliance with applicable agreements, institution policies, and laws and regulations; and
(5) Implementing appropriate corrective actions in the event that the third party fails to comply with such agreements, policies, or laws and regulations. Due diligence and monitoring activities should include a review of promotional materials used by third parties to ensure compliance with the TILA, the FTC Act, and other laws, as applicable.
In addition, institutions should structure third party relationships so as not to contravene RESPA’s general prohibition against paying or receiving any fee or other thing of value in exchange for the referral of business related to a reverse mortgage transaction. Fees must be paid only for the permissible services provided by the third party, consistent with the provisions of Section 8 of RESPA. Moreover, institutions should not accept fees from any third party without providing appropriate services to warrant any such fee.