Bank, thrifts and credit unions received a new framework for providing clear and balanced information to consumers about the risks and benefits of reverse mortgages under final guidance issued by the Federal Financial Institutions Examination Council (FFIEC). The guidance is of importance to CPAs who may consider reverse mortgages as part of a prudent personal financial planning strategy for their aging clients and CPAs employed with lenders.
Reverse mortgages enable eligible borrowers to remain in their homes while accessing home equity to meet emergency needs, supplement their incomes, or, in some cases, purchase a new home—without subjecting borrowers to ongoing repayment obligations during the life of the loan. To obtain a reverse mortgage, the borrower must occupy the home as a principal residence and generally be at least 62 years old. The guidance notes that the use of reverse mortgages could expand significantly in coming years as the U.S. population ages and more homeowners become eligible for reverse mortgages.
The guidance focuses on ways a financial institution may provide adequate information about reverse mortgages and qualified independent counseling to consumers and on ways to avoid potential conflicts of interest. It also addresses related policies, procedures, internal controls, and third-party risk management for institutions.
The guidance notes that proprietary reverse mortgages (in contrast to reverse mortgages insured by the federal Home Equity Conversion Mortgage (HECM) program) present the risk that lenders will be unable to meet their obligations to make payments owed to consumers. FHA-insured reverse mortgages offered under the HECM program account for approximately 90% of all reverse mortgages.
The guidance notes the numerous federal and state laws that apply to reverse mortgages, including:
- Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices.
- Truth in Lending Act (TILA) and the Federal Reserve’s implementing Regulation Z, which contain rules governing disclosures that institutions must provide for mortgages in advertisements, with an application, before loan consummation, and when interest rates change.
- Real Estate Settlement Procedures Act (RESPA) and HUD’s implementing Regulation X, which contain rules that, among other things, require disclosure of early estimated and final settlement costs and prohibit referral fees and other charges that are not for services actually performed.
- Equal Credit Opportunity Act.
- Fair Housing Act.
- National Flood Insurance Act.
- State laws prohibiting unfair or deceptive practices.
- Rules of state financial institution regulators that have the authority to supervise the mortgage-related activities of entities within their respective jurisdictions, including activities related to reverse mortgages.
The guidance is also aimed at addressing concerns that:
(1) Consumers may enter into reverse mortgage loans without understanding the costs, terms, risks and other consequences of these products, or may be misled by marketing and advertisements promoting reverse mortgage products;
(2) Counseling may not be provided to borrowers or may not be adequate to remedy any misunderstandings;
(3) Appropriate steps may not be taken to determine and to assure that consumers will be able to pay required property taxes and insurance; and
(4) Potential conflicts of interest and abusive practices may arise in connection with reverse mortgage transactions, including with the use of loan proceeds and the sale of ancillary investment and insurance products.
The adopting financial regulators expect institutions to use this guidance to ensure that risk management practices adequately address compliance and reputation risks associated with reverse mortgages. A failure to address these risks could significantly affect the overall effectiveness of an institution’s compliance and risk management efforts with respect to reverse mortgages.
The guidance, which is effective Oct. 16, has been adopted by the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration.
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