[Federal Register Volume 75, Number 158 (Tuesday, August 17, 2010)]
[Notices]
[Pages 50801-50812]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20286]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2010-0015]

FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket ID OTS-2010-24]

NATIONAL CREDIT UNION ADMINISTRATION


Reverse Mortgage Products: Guidance for Managing Compliance and 
Reputation Risks

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (FRB); Federal Deposit 
Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury 
(OTS); and National Credit Union Administration (NCUA).

ACTION: Final Guidance.

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SUMMARY: The OCC, FRB, FDIC, OTS, and NCUA (the Agencies) are issuing 
this final guidance entitled, ``Reverse Mortgage Products: Guidance for 
Managing Compliance and Reputation Risks'' (guidance). The Agencies 
developed this guidance, in conjunction with the State Liaison 
Committee of the Federal Financial Institutions Examination Council 
(FFIEC), to address compliance and reputation risks associated with 
reverse mortgages, which are complex loan products typically offered to 
elderly consumers. Institutions are 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: This final guidance is effective on October 18, 2010. Comments 
on the Paperwork Reduction Act burden estimates only may be submitted 
on or before September 16, 2010.

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.
    FRB: 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; or Richard M. Schwartz, Counsel, (202) 898-7424, Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, 
DNC 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: Robert C. Leonard, Program Officer, 703-518-6396, Office of 
Examination & Insurance, National Credit Union Administration, 1775 
Duke Street, Alexandria, VA 22314.

SUPPLEMENTARY INFORMATION:

I. Background Information

    Institutions under the Agencies' 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

[[Page 50802]]

the Truth in Lending Act (TILA), the Real Estate Settlement Procedures 
Act (RESPA), the Federal Trade Commission Act (FTC 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 
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. 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 and other 
entities subject to the Agencies' supervision (hereafter 
``institutions'') manage the compliance and reputation risks associated 
with reverse mortgages. To assist institutions in their efforts to 
manage these risks, the Agencies published for comment Reverse Mortgage 
Products: Guidance for Managing Compliance and Reputation Risks 
(proposed guidance), 74 FR 66652 (December 16, 2009). The proposed 
guidance discussed the general features of, certain legal provisions 
applicable to, and consumer protection concerns raised by reverse 
mortgage products. In addition, it focused 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 addressed related policies, procedures, and internal 
controls and third party risk management.
    The Agencies received 18 comments on the proposed guidance. 
Comments were received from financial institutions (institutions); 
industry-related trade associations (industry groups); counselors, 
consumer and community organizations (consumer organizations); 
government officials; and members of the public.

II. Overview of Public Comments

    The commenters were generally supportive of the proposed guidance. 
In general, institutions and industry groups sought additional clarity 
and flexibility in implementing the guidance, while consumer 
organizations and government commenters sought to adopt stronger 
standards, particularly with respect to policies designed to avoid 
conflicts of interest.
    A majority of institutions and industry groups sought more clarity 
on the extent to which HUD rules (such as those relating to fees) 
should be applied to proprietary reverse mortgages. They also sought 
additional clarity or flexibility regarding particular recommendations 
in the proposed guidance, including with respect to the information 
that should be provided to reverse mortgage borrowers in promotional 
materials, the conduct of counseling by telephone, and the restrictions 
on cross-selling. Institution and industry group commenters generally 
sought clarification that implementation of the guidance would be 
consistent with forthcoming changes to the HECM counseling protocols 
and the FRB's Regulation Z, the regulation that implements TILA.
    Consumer organizations and a government commenter generally 
supported the provision of balanced information about reverse mortgage 
alternatives, and avoidance of deceptive marketing by loan originators 
or brokers. Among the recommendations made by these commenters were to 
establish a suitability standard, engage in consumer testing of any new 
disclosures, strengthen the requirement for in-person counseling, and 
adopt stronger policies to avoid conflicts of interests. Several 
commenters made suggestions for additional topics that were not 
included in the proposed guidance; these related to data collection on 
the volume of reverse mortgages, anti-fraud provisions, test design for 
the HECM counseling roster, and other HECM program rules.

III. Revisions To Address Public Comments on the Guidance

    The Agencies made a number of changes to the proposal to respond to 
commenters' concerns and to provide additional clarity. Significant 
comments on the specific provisions of the proposed guidance, the 
Agencies' responses, and changes to the guidance are discussed below.

Communications With Consumers

    Commenters generally asked for a number of clarifications with 
respect to the proposed guidance on communications between institutions 
and potential reverse mortgage borrowers. Consumer organizations and a 
government commenter generally supported the provision of balanced 
information about reverse mortgages and alternatives, and avoidance of 
deceptive marketing by loan originators and brokers. One government 
commenter suggested consumer testing of new disclosures, if any, to 
improve communications.
    Some consumer organization and government commenters urged a strong 
role for lenders in determining the suitability of the loan for the 
borrower. In particular, these commenters suggested that it should be 
the duty of any lender or broker to articulate and match the consumer's 
needs, objectives, and circumstances to the terms of the loan and to 
reveal any interest that the lender or broker has in arranging the 
loan.
    This reverse mortgage guidance does not, and is not intended to, 
impose suitability obligations on lenders. The Agencies believe, 
however, that the provision of clear and balanced information and 
qualified independent counseling in accordance with the guidance will 
help to ensure that reverse mortgage borrowers do not enter into 
transactions that are not appropriate for their financial circumstances 
and needs.
    With regard to the commenter's recommendations for consumer 
testing, as noted in the preamble to the proposed guidance, the 
Agencies are considering whether to issue illustrations of consumer 
information for reverse mortgages. The Agencies will consider the 
commenter's consumer testing recommendations in connection with these 
illustrations. Before adopting any illustrations, the Agencies will 
issue them for notice and comment.
    Institution and industry group commenters generally sought 
clarification that implementation of the guidance would be consistent 
with changes to the HECM counseling protocols and the FRB's Regulation 
Z. One industry commenter asked that the Agencies clarify whether 
Regulation Z or FTC Act standards for proper disclosures would be 
applied to advertisements and promotional materials for reverse 
mortgages. These commenters also sought clarification of specific 
points regarding the list of the information items that should be

[[Page 50803]]

provided to reverse mortgage borrowers in promotional materials.
    As a general matter, the Agencies believe that the guidance is 
consistent with the HECM protocols and Regulation Z, as now in effect. 
The current HECM counseling protocols require that counselors provide 
to borrowers the same information that is listed in the proposed 
guidance. The Agencies are not aware of any proposed changes to the 
HECM requirement that counselors provide this information.
    While the FRB is reviewing Regulation Z disclosures for reverse 
mortgages, this project is not final. In light of this review, the 
Agencies are not addressing technical requirements that may be 
addressed in Regulation Z, and do not anticipate that the general 
recommendations in the guidance will conflict with any specific 
disclosure requirements for reverse mortgages adopted by the FRB.
    In response to a commenter's inquiry concerning whether Regulation 
Z standards would be applied to all marketing materials, the Agencies 
did not intend to incorporate--in stating that information should be 
provided clearly and conspicuously--Regulation Z's standard for ``clear 
and conspicuous'' disclosures. Rather, the Agencies sought to convey 
simply that important information should be presented in a clear and 
prominent manner. The final guidance has been clarified accordingly. 
Advertisements and other marketing materials, of course, will continue 
to be subject to any relevant requirements under Regulation Z, the FTC 
Act, and other applicable laws and regulations.
    In regard to the more specific issues raised by commenters, the 
Agencies have clarified the guidance by acknowledging that institutions 
may not be able to provide all of the information recommended in this 
guidance when advertising reverse mortgages through certain forms of 
media, such as radio, television, or billboards. In these 
circumstances, however, institutions should provide clear and balanced 
information about the risks of these products.\2\ The Agencies also 
clarified the meaning of ``clear and balanced information'' in the 
final guidance; in particular, information is balanced when it fairly 
presents risks and costs as well as potential benefits. The Agencies 
clarified in the final guidance when more comprehensive information 
should be provided, and that promotional materials should address how 
disbursements from the reverse mortgage may affect the borrower's 
ability to obtain public benefits. Information provided in promotional 
materials may cross-reference other materials, and may refer borrowers 
to tax or financial advisors.
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    \2\ These clarifications are consistent with other interagency 
guidance relating to nontraditional mortgages. Interagency Guidance 
on Nontraditional Mortgage Product Risks, 71 FR 58609, 58617 n.19 
(Oct. 4, 2006).
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Qualified Independent Counseling

    Commenters supported the recommendation in the guidance that 
consumers seeking any reverse mortgage should consult a qualified 
independent counselor. Commenters disagreed on the extent to which the 
guidance should encourage in-person counseling (as opposed to 
telephonic counseling). They also disagreed on certain procedures 
related to counseling--for example, how to inform borrowers about 
counselors and whether lenders should contact counselors directly.
    A majority of institutions and industry groups noted the 
disadvantages of requiring in-person counseling, including the shortage 
of qualified counselors and the logistical and other challenges that 
may make it difficult to bring the borrower(s) and their advisors to an 
in-person counseling session. One counseling agency also supported 
telephonic counseling, and noted that telephonic counseling may be more 
feasible, in particular, when a multilingual counselor is needed to 
provide counseling in the borrower's own language. Consumer group and 
government commenters, however, strongly supported in-person 
counseling, and advocated that it be used in all but rare cases. These 
commenters stated that in-person counseling sessions are longer, foster 
greater understanding, and give counselors a better opportunity to 
assess the borrower's needs and understanding of the transaction.
    In order for institutions to best promote consumer comprehension 
and manage compliance risks, the Agencies intend that the guidance 
reflect and be consistent with HUD's stated preference for in-person 
counseling whenever possible, and have modified the guidance to clarify 
that intention.
    Industry groups and financial institutions also requested greater 
clarification with respect to how institutions should refer borrowers 
to counselors and ensure that counselors have appropriate knowledge of 
proprietary products. Commenters also asked whether the Agencies 
expected institutions to ensure that counseling covered all of the 
topics noted in the guidance. Several commenters also referred to the 
fact that HUD is expected to release new protocols for HECM counseling 
and that these protocols would likely cover many of the topics 
discussed in the guidance.
    The Agencies have modified the guidance to address some of these 
specific concerns. In particular the guidance now indicates that 
lenders may provide borrowers with a list of reverse mortgage 
counselors, consistent with HUD guidelines for HECM counseling, and may 
provide borrowers with a substantial array of materials--including 
information about proprietary products--before the borrower meets with 
a reverse mortgage counselor. The guidance also has been modified to 
clarify that institutions are not expected to supervise or monitor the 
activities of qualified independent counselors. The Agencies expect 
that counselors' activities would conform to new HUD protocols when 
they are released.

Avoidance of Potential Conflicts

    Generally, consumer organizations and one regulatory agency 
supported the guidance's view that institutions should take all 
reasonably necessary steps to avoid any appearance of a conflict of 
interest, though some consumer organizations urged the adoption of 
stricter standards than proposed. Institution and industry groups 
sought additional clarifications to this portion of the proposed 
guidance.
    The proposed guidance recommended that policies prohibit the 
reverse mortgage from being conditioned on the purchase of ``any other 
financial or other product'' from the lender (``anti-tying 
provision''). Consumer organizations urged stricter standards, 
including the adoption of further restrictions prohibiting yield spread 
premiums (YSPs) and limiting sales of other products by lenders or 
their affiliates. Industry commenters noted that this provision, as 
stated, was broader than applicable federal anti-tying rules, and would 
prohibit, for example, restricting the availability of reverse 
mortgages to consumers having a deposit relationship with the 
institution.
    In response to these comments, the Agencies are clarifying the 
anti-tying and conflict avoidance provisions so that they more clearly 
address applicable federal rules, including the anti-tying rules 
contained in the Bank Holding Company Act Amendments of 1970 and the 
Home Owners' Loan Act; the rules relating to insurance sales adopted by 
the OCC, FRB, FDIC, and OTS; and the provisions applicable to HECMs. 
The Agencies provide, as an example, that an institution may risk 
violations, depending on the specific law that applies, if it requires 
consumers to obtain annuity products--

[[Page 50804]]

or any other product that is not a traditional banking product--in 
order to obtain a reverse mortgage or varies the price of the reverse 
mortgage based on a condition that the borrower purchase such other 
product from the institution or affiliate. The Agencies believe that 
this example will help prevent violations of rules, as applicable.
    The guidance also clarifies the Agencies' expectation that 
institutions' policies and procedures will be designed to ensure that 
brokers with whom they do business as agents also will not condition or 
vary the price of the loan on the consumer's obtaining some additional 
product or service (other than a traditional banking product). The 
Agencies also have added a related recommendation that institutions' 
policies and procedures will be designed to ensure that neither lenders 
nor brokers require the borrower to obtain any insurance, annuity, or 
similar product (other than appropriate title, flood, or hazard 
insurance as permitted or required by applicable law). This 
recommendation reflects insurance sales restrictions currently 
applicable to HECMs.
    The proposed guidance also contained recommendations to guard 
against inappropriate incentives for the origination of reverse 
mortgages or the sale of other products. Several commenters sought 
clarification on the extent to which they could offer or refer 
consumers to other products, particularly where those products are 
provided by third parties or are typically required in connection with 
mortgage settlements.
    The Agencies believe that the clarifications described above help 
to address these commenters' concerns. The final guidance stresses that 
institutions must comply with relevant anti-tying rules, and, further, 
should consider other appropriate measures necessary to guard against 
improper incentives or potential conflicts of interest. The Agencies 
also removed an example included in the proposed guidance to address 
commenters' concerns that it exceeded the scope of the anti-tying rules 
by implying that the Agencies wished to ban the offering of any other 
products or any referral to providers of other products in connection 
with a reverse mortgage. In addition, the Agencies emphasized in the 
final guidance that policies relating to cross-selling--offering or 
referring consumers to other products--should be designed to ensure 
that the activities are clearly consistent with FTC Act standards.

Other Issues

    Fees. An industry commenter requested clarification on what 
limitations the Agencies intended by recommending in the proposed 
guidance that institutions adopt relevant HECM requirements for 
proprietary mortgages, including requirements with respect to 
``affordable origination fees.'' The Agencies note that HECM 
origination fees are expressly limited by statute. In response to this 
comment, the Agencies have deleted the specific reference to affordable 
origination fees. The Agencies do not intend to set fee limits in this 
guidance. However, 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 with appropriate consideration of costs, 
risks, and returns. Consistent with safe and sound banking practices in 
setting interest rates, fees, and other charges, an institution should 
consider, among other factors, the costs incurred in originating the 
loan and the risks associated with the loan. While HECM origination 
fees are expressly limited by statute, the costs and risks of 
proprietary loans may be different from those of HECMs. For example, 
the lack of FHA insurance on proprietary loans will mean that the 
institution (and not HUD) bears the risk that the borrower lives longer 
than expected, that the interest rates are higher than expected, or 
that the collateral value does not increase as rapidly as projected. 
The Agencies also note that HECMs may carry substantial other costs--
principally insurance premiums--that proprietary reverse mortgages may 
lack. In addition to considering safe and sound banking practices in 
setting fees, institutions should comply with any applicable law or 
regulation, and follow guidance governing fees.
    Taxes and Insurance. Financial institutions and industry group 
commenters requested clarification regarding the Agencies' expressed 
concern about ensuring borrowers' ability to pay taxes and insurance. 
These commenters were concerned that this requirement would require 
them to set traditional credit underwriting standards for reverse 
mortgages and deny loans to consumers if these standards were not met. 
The Agencies are not imposing a credit underwriting standard in this 
guidance. There are a number of other ways that institutions can take 
appropriate steps to determine or ensure that a consumer has the 
ability to pay taxes and insurance. These include escrows, in 
compliance with applicable laws,\3\ and set-aside arrangements.
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    \3\ See 24 CFR 206.205(e)(1) and 24 CFR 3500.17.
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    Third Party Risk Management. One consumer organization commenter 
urged that loan originators should ensure that brokers do not advertise 
reverse mortgages as ``government benefits.'' In this regard, the 
Agencies note that lender due diligence and monitoring activities 
should include a review of promotional materials used by third parties 
to ensure compliance with TILA, the FTC Act, and other laws, as 
applicable. The guidance has been modified to clarify this position.
    Other. One consumer organization recommended that the Agencies 
collect data on reverse mortgages. Later in 2010, the Agencies will 
begin collecting data on reverse mortgages on the Call Report and 
Thrift Financial Report.\4\ Several commenters requested that HUD 
change certain requirements relating to the HECM counseling roster or 
the origination or termination of HECMs. These matters relate to HUD's 
operation of the HECM program and it would not be appropriate for the 
Agencies to address these issues in the guidance.
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    \4\ See 74 FR 68314 (Dec. 23, 2009) and 74 FR 68326 (Dec. 23, 
2009).
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IV. 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. To implement this 
information collection contained in this guidance, the OCC, FDIC, OTS, 
and NCUA will seek OMB approval. The FRB has approved this information 
collection under its delegated authority from OMB.
    On December 16, 2009,\5\ the agencies sought comment on the burden 
estimates for this information collection. No comments were received 
regarding the burden estimates.
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    \5\ 74 FR 66652.
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    Comments continue to be 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;

[[Page 50805]]

    (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.
    Comments on these questions should be directed to:
    OCC: Communications Division, Office of the Comptroller of the 
Currency, Mailstop 2-3, Attention 1557-NEW, 250 E Street, SW., 
Washington, DC 20219. In addition comments may be sent by fax to (202) 
874-5274, or by electronic mail to regs.comments@occ.treas.gov. You may 
personally inspect and photocopy comments at the OCC, 250 E Street, 
SW., Washington, DC. For security reasons, the OCC requires that 
visitors make an appointment to inspect comments. You may do so by 
calling (202) 874-4700. Upon arrival, visitors will be required to 
present valid government-issued photo identification and to submit to 
security screening in order to inspect and photocopy comments.
    FRB: You may submit comments, identified by Docket No. OP-1362, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the FRB's Web site at 
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
unless modified for technical reasons. Accordingly, your comments will 
not be edited to remove any identifying or contact information. Public 
comments may also be viewed in electronic or paper form in Room MP-500 
of the FRB's Martin Building (20th and C Streets, NW.) between 9 a.m. 
and 5 p.m. on weekdays.
    FDIC: Interested parties are invited to submit written comments. 
All comments should refer to the name of the collection, ``Reverse 
Mortgage Products Guidance.'' Comments may be submitted by any of the 
following methods:
     http://www.FDIC.gov/regulations/laws/federal/propose.html.
     E-mail: comments@fdic.gov. Include the name and number of 
the collection in the subject line of the message.
     Mail: Leneta G. Gregorie (202) 898.3719, Counsel, Federal 
Deposit Insurance Corporation, PA1730-3000, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery: Comments may be hand-delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street), on business days between 7 a.m. and 5 p.m.
    OTS: Send comments, referring to the collection by title of the 
proposal or by OMB approval number, to OMB and OTS at these addresses: 
Office of Information and Regulatory Affairs, Attention: Desk Officer 
for OTS, U.S. Office of Management and Budget, 725--17th Street, NW., 
Room 10235, Washington, DC 20503, or by fax to (202) 395-6974; and 
Information Collection Comments, Chief Counsel's Office, Office of 
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, by fax to 
(202) 906-6518, or by e-mail to infocollection.comments@ots.treas.gov. 
OTS will post comments and the related index on the OTS Internet Site 
at www.ots.treas.gov. In addition, interested persons may inspect 
comments at the Public Reading Room, 1700 G Street, NW., by 
appointment. To make an appointment, call (202) 906-5922, send an e-
mail to public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to 
(202) 906-7755.
    NCUA: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the 
instructions for submitting comments.
     E-mail: Address to regcomments@ncua.gov. Include ``[Your 
name] Comments on Reverse Mortgage Products: Guidance for Managing 
Compliance and Reputation Risks,'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary F. Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public inspection: All public comments are available on the 
agency's Web site at http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx as submitted, except 
as may not be possible for technical reasons. Public comments will not 
be edited to remove any identifying or contact information. Paper 
copies of comments may be inspected in NCUA's law library, at 1775 Duke 
Street, Alexandria, Virginia 22314, by appointment weekdays between 9 
a.m. and 3 p.m. To make an appointment, call (703) 518-6546 or send an 
e-mail to OGC Mail @ncua.gov.
    You should send a copy of your comments to the OMB Desk Officer for 
the agencies, by mail to U.S. Office of Management and Budget, 725 17th 
Street, NW., 10235, Washington, DC 20503, or by fax to (202) 
395-6974.
    Title of Information Collection: Reverse Mortgage Products.
    OMB Control Numbers: New collection; to be assigned by OMB.
    Abstract: The Agencies previously determined that certain 
provisions of the guidance contain information collections. However, a 
number of the guidance provisions are currently standard business 
practice for proprietary and HECM reverse mortgages and, therefore, 
under the ``usual and customary'' standard, PRA clearance is not 
warranted. 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 
guidance provisions 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.\6\ This is likely due to the recent decline in

[[Page 50806]]

housing values, resulting in decreased equity in homes.
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    \6\ See the FRB'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 provisions in the guidance 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 are encouraged 
under the guidance to follow or adopt relevant HECM requirements for 
mandatory counseling, disclosures, 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 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.
    FRB: Bank holding companies, state member banks, branches and 
agencies of foreign banks (other than federal branches, federal 
agencies, and insured state branches of foreign banks), commercial 
lending companies owned or controlled by foreign banks, and 
organizations operating under section 25 or 25A of the Federal Reserve 
Act.
    FDIC: Insured state nonmember banks.
    OTS: Savings associations and savings and loan 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.
    FRB:
    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 final guidance follows:

V. Guidance

    Reverse Mortgage Products:

Guidance for Managing Compliance and Reputation Risks

Introduction

    The Office of the Comptroller of the Currency (OCC), Office of 
Thrift Supervision (OTS), Board of Governors of the Federal Reserve 
System (FRB), Federal Deposit Insurance Corporation (FDIC), National 
Credit Union Administration (NCUA) (the Agencies) are issuing this 
guidance to assist their regulated 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.
---------------------------------------------------------------------------

    \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, 
U.S. branches and agencies of foreign banks engaged in reverse 
mortgage transactions, and any other entity supervised by those 
adopting the guidance. The guidance refers to all of those covered 
as ``institutions.''
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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.
---------------------------------------------------------------------------

    \2\ The Federal Housing Administration (FHA) has a program that 
enables 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).
---------------------------------------------------------------------------

    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

[[Page 50807]]

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 to lenders, 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 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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.

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. HECM reverse mortgages have accounted for 
approximately 90% of all reverse mortgages.\7\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.\8\
---------------------------------------------------------------------------

    \8\ For a further explanation of the non-recourse features of a 
HECM, see HUD Mortgagee Letter 2008-38.
---------------------------------------------------------------------------

    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.\9\
---------------------------------------------------------------------------

    \9\ HECMs must be first lien mortgages. 12 U.S.C. 1715z-
20(b)(3). Only certain subordinate liens are permissible in 
connection with HECM loans. See HUD Mortgagee Letter 2009-49.
---------------------------------------------------------------------------

    The funds from a reverse mortgage may be disbursed in several 
different ways:
     A single lump sum \10\ that distributes up to the full 
amount of the principal limit \11\ in one payment;
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    \10\ 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.
    \11\ 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.
---------------------------------------------------------------------------

     A credit line that permits the borrower to decide the 
timing and amount of the loan advances;
     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
     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

[[Page 50808]]

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.\12\ The OCC, 
the FRB, 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.\13\ 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 is material.\14\ 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.\15\
---------------------------------------------------------------------------

    \12\ 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 FRB and FDIC Guidance on Unfair or 
Deceptive Acts or Practices by State-Chartered Banks, March 11, 
2004; and OTS CEO Mem.  347, ``Unfair or Deceptive Acts or 
Practices: Examination Procedures,'' May 7, 2010. 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.
    \13\ 12 U.S.C. 1766 and 1786.
    \14\ These principles are derived from the Policy Statement on 
Deception, issued by the Federal Trade Commission on October 14, 
1983.
    \15\ 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 FRB'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,\16\ including notice of their right to rescind the 
loan, where applicable.\17\
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    \16\ See 12 CFR 226.33(b), 226.5b(d), 226.18, and 226.19
    \17\ 12 CFR 226.15 and 226.23. Requirements related to 
rescission rights and notices are not applicable, however, for home 
purchase transactions.
---------------------------------------------------------------------------

    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.\18\ For closed-end, variable rate loans, 
lenders must provide the variable rate program disclosures,\19\ as well 
as required notices of interest rate adjustments.\20\
---------------------------------------------------------------------------

    \18\ See 12 CFR 226.33(b), 226.5b(d), 226.18, and 226.19.
    \19\ 12 CFR 226.19(b)(1).
    \20\ 12 CFR 226.20(c).
---------------------------------------------------------------------------

    In addition, TILA requires that a loan cost disclosure form be 
provided to reverse mortgage borrowers.\21\ The total annual loan cost 
shown on the form includes 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).
---------------------------------------------------------------------------

    \21\ 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.
---------------------------------------------------------------------------

     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:
     Equal Credit Opportunity Act;
     Fair Housing Act; and
     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.\22\
---------------------------------------------------------------------------

    \22\ Federal financial institution regulators also have the 
authority to supervise entities subject to their respective 
jurisdictions.
---------------------------------------------------------------------------

    HECM reverse mortgages also are subject to the consumer protections 
and other special provisions set forth in HUD regulations.\23\ 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.\24\ 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.\25\ HUD encourages, but does not require, that HECM 
counseling be conducted in person.\26\ 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.
---------------------------------------------------------------------------

    \23\  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).
    \24\ Counselors are required to pass an examination to be 
included on a HUD roster before they can provide counseling on 
HECMs. See 24 CFR 206.300 et seq.
    \25\ See 12 U.S.C. 1715z-20.
    \26\ Applicable state laws, however, may have other requirements 
pertaining to counseling for reverse mortgages, including 
requirements that counseling be conducted in person.
---------------------------------------------------------------------------

    Recent statutory changes to the HECM program established additional 
consumer protections.\27\ 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.
---------------------------------------------------------------------------

    \27\ Housing and Economic Recovery Act of 2008 (HERA), Public 
Law 110-289, Sec.  2122(a)(9) (July 30, 2008).

---------------------------------------------------------------------------

[[Page 50809]]

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.\28\ 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.
---------------------------------------------------------------------------

    \28\ See note 3, supra.
---------------------------------------------------------------------------

    The Agencies are concerned that:
    (1) Consumers may enter into reverse mortgage loans without 
understanding the costs,\29\ terms, risks, and other consequences of 
these products, or may be misled by marketing and advertisements 
promoting reverse mortgage products;
---------------------------------------------------------------------------

    \29\ 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.
---------------------------------------------------------------------------

    (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.
    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.\30\
---------------------------------------------------------------------------

    \30\ 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.
---------------------------------------------------------------------------

    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.\31\
---------------------------------------------------------------------------

    \31\ Regulation Z prohibits misrepresentations about government 
endorsements in advertisements for closed-end credit secured by a 
dwelling. 12 CFR 226.24.
---------------------------------------------------------------------------

    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 (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.\32\ 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.
---------------------------------------------------------------------------

    \32\ 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).
---------------------------------------------------------------------------

    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,\33\ 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.
---------------------------------------------------------------------------

    \33\ See 24 CFR 206.205(e)(1) and 24 CFR 3500.17.
---------------------------------------------------------------------------

    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.\34\
---------------------------------------------------------------------------

    \34\ 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).
---------------------------------------------------------------------------

    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

[[Page 50810]]

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 since proprietary 
reverse mortgages are not subject to the consumer protection 
requirements applicable to HECM reverse mortgages.\35\ 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.
---------------------------------------------------------------------------

    \35\ 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.
---------------------------------------------------------------------------

    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 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.\36\ 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.
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    \36\ 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:
     Borrower and property eligibility;
     When marketing proprietary products, the fact that these 
reverse mortgages are not government insured and the resulting risks to 
consumers;
     Determination of principal limits, or maximum loan limits, 
based on home value, borrower age, expected interest rates, and program 
limitations;
     Lump sum and other disbursement options and their possible 
implications for the borrower's ability to obtain public benefits;
     The circumstances under which the loan must be repaid;
     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 and to 
maintain the property as required;
     Fees and charges associated with reverse mortgages;
     The requirement to make direct payments for real estate 
taxes and insurance if there is no provision for an escrow or a set-
aside to pay these obligations;
     Alternatives to reverse mortgage products that are offered 
by the institution and may address the homeowner's needs; and
     The importance of reverse mortgage counseling and 
information about how to find a qualified independent counselor so that 
the borrower is

[[Page 50811]]

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.
    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.
    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.\37\ 
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.
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    \37\ HECM lenders must provide a list of 10 counselors for 
reverse mortgages. HUD Mortgagee Letter 2009-10.
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    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:
     The availability of other housing, social service, health, 
and financial options;
     Financing options other than reverse mortgages, including 
other mortgage products, sale-leaseback financing, and deferred payment 
loans;
     The differences between HECM loans and proprietary reverse 
mortgages; \38\
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    \38\ Because counselors may not be knowledgeable on all 
proprietary products, an institution may provide relevant 
information about its proprietary products to a consumer before the 
counseling session in order to facilitate the counseling session.
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     The financial implications and tax consequences of 
entering into a reverse mortgage;
     The impact of a reverse mortgage on eligibility for 
federal and state needs-based assistance programs, including 
Supplemental Security Income; and
     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 regarding consumer counseling in 
connection with HECM loans.
    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:
     Adopt clear written policies and internal controls 
designed to ensure that the institution does not violate any applicable 
anti-tying restrictions.\39\ For example, an institution risks 
violations if it: (1) Requires the borrower to purchase any annuity, 
insurance or any product other than a traditional banking product in 
order to obtain the reverse mortgage from the institution or an 
affiliate, or (2) varies the price of the reverse mortgage based on a 
condition that the borrower purchase such other product. Further, the 
Agencies expect that institutions will not do either of these things 
indirectly through brokers acting as agents;
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    \39\ The anti-tying provisions of Section 106(b) of the Bank 
Holding Company Act of 1970 for banks and their subsidiaries, as 
applicable, 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, from the 
institution or an affiliate as a condition to obtaining or varying 
the price of credit. Exceptions from these anti-tying prohibitions 
are permitted if the required products are loans, discounts, 
deposits, or trust services (i.e., traditional banking products). 
See 12 U.S.C. 1464(q), 1467a(n), and 1972. 12 CFR 225.7. 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. Tying arrangements also remain subject to the general 
antitrust laws.
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     Adopt clear written policies and internal controls 
designed to ensure that the institution complies with restrictions 
designed to avoid conflicts of interest.\40\ For example, an 
institution risks violations if it requires the borrower to purchase 
any annuity, insurance (other than appropriate title, flood or hazard 
insurance), or similar financial product from the institution or third 
party in order to obtain the reverse mortgage from the institution or 
broker;
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    \40\ See 12 U.S.C. 1715z-20(n)-(o) for anti-tying provisions 
related to HECMs.
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     Adopt clear policies designed to ensure that loan 
originators and brokers acting on behalf of an institution do not have 
an inappropriate incentive to sell other products that may appear to be 
linked to the granting of a reverse mortgage or to engage in 
inappropriate cross-marketing of other products. Such policies should 
ensure that any such cross-selling is clearly consistent with the FTC 
Act standards; and
     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

[[Page 50812]]

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. 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.

    Dated: July 26, 2010.
John C. Dugan,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, August 3, 2010.
Jennifer J. Johnson,
Secretary of the Board.

    By order of the Federal Deposit Insurance Corporation.

    Dated: July 21, 2010.
Valerie J. Best,
Assistant Executive Secretary.
    Dated: August 11, 2010.

    By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
    Dated: July 27, 2010.

    By the National Credit Union Administration.
Debbie Matz,
Chairman.
[FR Doc. 2010-20286 Filed 8-16-10; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P; 753501-P