Regulatory Bulletin 5.1-106 Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks
Effective on October 18, 2010, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision, Treasury (OTS), and the National Credit Union Administration (NCUA) (collectively, the "Agencies"), in conjunction with the State Liaison Committee of the Federal Financial Institutions Examination Council (FFIEC), published final guidance in the Federal Register (Volume 75, Number 158, Pages 50801-50812) entitled "Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks" ("interagency guidance"). The interagency guidance applies to all banks and their subsidiaries, bank holding companies (other than foreign banks) and their nonbank subsidiaries, savings associations and their subsidiaries, savings and loan holding companies and their subsidiaries, credit unions, and U.S. branches and agencies of foreign banks engaged in reverse mortgage transactions.
Recognizing that the federal guidance does not cover all reverse mortgage loan originations, the Division of Banks (the "Division") has developed parallel guidance for licensed mortgage brokers and mortgage lenders in Massachusetts. The Division strongly supports the purpose of the guidance adopted by the Agencies and is committed to promote the uniform application of consumer protections for all borrowers.
This guidance is intended to promote consistent regulation in the reverse mortgage market and clarify how licensed mortgage brokers and mortgage lenders (collectively referred to as "Licensees") can offer reverse mortgage products in a way that addresses the unique consumer protection concerns raised by reverse mortgage products.
In order to maintain regulatory consistency, this guidance substantially mirrors the interagency guidance, except for the deletion of sections not applicable to non-depository institutions and the addition of information relative to Massachusetts specific laws and regulations.
2.0 Guidance on reverse mortgage product risks
The Agencies developed this guidance to assist their regulated financial institutions 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.
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. 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.
Nevertheless, reverse mortgages are complex loan products that present a wide range of complicated options to borrowers. Moreover, the need to provide adequate information about reverse mortgages and to ensure appropriate consumer protections is particularly high. This is because reverse mortgages are typically secured by the borrower's primary asset-his or her home. Consequently, a reverse mortgage may provide the only funds available to a consumer to pay for healthcare needs and other living expenses. (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 Licensees 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 Division recognizes that reverse mortgage products may present other risks to mortgage lenders, such as credit, interest rate, and liquidity risks, especially for proprietary reverse mortgage products lacking the insurance offered under the federal Home Equity Conversion Mortgage (HECM) program. (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 mortgage lenders will be unable to meet their obligations to make payments due to consumers. (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, Licensees should manage the compliance and reputation risks associated with reverse mortgages. This guidance is intended to assist Licensees in their efforts to manage these risks. This guidance focuses on ways a Licensee 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 Licensees.
This guidance may be particularly useful for Licensees 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 Division expects Licensees 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 a Licensee's compliance and risk management efforts with respect to reverse mortgages. The Division will review compliance and risk management processes in this area during compliance examinations and will request remedial actions if Licensees do not have adequate controls in place.
The reverse mortgage market currently consists of two basic types of reverse mortgage products: proprietary products offered by an individual lender and FHA-insured reverse mortgages offered under the HECM program. HECM reverse mortgages have accounted for approximately 90% of all reverse mortgages. (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.
To obtain a reverse mortgage, the borrower must occupy the home as a principal residence and generally be at least 62 years of age under the HECM program. Under Massachusetts law, borrowers must be at least 60 years of age. Reverse mortgages are typically structured as first lien mortgages, and generally require that any prior mortgage be paid off either before obtaining the reverse mortgage or with the funds from the reverse mortgage.
The funds from a reverse mortgage may be disbursed in several different ways:
Generally, the size of the loan will be larger when the borrower is older, the home is more valuable, or interest rates are lower. Interest rates on a reverse mortgage may be fixed or variable.
- A single lump (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.) sum that distributes up to the full amount of the principal limit (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.) in one payment;
- 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.
Both HECMs and proprietary reverse mortgage products are subject to laws and regulations governing mortgage lending. The following are particularly relevant to the issues addressed in this guidance:
- Federal Trade Commission Act (FTC Act). Section 5 of the FTC Act prohibits unfair or deceptive acts or practices. The FTC Act sets forth principles describing circumstances under which practices may be found to be deceptive and thereby unlawful under section 5 of the Act. Supervisory guidance has been issued to financial institutions concerning unfair or deceptive acts or practices by the federal banking regulatory bodies. Similarly, Massachusetts law regarding unfair or deceptive acts or practices apply to reverse mortgage transactions. See General Laws chapter 93A, section 2(a), and the Office of the Attorney General's implementing regulation 940 CMR 8.06.
- Truth in Lending Act (TILA). TILA and the FRB's implementing Regulation Z contain rules governing disclosures that licensees 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, including notice of their right to rescind the loan, where applicable.
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. For closed-end, variable rate loans, lenders must provide the variable rate program disclosures, as well as required notices of interest rate adjustments.
In addition, TILA requires that a loan cost disclosure form be provided to reverse mortgage borrowers. 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).
- 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, a Licensee 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:
HECM reverse mortgages also are subject to the consumer protections and other special provisions set forth in HUD regulations. 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. 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. HUD encourages, but does not require, that HECM counseling be conducted in person. 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.
Recent statutory changes to the HECM program established additional consumer protections. (Housing and Economic Recovery Act of 2008 (HERA), Public Law 110-289, § 2122(a)(9) (July 30, 2008).) 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.
- Equal Credit Opportunity Act;
- Fair Housing Act; and
- National Flood Insurance Act.
- Massachusetts law. All reverse mortgage loans made in the Commonwealth must be made in accordance with programs that have been reviewed and approved by the Commissioner. Reverse mortgage loan programs submitted to the Division for approval must meet the requirements of General Laws chapter 167E, sections 7 and 7A, which is applicable to Massachusetts mortgage lenders pursuant to General Laws chapter 183, section 67. Specific Massachusetts requirements include the utilization of counseling approved by the Executive Office of Elder Affairs, an affirmative "opt-in" requirement, and the requirement to provide borrowers a 7 day "cooling off" period following the acceptance of a loan commitment. Note that mortgage brokers that will be brokering reverse mortgage loans do not need to file a reverse mortgage program for approval, however, brokers should ensure that the lenders in the reverse mortgage transaction have an approved program. Any mortgage lender seeking approval of a reverse mortgage loan program must submit a written request for approval to the Division of Banks. Mortgage Lenders seeking approval of a reverse mortgage program should review General Laws chapter 167E, sections 7 and 7A, which provides a detailed description of the statutory requirements. Additional detailed information regarding the submission and approval process of reverse mortgage loan programs may be found at the Division's website at www.mass.gov/reversemortgage.
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. Thus, lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the Licensees 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.
The Division is concerned that:
- Consumers may enter into reverse mortgage loans without understanding the costs (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.), terms, risks, and other consequences of these products, or may be misled by marketing and advertisements promoting reverse mortgage products;
- Counseling may not be adequate to remedy any misunderstandings;
- Appropriate steps may not be taken to determine and to assure that consumers will be able to pay required taxes and insurance; and
- 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. (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 4, 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. (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. Borrowers also may not receive sufficient information about other potential alternatives to reverse mortgages that may meet their financial needs, including state property tax relief programs, other public benefits, and community service programs.
The complex structure of reverse mortgages may prevent a borrower from fully understanding the products. For example, the ability to access the loan proceeds in a variety of ways may provide flexibility for a borrower. However, some payment options may adversely affect a borrower's ability to qualify for needs-based public benefits, such as Supplemental Security Income.
In addition, reverse mortgages are not typically structured with a requirement to escrow for taxes and hazard insurance (or for the lender to pay these amounts and add them to the loan balance). If the borrower does not pay taxes and insurance, the reverse mortgage itself may become due, which could result in the borrower losing the home. Without adequate analysis of the borrower's ability to make these required payments through available assets or loan proceeds, or the establishment of a set-aside or an escrow, in compliance with applicable laws, both the borrower and the lender can face substantial risks. To ensure consumer understanding, Licensees 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.
Existence and Effectiveness of Consumer Counseling - Any Licensee offering reverse mortgage loans must ensure that the prospective borrower has completed a reverse mortgage counseling program which has been approved by the Executive Office of Elder Affairs in accordance with General Laws chapter 167E, section 7(e). A list of approved counseling agencies is available from the Executive Office of Elder Affairs and can also be accessed from the Division's website at www.mass.gov/reversemortgage. Massachusetts law provides that a reverse mortgage transaction with a borrower that has not received counseling by a third party approved by the Executive Office of Elder Affairs shall render the terms of the reverse mortgage unenforceable. (St. 2010, c.258, sections 2,3, and 4.)
Effective August 1, 2012, borrowers with a gross income of less than 50% of the area median income who possess assets, excluding primary residence, valued at less than $120,000, must attend an in person reverse mortgage counseling session. (Id.)
There is a risk to the consumer that consumer counseling may not be effective. 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. (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 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.
The consumer protection concerns discussed above raise compliance and reputation risks for Licensees offering reverse mortgages. The guidance set forth below is intended to assist Licensees in managing these risks effectively. Licensees 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 Division will assess whether Licensees have taken adequate steps to address the risks discussed in this guidance.
Licensees 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. (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.) Licensees 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 Division expects Licensees offering proprietary reverse mortgages to reasonably price such products, including with respect to origination fees, consistent with safe and sound practices, and appropriate consideration of costs, risks, and returns. Taking these steps would help to ensure that Licensees are addressing the full range of consumer protection concerns raised by reverse mortgages. Moreover, the Division expects Licensees to take appropriate steps to determine or ensure that consumers will be able to pay required taxes and insurance.
Communications with Consumers - Many of the consumer protection concerns regarding reverse mortgages relate to the adequacy of information provided to consumers. Licensees 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, Licensees 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. Licensees 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 Division will evaluate potentially misleading marketing materials and information provided to consumers and take appropriate action to address any marketing that violates Massachusetts law or regulations relative to unfair or deceptive acts or practices, including but not limited to, General Laws chapter 93A, section 2(a), and the Office of the Attorney General's implementing regulation 940 CMR 8.06(1) and/or the Division's regulation at 209 CMR 42.00 et seq. Evidence of any unfair and deceptive acts and practices will lead to a prompt regulatory action by the Division.
Licensees 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, Licensees 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 Licensee about a reverse mortgage and receives information about reverse mortgages, or when marketing materials relating to reverse mortgage are provided by the Licensee to the consumer-not just upon the submission of an application or at consummation. (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).) 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.
Accordingly, in order to assist consumers in their product selection decisions, a Licensee should use promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgage products. This information would normally include but need not be limited to:
The Division recognizes that Licensees 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, Licensees 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 from a mortgage Lender 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 processing an application for a reverse mortgage loan or charging an application fee. Before counseling, Licensees may provide information to consumers that both consumers and counselors may find useful in evaluating proprietary and HECM reverse mortgages. For example, the Licensee 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 a Licensee 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.
The Division reminds the industry that a Licensee may not begin to process a reverse mortgage loan, except for the limited purposes just described above, until the consumer has completed the counseling session and a certificate signed by the counselor and borrower(s) has been received by the Licensee. Further, while HUD permits a waiver of counseling in certain limited reverse mortgage transactions, it is the Division's position that counseling may not be waived under any circumstance. Therefore, a waiver of counseling is not permissible in any reverse mortgage loan transaction, including a HECM to HECM refinance in the Commonwealth.
To ensure the independence of counselors, Licensees 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. (HECM lenders must provide a list of 10 counselors for reverse mortgages. HUD Mortgagee Letter 2009-10.) Similarly, a Licensee'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. Licensees 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.
Licensees 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 Division notes 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, Licensees should take all reasonably necessary steps to avoid any appearance of a conflict of interest and violation of applicable laws and rules. For example, a Licensee should:
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 - Licensees 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, Licensees 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, Licensees' 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, Licensees' 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, Licensees should also review consumer complaints to identify potential compliance and reputation risks.
The Role of Mortgage Brokers and Third Party Risk Management - As previously noted, a mortgage broker that will be brokering reverse mortgage loans does not need to file a reverse mortgage program for approval. However, any mortgage broker intending to broker reverse mortgage loans in the Commonwealth must ensure that the product to be offered is one that has been approved by the Division. A list of approved reverse mortgage programs may be found on the Division's website at www.mass.gov/reversemortgage.
In addition, it is the Division's position that reverse mortgage brokers must retain evidence of compliance with the disclosure requirements outlined in General Laws chapter 167E, sections 7 and 7A. These include but are not necessarily be limited to: (1) evidence of the 7-day cooling off period disclosure ("Disclosure"); and (2) evidence of counseling by an agency approved by the Executive Office of Elder Affairs in accordance with General Laws chapter 167E, section 7(e). Licensed mortgage brokers are reminded that they may not provide an applicant with the Disclosure; however, they may transmit the Disclosure provided to the broker by a mortgage lender to applicants.
When making, or servicing reverse mortgages through a mortgage broker or other third party, mortgage lenders 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 lender'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, lender 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 the mortgage brokers to ensure compliance with applicable laws.
In addition, mortgage lenders 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, mortgage lenders should not accept fees from any third party without providing appropriate services to warrant any such fee.
- 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 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 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;
- 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.
- Adopt clear written policies and internal controls designed to ensure that the Licensee complies with restrictions designed to avoid conflicts of interest. For example, a Licensee risks violations if it, or an agent acting on behalf of the Licensee, requires the borrower to purchase any annuity, insurance (other than appropriate title, flood or hazard insurance), or similar financial product from a third party or affiliate in order to obtain the reverse mortgage from the Licensee;
- 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;
- Adopt clear compensation policies to guard against other inappropriate incentives for loan originators and third parties, to make a reverse mortgage loan.
3.0 Historical notes
This bulletin was first issued on December 15, 2010.