[Federal Register Volume 74, Number 240 (Wednesday, December 16, 2009)]
[Notices]
[Pages 66652-66660]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-29882]
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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
[Docket No. FFIEC-2009-0001]
Reverse Mortgage Products: Guidance for Managing Compliance and
Reputation Risks
AGENCY: Federal Financial Institutions Examination Council (FFIEC).
ACTION: Notice; request for comment.
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SUMMARY: The Federal Financial Institutions Examination Council
(FFIEC), on behalf of its members, requests comment on this proposed
Reverse Mortgage Products: Guidance for Managing Compliance and
Reputation Risks (guidance). Upon completion of the guidance, and after
consideration of comments received from the public, the Federal
financial institution regulatory agencies will issue it as supervisory
guidance to the institutions that they supervise and the State Liaison
Committee of the FFIEC will encourage state regulators to adopt the
guidance. Accordingly, institutions will be expected to use the
guidance in their efforts to ensure that their risk management and
consumer protection practices adequately address the compliance and
reputation risks raised by reverse mortgage lending.
DATES: Comments must be received on or before February 16, 2010.
ADDRESSES: Because paper mail in the Washington, DC area and received
by the FFIEC is subject to delay due to heightened security
precautions, commenters are encouraged to submit comments by the
Federal eRulemaking Portal, if possible. Please use the title ``Reverse
Mortgage Comments'' to facilitate the organization and distribution of
the comments. You may submit comments by any of the following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to http://www.regulations.gov, under the ``More Search Options'' tab click next
to the ``Advanced Docket Search'' option where indicated, select
``FFIEC'' from the agency drop-down menu, then click ``Submit.'' In the
``Docket ID'' column, select ``Docket Number FFIEC-2009-0001'' to
submit or view public comments and to view supporting and related
materials for this notice of proposed rulemaking. The ``How to Use This
Site'' link on the Regulations.gov home page provides information on
using Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
Mail: Paul Sanford, Executive Secretary, Federal Financial
Institutions Examination Council, L. William Seidman Center, Mailstop:
D 8073a, 3501 Fairfax Drive, Arlington, Virginia 22226-3550.
Hand Delivery/Courier: Paul Sanford, Executive Secretary, Federal
Financial Institutions Examination Council, L. William Seidman Center,
Mailstop: D 8073a, 3501 Fairfax Drive, Arlington, Virginia 22226-3550.
Instructions: You must include ``FFIEC'' as the agency name and
``Docket Number FFIEC-2009-0001'' in your comment. In general, the
FFIEC will enter all comments received into the docket and publish them
on the Regulations.gov Web site without change, including any business
or personal information that you provide such as name and address
information,
[[Page 66653]]
e-mail addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not enclose any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this notice of proposed rulemaking electronically by following these
instructions: Go to http://www.regulations.gov, under the ``More Search
Options'' tab click next to the ``Advanced Document Search'' option
where indicated, select ``FFIEC'' from the agency drop-down menu, then,
click ``Submit.'' In the ``Docket ID'' column, select ``Docket FFIEC-
2009-0001'' to view public comments for this rulemaking action.
Docket: You may also view or request available background documents
and project summaries using the methods described above.
FOR FURTHER INFORMATION CONTACT:
OCC: Karen Tucker, National Bank Examiner and Senior Compliance
Specialist, or Jesse Butler, Bank Examiner and Compliance Specialist,
Compliance Policy, (202) 874-4428; Stephen Van Meter, Assistant
Director, or Nancy Worth, Counsel, Community and Consumer Law Division,
(202) 874-5750, Office of the Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
Board: Kathleen Conley, Senior Supervisory Consumer Financial
Services Analyst, (202) 452-2389; Brent Lattin, Senior Attorney, (202)
452-3667, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551. For users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
FDIC: Michael R. Evans, Fair Lending Specialist, Compliance Policy
Section, Division of Supervision and Consumer Protection, (202) 898-
6611; Richard Schwartz, Counsel, Legal Division, (202) 898-7424,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
OTS: David Adkins, Fair Lending Specialist, (202) 906-6716, or
Richard Bennett, Senior Compliance Counsel, (202) 906-7409, Office of
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
NCUA: Matthew J. Biliouris, Program Officer, (703) 518-6394, Office
of Examination & Insurance, National Credit Union Administration, 1775
Duke Street, Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Background Information
The FFIEC is proposing to recommend to the Federal financial
institution regulatory agencies guidance on managing compliance and
reputation risks presented by reverse mortgage products. The six
members of the FFIEC are the Federal financial institution regulatory
agencies (the Office of the Comptroller of the Currency (OCC); the
Board of Governors of the Federal Reserve System (Board); the Federal
Deposit Insurance Corporation (FDIC); the Office of Thrift Supervision
(OTS); the National Credit Union Administration (NCUA)), and the State
Liaison Committee (SLC) of the FFIEC.
As part of its mission, the FFIEC makes recommendations regarding
supervisory matters and the adequacy of supervisory tools to the
Federal financial institution regulatory agencies. The FFIEC also
establishes standards for examinations of financial institutions that
shall be applied by the agencies. These agencies expect that all
financial institutions that they supervise--that is, banks and their
subsidiaries, bank holding companies and their nonbank subsidiaries,
savings associations and their subsidiaries, savings and loan holding
companies and their subsidiaries, and credit unions
(``institutions'')--will effectively assess and manage risks associated
with their lending activities, including those associated with reverse
mortgage products. Upon completion of the guidance, and after
consideration of comments received from the public, the Federal
financial institution regulatory agencies will issue it as supervisory
guidance to the institutions that they supervise. Accordingly, such
institutions will be expected to use the guidance in their efforts to
ensure that their risk management and consumer protection practices
adequately address the compliance and reputation risks raised by
reverse mortgage lending.
The SLC, which is composed of representatives of five State
agencies that supervise financial institutions, was established to
encourage the application of uniform examination principles and
standards by State and Federal supervisory agencies. Upon finalization
of the FFIEC guidance, the SLC will encourage the adoption of the
guidance by state regulators. Entities regulated by the state agencies
that adopt the guidance would be expected to use it in their efforts to
ensure that their risk management and consumer protection practices
adequately address the compliance and reputation risks raised by
reverse mortgage lending.
Reverse mortgages are home-secured loans typically offered to
elderly consumers. Institutions under the FFIEC members' supervision
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.\1\ Both HECMs and proprietary products are subject to various
laws governing mortgage lending including the Truth in Lending Act, the
Real Estate Settlement Procedures Act, the Federal Trade Commission
Act, and the fair lending laws. HECMs are also subject to an extensive
regulatory regime established by HUD, including provisions for FHA
insurance of HECM loans that protect both lenders and reverse mortgage
borrowers.
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\1\ A HECM is a reverse mortgage product insured by the Federal
Housing Administration (FHA), which is part of the U.S. Department
of Housing and Urban Development (HUD), and subject to a range of
federal consumer protection and other requirements. See 12 U.S.C.
1715z-20; 24 CFR part 206.
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Reverse mortgages enable eligible borrowers to remain in their home
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. The use of reverse mortgages could expand
significantly in coming years as the U.S. population ages and more
homeowners become eligible for reverse mortgage products. If prudently
underwritten and used appropriately, these products have the potential
to become an increasingly important credit product for addressing
certain credit needs of an aging population.
However, reverse mortgages can be highly complex loan products, and
it is particularly important to provide adequate information and other
consumer protections. Typically, elderly borrowers are securing a
reverse mortgage with their primary asset--their home. Thus, borrowers
may depend on the reverse mortgage proceeds for the cash flow needed to
pay for health care and other living expenses.
For these reasons, it is critical that institutions manage the
compliance and reputation risks associated with reverse mortgages. The
proposed guidance set forth in this document is intended to assist
institutions in their efforts to manage these risks. While the FFIEC
members have not encountered widespread use of reverse mortgage lending
by the institutions that they supervise, the FFIEC members are
proposing this reverse mortgage
[[Page 66654]]
guidance in light of the anticipated growth in this lending product.
II. Principal Elements of the Guidance
The proposed guidance discusses the general features of, certain
legal provisions applicable to, and consumer protection concerns raised
by reverse mortgage products. In addition, it 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. The proposed guidance also addresses related policies,
procedures, and internal controls and third party risk management.
For example, the proposed guidance stresses the importance of
avoiding potential conflicts of interest and abusive practices. In
addition, the proposed guidance emphasizes the importance of
independent credit counseling for consumers considering reverse
mortgages. Pursuant to the proposed guidance, such counseling should
cover the potential consequences of entering into these transactions,
such as the potential effect on eligibility for needs-based public
benefits.
The proposed guidance also recommends that consumers be provided
clear and balanced information about the relative benefits and risks of
reverse mortgage products, at a time that will help consumers'
decision-making processes. Consistent with this advice, the proposed
guidance suggests that institutions inform borrowers about reverse
mortgage alternatives that they already offer.
III. Request for Comment
Comment is requested on all aspects of the proposed guidance.
IV. Supplemental Guidance
The FFEIC believes that illustrations of potential costs and
benefits of reverse mortgages, relative to alternatives to reverse
mortgages, may be useful to institutions as they seek to implement the
Interagency Guidance recommendations relating to communicating fees and
charges information to consumers. Thus, the FFIEC, on behalf of its
members, is developing sample illustrations to assist institutions in
providing consumers with information about the relative benefits and
risks of reverse mortgages, as outlined in the proposed reverse
mortgage guidance.
V. Paperwork Reduction Act
In accordance with section 3512 of the Paperwork Reduction Act of
1995, 44 U.S.C. 3501-3521 (PRA), the Agencies may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The proposed guidance
includes reporting, recordkeeping, and disclosure requirements, some of
which implicate PRA as more fully explained below.
Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the Federal banking agencies' functions,
including whether the information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments should
be addressed to:
OCC: Please follow the instructions found in the ADDRESSES caption
above for submitting comments.
FRB: Please follow the instructions found in the ADDRESSES caption
above for submitting comments.
FDIC: Please follow the instructions found in the ADDRESSES caption
above for submitting comments.
OTS: Please follow the instructions found in the ADDRESSES caption
above for submitting comments.
NCUA: Please follow the instructions found in the ADDRESSES caption
above for submitting comments.
All Agencies: A copy of the comments may also be submitted to the
OMB desk officer for the Agencies: Office of Information and Regulatory
Affairs, Office of Management and Budget, New Executive Office
Building, Washington, DC 20503.
Title of Information Collection: Reverse Mortgage Products.
OMB Control Numbers: New collection; to be assigned by OMB.
Abstract: The proposed guidance includes reporting, recordkeeping,
and disclosure requirements applicable to both proprietary and HECM
reverse mortgages. However, a number of the requirements are currently
standard business practice for proprietary and HECM reverse mortgages
and, therefore, under the ``usual and customary'' standard do not
require PRA clearance. There are also requirements currently covered
under approved TILA-related information collections for proprietary and
HECM reverse mortgages, and an approved HUD information collection for
HECM reverse mortgages.
Proprietary reverse mortgage products, however, are not subject to
the consumer protection provisions of the HECM program, so these
requirements would normally be submitted for approval under PRA.
However, recent research has shown that, despite the significant growth
in reverse mortgages since inception of the HECM program in 1989,
currently the market for proprietary reverse mortgages has dissipated
to the point that, industry-wide, there are fewer than 10 lenders
offering such products.\2\ This is likely due to the recent decline in
housing values, resulting in decreased equity in homes.
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\2\ See the Board's Divisions of Research & Statistics and
Monetary Affairs Finance and Economics Discussion Series paper
``Reversing the Trend: The Recent Expansion of the Reverse Mortgage
Market,'' http://www.federalreserve.gov/pubs/feds/2009/200942/200942pap.pdf.
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Given the minimal number of lenders currently offering proprietary
reverse mortgages, the agencies are not now seeking OMB approval for
the consumer protection provisions in the guidance applicable to
proprietary reverse mortgages. The agencies will, however, seek PRA
approval once this sector of the market recovers.
Lastly, there are requirements that apply to both proprietary and
HECM reverse mortgages that do not meet the ``usual and customary''
standard, are not covered by already approved information collections
and, therefore, require PRA clearance.
Proprietary Reverse Mortgages
Institutions offering proprietary reverse mortgages will be
encouraged under the guidance to follow or adopt relevant HECM
requirements for mandatory counseling, disclosures, affordable
origination fees, restrictions on cross-selling of ancillary products,
and reliable appraisals.
Proprietary and HECM Reverse Mortgages
Institutions offering either HECMs or proprietary reverse mortgages
are encouraged to develop clear and balanced product descriptions and
make them available to consumers shopping for a mortgage. They should
set forth a description of how disbursements can
[[Page 66655]]
be received and include timely information to supplement the TILA and
other disclosures. Promotional materials and product descriptions
should include information about the costs, terms, features, and risks
of reverse mortgage products.
Institutions should adopt policies and procedures that prohibit
directing a consumer to a particular counseling agency or contacting a
counselor on the consumer's behalf. They should adopt clear written
policies and establish internal controls specifying that neither the
lender nor any broker will require the borrower to purchase any other
product from the lender in order to obtain the mortgage. Policies
should be clear so that originators do not have an inappropriate
incentive to sell other products that appear linked to the granting of
a mortgage. Legal and compliance reviews should include oversight of
compensation programs so that lending personnel are not improperly
encouraged to direct consumers to particular products.
Institutions making, purchasing, or servicing reverse mortgages
through a third party should conduct due diligence and establish
criteria for third party relationships and compensation. They should
set requirements for agreements and establish systems to monitor
compliance with the agreement and applicable laws and regulations. They
should also take corrective action if a third party fails to comply.
Third party relationships should be structured in a way that does not
conflict with RESPA.
Affected Public:
OCC: National banks, their subsidiaries, and federal branches or
agencies of foreign banks.
Board: Bank holding companies and state member banks.
FDIC: Insured state nonmember banks.
OTS: Federal savings associations and their affiliated holding
companies.
NCUA: Federally-insured credit unions.
Type of Review: Regular.
Estimated Burden:
OCC:
Number of respondents: 77.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 3,696 hours.
Board:
Number of respondents: 18.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 864 hours.
FDIC:
Number of respondents: 48.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 2,304 hours.
OTS:
Number of respondents: 20.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 960.
NCUA:
Number of respondents: 85.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 4,080 hours.
The text of the proposed interagency Reverse Mortgage Products:
Guidance for Managing Compliance and Reputation Risks follows:
Reverse Mortgage Products: Guidance for Managing Compliance and
Reputation Risks
Introduction
The members of the Federal Financial Institutions Examination
Council (FFIEC or Agencies)--consisting of the Office of the
Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS),
Board of Governors of the Federal Reserve System (Board), Federal
Deposit Insurance Corporation (FDIC), National Credit Union
Administration (NCUA), and State Liaison Committee (SLC)--are issuing
guidance to assist financial institutions \1\ in managing risks
presented by reverse mortgage products. Reverse mortgages are home-
secured loans, typically offered to elderly consumers, which present
consumer protection issues that raise compliance and reputation risks
for the institutions offering them.
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\1\ This guidance applies to all banks and their subsidiaries,
bank holding companies (other than foreign banks) and their nonbank
subsidiaries, savings associations and their subsidiaries, savings
and loan holding companies and their subsidiaries, credit unions,
and U.S. branches and agencies of foreign banks engaged in reverse
mortgage transactions.
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Expected increases in the elderly population of the United States
and other factors suggest that the use of reverse mortgages could
expand significantly in coming years as more homeowners become eligible
for reverse mortgage products. These loan products enable eligible
borrowers to access the equity in their homes in order to meet
emergency needs, to supplement their incomes, or to purchase a new
home.\2\ Reverse mortgages can meet these objectives without subjecting
borrowers to ongoing repayment obligations during the life of the loan,
while enabling borrowers to remain in their homes. As a result, the
Agencies believe that reverse mortgages, offered appropriately, could
become an increasingly important mechanism for institutions to address
credit needs of an aging population.
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\2\ The Federal Housing Administration (FHA) has announced a
program that would enable eligible borrowers to use the proceeds of
a federally-insured reverse mortgage for the purchase of a new
principal residence. See U.S. Department of Housing and Urban
Development (HUD) Mortgagee Letter 2008-23 (October 20, 2008) and
HUD Mortgagee Letter 2009-11 (March 27, 2009).
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Nevertheless, reverse mortgages are complex loan products that
present a wide range of complicated options to borrowers. Moreover, the
need to provide adequate information about reverse mortgages and to
ensure appropriate consumer protections is particularly high. This is
because reverse mortgages are typically secured by the borrower's
primary asset--his or her home. Consequently, a reverse mortgage may
provide the only funds available to a consumer to pay for health care
needs and other living expenses.\3\
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\3\ In 2007, the typical reverse mortgage borrower was 73 years
old, had a home valued at $261,500, and had financial assets of less
than $33,000. AARP, Reverse Mortgage: Niche Product or Mainstream
Solution, Dec. 2007 (available at http://assets.aarp.org/rgcenter/consume/2007_22_revmortgage.pdf).
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For these and other reasons, 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. While this guidance addresses consumer protection concerns
that raise compliance and reputation risks, the Agencies recognize that
reverse mortgage products may present other risks, too, such as credit,
interest rate, and liquidity risks,\4\ especially for proprietary
reverse mortgage products lacking the insurance offered under the
federal Home Equity Conversion Mortgage (HECM) program.\5\
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\4\ Institutions also should manage these other risks
appropriately. In this regard, institutions are advised to conform
their reverse mortgage lending activities to any applicable guidance
from their respective supervisory agencies, and to consult with
those agencies with respect to any such safety and soundness issues.
\5\ A HECM is a reverse mortgage product insured by the FHA,
part of the HUD, and is subject to a range of consumer protection
and other requirements. See 12 U.S.C. 1715z-20; 24 CFR 206. A lender
making a HECM loan may assign it to HUD when the outstanding balance
reaches 98% of the maximum claim amount. See 24 CFR 206.107(a)(1).
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[[Page 66656]]
As explained in further detail below, the complex nature of reverse
mortgages presents the risk that consumers will not understand the
costs, terms, and consequences of the products. Consumers also may be
harmed by any conflicts of interest or abusive or fraudulent practices
related to the sale of ancillary products or services. In contrast to
HECM reverse mortgages, proprietary reverse mortgages also present the
risk that lenders will be unable to meet their obligations to make
payments due to consumers.\6\
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\6\ Under the FHA insurance program for HECM loans, HUD will
make payments to a consumer if a HECM lender fails to make a payment
due to the consumer. See 24 CFR 206.117 and 206.121.
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As with other lending products, institutions should manage the
compliance and reputation risks associated with reverse mortgages. This
guidance is intended to assist institutions in their efforts to manage
these risks. This guidance focuses on ways an institution may provide
adequate information about reverse mortgage products and qualified
independent counseling to consumers and on ways to avoid potential
conflicts of interest. The guidance also addresses related policies,
procedures, internal controls, and third party risk management for
institutions.
This guidance may be particularly useful for institutions that
offer proprietary reverse mortgage products that are not subject to the
regulatory requirements applicable to reverse mortgages offered under
the HECM program. Depending on how they are structured, proprietary
reverse mortgage products may contain a higher degree of risk than
HECMs. Therefore, to address these risks effectively, proprietary
products may warrant careful scrutiny under the principles,
considerations, and risks discussed in this guidance.
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 efforts with
respect to reverse mortgages. The Agencies will review risk management
processes in this area and will request remedial actions if
institutions do not adequately manage these risks.
Background
The reverse mortgage market currently consists of two basic types
of reverse mortgage products: Proprietary products offered by an
individual institution and FHA-insured reverse mortgages offered under
the HECM program. To date, HECM reverse mortgages have accounted for
approximately 90% of all reverse mortgages.\7\
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\7\ AARP, Reverse Mortgage: Niche Product or Mainstream
Solution, Dec. 2007, at 1 (available at http://assets.aarp.org/rgcenter/consume/2007_22_revmortgage.pdf).
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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,\8\
and require that any prior mortgage be paid off either before obtaining
the reverse mortgage or with the funds from the reverse mortgage.
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\8\ HECMs, by statute, must be first lien mortgages. 12 U.S.C.
1715z-20(b)(3).
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The funds from a reverse mortgage may be disbursed in several
different ways:
[rtarr8] A single lump sum \9\ that distributes up to the full
amount of the principal limit \10\ in one payment;
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\9\ While HECM payment plans do not include a separate ``lump
sum'' option, HECMs provide an effective substitute for such an
option through a line of credit that can be fully drawn at
consummation.
\10\ The principal limit is the maximum payment that can be made
to the borrower. The principal limit depends on the age of the
youngest borrower, the expected interest rate, and the ``maximum
claim amount.'' The maximum claim amount is either (1) the lower of
the actual value or FHA loan limit (for HECMs) or (2) the loan-to-
value ratio established by the lender (for proprietary mortgages).
The maximum claim amount includes the principal limit (cash
available to the borrower), accrued interest, and any set-asides for
repairs or servicing fees required by the loan terms.
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[rtarr8] A credit line that permits the borrower to decide the
timing and amount of the loan advances;
[rtarr8] A monthly cash advance, either for a fixed number of years
selected by the borrower or for as long as the borrower lives in the
home; or
[rtarr8] Any combination of the above selected by the borrower.
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.
Legal Considerations
Both HECMs and proprietary reverse mortgage products are subject to
laws and regulations governing mortgage lending. The following are
particularly relevant to the issues addressed in this guidance:
Federal Trade Commission Act (FTC Act). Section 5 of the
FTC Act prohibits unfair or deceptive acts or practices.\11\ The OCC,
the Board, the FDIC, and the OTS enforce this provision of the FTC Act
and any applicable regulations under authority granted in the FTC Act
and section 8 of the Federal Deposit Insurance Act. The NCUA enforces
this provision of the FTC Act and any applicable regulations under
authority granted in the FTC Act and sections 120 and 206 of the
Federal Credit Union Act.\12\
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\11\ Supervisory guidance to financial institutions has been
issued concerning unfair or deceptive acts or practices. See OCC
Advisory Letter 2002-3--Guidance on Unfair or Deceptive Acts or
Practices, March 22, 2002; Joint Board and FDIC Guidance on Unfair
or Deceptive Acts or Practices by State-Chartered Banks, March 11,
2004. See also Unfair or Deceptive Acts or Practices, 74 FR 5498
(Jan. 29, 2009) (final rule issued by the Board, OTS, and NCUA
discussing unfairness and deception standards). Federally-insured
credit unions are prohibited from using any advertising or
promotional material that is inaccurate, misleading, or deceptive in
any way concerning its products, services, or financial condition.
12 CFR 740.2. The OTS also has a regulation that prohibits savings
associations from using advertisements or other representations that
are inaccurate or misrepresent the services or contracts offered. 12
CFR 563.27. This regulation supplements its authority under the FTC
Act.
\12\ 12 U.S.C. 1766 and 1786.
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Practices may be found to be deceptive and thereby unlawful under
section 5 of the FTC Act if: (1) There is a representation, omission,
act, or practice that is likely to mislead the consumer; (2) the act or
practice would be deceptive from the perspective of a reasonable
consumer; and (3) the representation, omission, act, or practice
[[Page 66657]]
is material.\13\ A practice may be found to be unfair and thereby
unlawful under section 5 of the FTC Act if (1) the practice causes or
is likely to cause substantial consumer injury; (2) the injury is not
outweighed by benefits to the consumer or to competition; and (3) the
injury caused by the practice is one that consumers could not
reasonably have avoided.\14\
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\13\ These principles are derived from the Policy Statement on
Deception, issued by the Federal Trade Commission on October 14,
1983.
\14\ 15 U.S.C. 45(n). See also the Policy Statement on
Unfairness, issued by the Federal Trade Commission on December 17,
1980.
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Truth in Lending Act (TILA). TILA and the Board's
implementing Regulation Z contain rules governing disclosures that
institutions must provide for mortgages in advertisements, with an
application, before loan consummation, and when interest rates change.
Reverse mortgage borrowers must receive all disclosures that are
required under TILA,\15\ including notice of their right to rescind the
loan.\16\
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\15\ See 12 CFR 226.33(b), 226.5b(d), and 226.18.
\16\ 12 CFR 226.15 and 226.23. Rescission rights and notices are
not available, however, for home purchase transactions.
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Reverse mortgages may be structured as open-end credit or as
closed-end credit within the meaning of Regulation Z. Disclosures
required by TILA relating to open-end or closed-end mortgages must be
provided, as appropriate.\17\ For closed-end, variable rate loans,
lenders must provide the variable rate program disclosures,\18\ as well
as required notices of interest rate adjustments.\19\
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\17\ See 12 CFR 226.33(b), 226.5b(d), and 226.18.
\18\ 12 CFR 226.19(b)(1). Closed-end, variable rate reverse
mortgages, particularly under the HECM program, have been less
common than the open-end line of credit structure.
\19\ 12 CFR 226.20(c).
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In addition, TILA requires that a Total Annual Loan Cost (TALC)
form be provided to reverse mortgage borrowers.\20\ The total annual
loan cost rates shown on the TALC form include the upfront costs (e.g.,
origination fee, third-party closing fee, and any upfront mortgage
insurance premium), interest, and ongoing charges (e.g., monthly
service fee and any annual mortgage insurance premium).
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\20\ See 15 U.S.C. 1648; 12 CFR 226.33(b)(2) and 226.33(c)(1)
and related commentary in Supplement I to 12 CFR 226; and 12 CFR
226, Appendix K (including model TALC form).
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Real Estate Settlement Procedures Act (RESPA). RESPA and
HUD's implementing Regulation X 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. As a general matter, an institution may neither pay
nor accept any fee or other thing of value in exchange for the referral
of business related to a reverse mortgage transaction.
Institutions that offer reverse mortgage products must ensure that
they do so in a manner that complies with the foregoing and all other
applicable laws and regulations, including the following Federal laws:
[rtarr8] Equal Credit Opportunity Act;
[rtarr8] Fair Housing Act; and
[rtarr8] National Flood Insurance Act.
State laws, including laws regarding unfair or deceptive acts or
practices, also may apply to reverse mortgage transactions. Currently,
more than twenty states have laws or regulations governing various
aspects of reverse mortgages. In addition, all state financial
institution regulators have the authority to supervise the mortgage-
related activities of entities subject to their respective
jurisdictions, including activities related to reverse mortgages.\21\
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\21\ Federal financial institution regulators also have the
authority to supervise the activities of the entities subject to
their respective jurisdictions to ensure their compliance with all
applicable laws and regulations, and that the institutions are
operating in a safe and sound manner consistent with supervisory
standards.
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HECM reverse mortgages also are subject to the consumer protections
and other special provisions set forth in HUD regulations.\22\ HECM
consumer protections include information provided to consumers through
qualified independent counselors. Before obtaining a HECM reverse
mortgage, the borrower must receive counseling from a HUD-approved
housing counseling agency.\23\ The counseling agency is required to
discuss with the borrower: (1) Alternatives to HECMs, (2) the financial
implications of entering into a HECM (including tax consequences), (3)
the effect on eligibility for assistance under Federal and State
programs, and (4) the impact on the estate and heirs of the
homeowner.\24\ HUD encourages, but does not require, that HECM
counseling be conducted in person.\25\ HECMs also carry particular
disclosure requirements under HUD rules, including a requirement that
the lender provide copies of the mortgage, note, and loan agreement to
the borrower at the time that the borrower's application is completed.
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\22\ HUD also provides model forms for HECMs. See Home Equity
Conversion Mortgage Handbook 4235.1 (available at http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4235.1/index.cfm)
\23\ HUD has proposed regulatory changes and is developing
counseling protocols that would require counselors to take a HECM
examination before providing counseling on reverse mortgages. Home
Equity Conversion Mortgage (HECM) Counseling Standardization and
Roster, 72 FR 869 (Jan. 8, 2007).
\24\ See 12 U.S.C. 1715z-20.
\25\ Applicable state laws, however, may have other requirements
pertaining to counseling for reverse mortgages, including
requirements that counseling be conducted in person.
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Recent statutory changes to the HECM program established additional
consumer protections.\26\ For example, Congress adopted consumer
protections to guard against potential conflicts of interest,
including: (1) Special requirements for HECM lenders that are
associated with any other ``financial or insurance activity,'' (2) a
prohibition on lenders' conditioning the availability of the HECM on
the purchase of other financial or insurance products (with limited
exceptions), and (3) a requirement that the HECM borrower receive
adequate counseling from an independent third party who is not
compensated by or associated with a party connected to the transaction.
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\26\ Housing and Economic Recovery Act of 2008 (HERA), Public
Law 110-289, Sec. 2122(a)(9) (July 30, 2008).
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Compliance and Reputation Risks
While reverse mortgages may provide a valuable source of funds for
some borrowers, they are complex home-secured loans offered to
borrowers who typically have limited income and few assets other than
the home securing the loan.\27\ Thus, 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.
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\27\ See note 3, supra.
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The Agencies are concerned that:
(1) Consumers may enter into reverse mortgage loans without
understanding the costs,\28\ terms, risks, and other consequences of
these products, or may be misled by marketing and advertisements
promoting reverse mortgage products;
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\28\ If a HECM borrower finances his or her closing costs, the
closing costs are included in the outstanding balance of the loan.
Costs of a HECM loan include an origination fee, third-party closing
costs, a monthly servicing fee, and mortgage insurance premiums
determined by an FHA formula.
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(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
[[Page 66658]]
transactions, including with the use of loan proceeds and the sale of
ancillary investment and insurance products.
Consumer Information and Understanding--Litigation, consumer
complaints, and testimony before Congress about reverse mortgage
products have provided both anecdotal evidence of misrepresentations to
consumers and clear indications that borrowers do not consistently
understand the terms, features, and risks of their loans.\29\
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\29\ See Testimony presented at Hearings of the U.S. Senate
Special Committee on Aging conducted on December 12, 2007, available
on the Internet at http://aging.senate.gov/hearing_detail.cfm?id=296507. See also AARP report reference in note 7,
above.
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For example, 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. For example, advertisements that are potentially
misleading include ``income for life,'' ``you'll never owe more than
the value of your home,'' ``no payments ever,'' and ``no risk.''
Consumer misunderstanding also may be the result of misrepresentations
that reverse mortgages constitute ``government benefits'' or a
``government program,'' with no explanation that the products are loans
made by private entities and that the only government program for
reverse mortgages is the federally-insured HECM program.\30\
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\30\ Regulation Z prohibits misrepresentations about government
endorsements in advertisements for closed-end credit secured by a
dwelling. 12 CFR 226.24.
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In addition, 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, 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.\31\
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.
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\31\ For example, HECMs carry upfront origination and mortgage
insurance fees that may total four percent of the loan amount (in
addition to other closing costs and ongoing insurance and servicing
fees). In HERA, Congress required the U.S. Government Accountability
Office (GAO) to study ways of reducing borrower costs and insurance
premiums. See GAO report entitled: ``Reverse Mortgages: Policy
Changes Have Had Mostly Positive Effects on Lenders and Borrowers,
but These Changes and Market Developments have Increased HUD's
Risk'' (GAO-09-836).
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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 account 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 an escrow, both the borrower and the lender can face
substantial risks. Institutions offering reverse mortgages should
clearly advise consumers about their obligation to make payments for
taxes and insurance if they do not escrow.
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. 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. For example, at least one study has suggested that a
significant proportion of HECM borrowers who received counseling did
not understand the costs and other features of their loans.\32\
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\32\ See AARP, Reverse Mortgage: Niche Product or Mainstream
Solution, Dec. 2007, at 72, 98 (available at http://assets.aarp.org/rgcenter/consume/2007_22_revmortgage.pdf).
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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.
Guidance
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. 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. The Agencies will
assess whether institutions have taken adequate steps to address the
risks discussed in this guidance.
Lenders offering proprietary products should be especially diligent
regarding effective compliance risk management
[[Page 66659]]
since proprietary reverse mortgages are not subject to the consumer
protection requirements applicable to HECM reverse mortgages.\33\ The
Agencies expect institutions offering proprietary reverse mortgage
products to follow or to adopt as appropriate relevant HECM
requirements in the general areas of mandatory counseling, disclosures,
affordable origination fees, restrictions on cross-selling of ancillary
products, and reliable appraisals. Taking this step should 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 that
consumers will be able to pay required taxes and insurance.
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\33\ HECM lenders must comply with requirements of the HECM
program. This guidance is intended to supplement, and not conflict
with, existing guidance and rules for HECM lenders. It is also
intended to provide HECM lenders guidance on managing compliance and
reputation risks.
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Communications with Consumers--Many of the consumer protection
concerns regarding reverse mortgages relate to the adequacy of
information provided to 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 conspicuously. 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.
Institutions also should be attentive to the timing, content, and
clarity of all information presented to consumers. For example,
institutions should develop clear and balanced product descriptions and
make them available when a consumer is shopping for a mortgage and not
just upon the submission of an application or at consummation.\34\ Such
information should describe how disbursements from the reverse mortgage
can be received. The provision of timely and descriptive information
would serve as an important supplement to the disclosures currently
required under TILA and other laws.
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\34\ When developing consumer information, institutions should:
(1) Focus on information that is important to consumer decision
making; (2) highlight key information so it will be noticed; (3)
employ a user-friendly and readily navigable format for presenting
the information; and (4) use plain language, with concrete and
realistic examples. A consumer may benefit from comparative tables
describing key features of reverse mortgages (including the
different draw options).
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Accordingly, 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:
[rtarr8] Borrower and property eligibility;
[rtarr8] When marketing proprietary products, the fact that these
reverse mortgages are not government insured and the resulting risks to
consumers;
[rtarr8] Determination of principal limits based on home value,
borrower age, and expected interest rates;
[rtarr8] Lump sum and other disbursement options and their possible
implications;
[rtarr8] The circumstances under which the loan must be repaid;
[rtarr8] The actions the borrower must take to prevent the loan
from becoming in default and therefore due and payable, including the
need to continue to pay taxes and insurance on the property;
[rtarr8] Fees and charges associated with reverse mortgages;
[rtarr8] The requirement to make payments for real estate taxes and
insurance if not escrowed;
[rtarr8] Alternatives to reverse mortgage products that are offered
by the institution and may address the homeowner's needs; and
[rtarr8] The importance of reverse mortgage counseling and
information about how to find a qualified independent counselor so that
the borrower is informed about possible alternatives to a reverse
mortgage, the potential consequences of entering into a reverse
mortgage, and the potential effect on eligibility for needs-based
public benefits.
Qualified Independent Counseling--To further promote consumer
understanding and manage compliance risks, reverse mortgage lenders
offering proprietary products should require counseling from qualified
independent counselors before a consumer submits an application for
reverse mortgage loan or pays an application fee. 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.
Similarly, an institution's policies could 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 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.
As a general matter, qualified independent counselors should
provide adequate time to discuss these matters in detail and to address
questions and concerns raised by homeowners, and should be able to
inform the consumer about the following and other relevant matters:
[rtarr8] The availability of other housing, social service, health,
and financial options;
[rtarr8] Financing options other than reverse mortgages, including
other mortgage products, sale-leaseback financing, and deferred payment
loans;
[rtarr8] The differences between HECM loans and proprietary reverse
mortgages;
[rtarr8] The financial implications and tax consequences of
entering into a reverse mortgage;
[rtarr8] The impact of a reverse mortgage on eligibility for
federal and state needs-based assistance programs, including
Supplemental Security Income; and
[rtarr8] The impact of the reverse mortgage on the estate and
heirs.
The Agencies note that the provision of such information would be
consistent with HUD guidance for HECM lenders regarding consumer
counseling.
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. For example, reverse mortgage lenders should:
[rtarr8] Adopt clear written policy and internal controls stating
that neither the lender nor any broker will require the borrower to
purchase any other financial or other product from the
[[Page 66660]]
lender in order to obtain the reverse mortgage; \35\
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\35\ The anti-tying provisions of Section 106(b) of the Bank
Holding Company Act of 1970 applicable to banks, and comparable
anti-tying provisions for savings associations, savings and loan
holding companies, and their affiliates, prohibit these institutions
from, among other things, requiring a customer to purchase certain
nonbanking products or services, including insurance and annuity
products, as a condition to obtaining or varying the price of
credit. See 12 U.S.C. 1972, 1464(q), and 1467a(n), respectively. In
addition, banks and savings associations that offer insurance and
annuities are specifically prohibited from engaging in practices
that would cause a consumer to believe that an extension of credit
is conditioned on the purchase of insurance or an annuity from the
creditor. See 12 U.S.C. 1831x and Consumer Protection in Sales of
Insurance Rules, 12 CFR 14.30, 208.83, 343.30, and 536.30. The
Agencies examine institutions for compliance with these legal
requirements and will take appropriate action to address any
violations.
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[rtarr8] Adopt clear policies so that originators do not have an
inappropriate incentive to sell other products that may appear to be
linked to the granting of a mortgage. For example, the institution's
policy could state that neither the lender nor any broker will offer to
the borrower or refer the borrower to a provider of an annuity or other
product or service prior to the closing of the reverse mortgage or, if
applicable, the expiration of the borrower's right to rescind the loan;
and
[rtarr8] Adopt clear compensation policies to guard against other
inappropriate incentives for loan officers and third parties, such as
mortgage brokers and correspondents, to make a loan.
In addition, conflicts are less likely to be a concern if the
borrower has received information and access to independent counseling
as described above.
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.
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. 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.
Dated: December 11, 2009.
Federal Financial Institutions Examination Council.
Paul Sanford,
Executive Secretary.
[FR Doc. E9-29882 Filed 12-15-09; 8:45 am]
BILLING CODE 6210-01-P