Reverse Mortgages
Refinance

Reverse mortgages slated for regulatory overhaul

by Broderick Perkins

(9/10/2010) ERATE Exclusive - The reverse mortgage is the latest home loan product in line for greater consumer protections from federal regulators.

The Federal Reserve Board has proposed a slate of new rules to improve disclosures and to stop unfair practices that can cost older, more vulnerable consumers more than the already high cost of the special loans.

With a reverse mortgage, borrowers 62 and older can turn home equity into a stream of cash they don't have to repay until they sell and move out, die or otherwise no longer own the home. The loaned money could come in handy, say for those with fixed or falling incomes and those who need cash quickly, especially if there are no living heirs.

The loans are available via a lump-sum payment, a line-of-credit, monthly check or some combination of all three, according to the National Reverse Mortgage Lenders Association

Most reverse mortgages are federally-insured Home Equity Conversion Mortgages (HECM), but there are also private lender-insured and uninsured loans available for a variety of costs, terms and conditions.

The loans are not for everyone and typically come with a requirement that the borrower obtain counseling before signing on the dotted line, because loans can be expensive, complex, confusing and predatory when consumers are sold a package that includes a reverse mortgage and other financial products.

The federal proposal for new regulations will be open for public comment until November. Final rules, with significant changes to Regulation Z (Truth in Lending) may not be on the books until next year.

In line with other, greater consumer protections, the new rules for reverse mortgages will:

• Improve the disclosures consumers receive for reverse mortgages and impose rules for reverse mortgage advertising to ensure advertisements contain accurate and balanced information.

• Improve the disclosures that explain a consumer's right to rescind certain mortgage transactions and clarify the responsibilities of the creditor if a consumer exercises the right.

• Ensure that consumers receive new disclosures when the parties agree to modify the key terms of an existing closed-end mortgage loan.

The Fed said consumers currently receive lengthy and confusing disclosures when applying for reverse mortgages and the disclosures often don't explain the features unique to reverse mortgages.

That will change.

Consumers will receive disclosures on or with the application form, using simple language to highlight the basic features and risks of reverse mortgages. Shortly after filling out the application, consumers would receive transaction-specific disclosures that reflect the actual terms of the reverse mortgage being offered.

Recognizing disclosures often aren't enough to protect consumers, the proposed rules address concerns consumers have been forced to buy, along with the reverse mortgage, supplemental financial products that can be costly and often unnecessary and not beneficial, such as annuities or long-term care insurance.

The rules would also:

• Prohibit creditors from conditioning a reverse mortgage on the consumer's purchase of another financial or insurance product.

• Require that a consumer receive counseling about reverse mortgages before a creditor can impose nonrefundable fees for a reverse mortgage or close the loan.