TopMortgage Compliance Update (1)
August 17, 2010
Reverse Mortgages: Compliance & Reputation Risk

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On August 16, 2010, the federal banking agencies and Federal Financial Institutions Examination Council (FFIEC) issued the attached final guidance (Guidance) reverse mortgages and complex loan products typically offered to elderly consumers.

Institutions are expected to use the Guidance to manage the risks associated with reverse mortgages, including consumer protection concerns, such as counseling requirements, conflicts of interest, related policies, procedures, internal controls, and third party risk management. In addition to legal considerations, the Guidance provides directives regarding:

Key Policy Issues Raised by the Reverse Mortgage Guidance
Consumer Information and Understanding
Existence and Effectiveness of Consumer Counseling
Conflicts of Interest and Abusive Practices
Third-Party Risk Management
Legal Considerations
Consumer protection laws and regulations applicable to both Home Equity Conversion Mortgages (HECM) and proprietary reverse mortgage products, including those required by the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices, the Truth in Lending Act, and other special provisions set forth in HUD regulations.

Key Policy Issues

Consumer Information and Understanding
Borrowers do not consistently understand the terms, features, fees, alternatives to and risks of their loans.

  • Provide consumers with clear and balanced information about the relative benefits and risks of reverse mortgage products, at a time that will help them make informed decisions.
  • Review advertisements and other marketing materials to ensure that important information is disclosed clearly and prominently.
  • Ensure 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.
  • Develop promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgage products.
Existence and Effectiveness of Consumer Counseling
While counseling is mandatory for HECM transactions, it may not be required for proprietary products. Counseling conducted over the telephone, in particular, may not be adequate in all cases.

  • Require that consumers obtain counseling from a qualified independent counselor.
  • Adopt policies that prohibit steering a consumer to any one particular counseling agency and that prohibit contacting a counselor on the consumer's behalf.
  • Strongly encourage the consumer to obtain counseling in person, whenever possible, and to attend counseling sessions with family members.
Conflicts of Interest and Abusive Practices
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.

  • Borrowers are not required to purchase any other financial or other product from the lender or broker in order to obtain the reverse mortgage.
  • Originators do not have an inappropriate incentive to sell other products that may appear to be linked to the granting of a reverse mortgage.
  • Compensation policies guard against other inappropriate incentives for loan officers and third parties, such as mortgage brokers and correspondents, to make a loan.
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.

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Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks, FR, Vol. 75, No. 158, pp 50801-50812 (8/16/10)

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