I. INTRODUCTION
Subtitle B of the Community Development Banking and Financial Institutions Act of 1994 (CDBFI Act) contains the Home Ownership and Equity Protection Act of 1994 (the “Act”). The Federal Reserve Board issued a rule as an addition to Regulation Z implementing the Act that requires disclosures to assist consumers in comparing the cost of reverse mortgage transactions. The rule also imposes disclosure requirements and substantive limitations on closed-end home equity mortgage loans bearing rates or fees above a certain percentage or amount. The rule was effective March 22, 1995, but compliance remained optional until October 1, 1995.
II. COVERED TRANSACTIONS
Reverse mortgage transactions are nonrecourse transactions in which a creditor makes cash advances to the customer and retains a lien on a customer’s principal residence against one or more advances. Under a reverse mortgage transaction, repayment only occurs after the consumer dies, transfers the dwelling or ceases to occupy the dwelling as a principal residence.
III. REQUIRED DISCLOSURES
At least three days before either consummation of a closed-end credit transaction or the first transaction under an open-end credit plan, written disclosures must be provided to the borrower in a form that the borrower may keep. These disclosures must include: 1) a statement that the consumer is not obligated to complete the reverse mortgage transaction merely because the consumer has received the disclosures required by this section or has signed an application for a reverse mortgage loan; and 2) a good-faith projection of the total cost of the credit.
The projected total cost is expressed as a table of “total annual loan cost rates.” This term is required in place of “annual interest rate” to avoid confusion with the term “annual percentage rate.” The table, based on the Department of Housing and Urban Development’s matrix for its home equity conversion mortgage program, must: a) show the cost for three loan terms: two year, the life expectancy of the youngest borrower obligated on the loan, and that life expectancy multiplied by 1.4. In addition, creditors may use an optional loan term of one-half of the youngest borrower’s life expectancy; b) include nine total annual loan cost rates, based on assumed annual home appreciation rates of 0%, 4%, and 8%; and c) base calculations on closing costs of 7%, unless specified differently in the contract.
Lenders must include, with the notice, a list of key factors used in calculating these rates, plus an explanation of how to interpret them. See Appendix K, “Total Annual Loan Cost Rate Computations for Reverse Mortgage Transactions,” which provides reverse mortgage model and sample forms that creditors may follow in providing this information to borrowers and Appendix L, “Assumed Loan Periods for Computations of Total Annual Loan Cost Rates.”
Appendix K can be found at https://www.fdic.gov/regulations/laws/rules/6500-3580.html and Appendix L can be found at http://www.consumerfinance.gov/eregulations/1026-L/2015-09000.
IV. NEBRASKA REVERSE MORTGAGE STATUTES
Older homeowners who have built up considerable equity in their home may describe themselves as “house rich, but cash poor.” A reverse mortgage may be an appealing product for such customers. Working like a conventional mortgage in reverse, a reverse mortgage pays an owner-occupied residential property owner in either regular installments or a lump sum payment through a line of credit that the property owner may draw down when required. Whereas a conventional loan’s balance becomes smaller with each installment payment, a reverse mortgage loan balance may grow larger over time. With each payment received by the property owner, the loan principal will increase; interest and other charges accrue on the total amount of funds that are advanced. Generally, reverse mortgage agreements are drafted so that repayment is not required until the property owner sells the property, moves, conveys title or dies.
There are different types of reverse mortgages. A “single purpose” reverse mortgage is generally offered for one specific purpose and provided by state or local government agencies. The U.S. Department of Housing and Urban Development (HUD) developed a “federally insured” reverse mortgage product called the “Home Equity Conversion Mortgage” (HECM) which is designed and insured by the FHA. Payment options are: (1) tenure payment option (equal monthly payments); (2) term payment option (equal monthly payments for a fixed term of months); and (3) line of credit payment option or combination of the same. The Home Keeper and Home Keeper for Home Purchase are programs designed by Fannie Mae. The former is designed to provide additional funds for properties with values that are higher than FHA limits and also applies to condominium unit owners whereas the latter is used to assist in the acquisition of a new home. There are other “proprietary” plans developed by private companies that select lenders to offer the plans.
In addition to Truth-in-Lending’s Regulation Z (See, § 226.33 and Appendices K and L) and the Real Estate Settlement Procedures Act (See, §§ 3500.2 and 3500.6) disclosure issues, bankers should be aware that Nebraska has its own set of statutes that address reverse mortgages. These statutes are reproduced below for your convenience.
45-101.04. General interest rate; maximum; when not applicable. [Excerpt]
The limitation on the rate of interest provided in section 45-101.03 shall not apply to: . . . (12) Loans secured by a reverse mortgage pursuant to section 45-702.01;
45-1068. Reverse-mortgage loan; rules governing; how made or acquired; charges authorized; forfeiture by lender.
(1) For purposes of this section, reverse-mortgage loan means a loan made by a licensee which (a) is secured by residential real es tate, (b) is nonrecourse to the borrower except in the event of fraud by the borrower or waste to the residential real estate given as security for the loan, (c) provides cash advances to the borrower based upon the equity in the borrower's owner-occupied principal residence, (d) requires no payment of principal or interest until the entire loan becomes due and payable, and (e) otherwise complies with the terms of this section.
(2) Reverse-mortgage loans shall be governed by the following rules without regard to the requirements set out elsewhere for other types of mortgage transactions: (a) Payment in whole or in part is permitted without penalty at any time during the period of the loan; (b) an advance and interest on the advance have priority over a lien filed after the closing of a reverse-mortgage loan; (c) an interest rate may be fixed or adjustable and may also provide for interest that is contingent on appreciation in the value of the residential real estate; and (d) the advance shall not be reduced in amount or number based on an adjustment in the interest rate when a reverse-mortgage loan provides for periodic advances to a borrower.
(3) Reverse-mortgage loans may be made or acquired without regard to the following provisions for other types of mortgage transactions: (a) Limitations on the purpose and use of future advances or any other mortgage proceeds; (b) limitations on future advances to a term of years or limitations on the term of credit line advances; (c) limitations on the term during which future advances take priority over intervening advances; (d) requirements that a maximum mortgage amount be stated in the mortgage; (e) limitations on loan-to-value ratios; (f) prohibitions on balloon payments; (g) prohibitions on compounded interest and interest on interest; and (h) requirements that a percentage of the loan proceeds must be advanced prior to loan assignment.
(4) A licensee may, in connection with a reverse-mortgage loan, charge to the borrower (a) a nonrefundable loan origination fee which does not exceed two percent of the appraised value of the owner-occupied principal residence at the time the loan is made, (b) a reasonable fee paid to third parties originating loans on behalf of the licensee, and (c) such other fees as are necessary and required, including fees for inspections, insurance, appraisals, and surveys.
(5) Licensees failing to make loan advances as required in the loan documents and failing to cure the default as required in the loan documents shall forfeit an amount equal to the greater of two hundred dollars or one percent of the amount of the loan advance the licensee failed to make.