On the heels of Congressional hearings and government reports on the expected growth in reverse mortgage products, regulators are eager to take steps to promote risk management and consumer protections in the marketing and sale of the products. Housing counseling agencies are well positioned to help satisfy the consumer protection goal, but should watch out for increased pressure placed on lenders to promote “qualified independent counselors.”
On December 16, 2009, the Federal Financial Institutions Examination Council (“FFIEC”), on behalf of its members, published in the Federal Register a request for comment on the proposed “Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks” (the “Guidance”). [1] Comments are due on or before February 16, 2010.
The proposed Guidance addresses general features of reverse mortgages; legal issues; consumer protection, information and qualified independent counseling; and conflicts of interest. The proposed Guidance also addresses related policies, procedures and internal controls, and third-party risk management for lenders.
The Guidance would apply to proprietary reverse mortgage products and those offered under the Home Equity Conversion Mortgage (“HECM”) program of the U.S. Department of Housing and Urban Development (“HUD”). Under the guidance, those offering proprietary reverse mortgages would be encouraged to follow or adopt relevant HECM requirements for mandatory counseling, disclosures, affordable origination fees, restrictions on cross-selling of ancillary products, and reliable appraisals.
The Guidance will potentially impact the scrutiny and amount of review that housing counseling agencies receive by lenders, interaction with lenders, if any, and, counseling session content. However, many of the consumer protection evaluative criteria that would be indirectly imposed on housing counseling agencies are already addressed in existing federal and state law and regulations (e.g., HUD HECM counseling requirements). In addition, many of the criteria for counseling agencies contained in the proposed Guidance mirror voluntary industry standards for reverse mortgage housing counseling established by industry trade associations.
Once finalized, the Guidance will be issued as supervisory guidance to the institutions that FFIEC members supervise, [2] while the State Liaison Committee of the FFIEC will encourage state regulators to adopt the Guidance. While the Guidance would not have the force of law, the request for comment states “institutions will be 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.”
The following key excerpts relevant to reverse mortgage housing counselors come from the request for comment and the proposed Guidance:
- “To further promote consumer understanding and manage compliance risks, reverse mortgage lenders offering proprietary products should require counseling from qualified independent counselors before a consumer submits an application for reverse mortgage loan or pays an application fee.”
- “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.”
- “Similarly, an institution's policies could 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 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.”
The Guidance also suggests that “qualified independent counselors” should be able 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;
- 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.
FFIEC notes that the provision of such information would be consistent with HUD guidance for HECM lenders regarding consumer counseling. In addition, the proposed Guidance, with regard to steps to avoid conflicts of interest by lenders, states that “conflicts are less likely to be a concern if the borrower has received information and access to independent counseling [as set forth in the Guidance].”
Conclusions
Whether you provide HUD-approved housing counseling for HECM reverse mortgages only, or if you also provide counseling services with respect to proprietary reverse mortgage products, it is important to ensure that your agency’s educational and housing counseling services are properly understood and evaluated against all relevant federal guidance. The FFIEC proposed Guidance to lenders highlights both emerging legal issues and the important role that housing counseling plays to help protect borrowers considering a reverse mortgage product.
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For more information, please contact Jonathan Pompan at 202.344.4383 or jlpompan@Venable.com.
For more information about this and related industry topics, see www.venable.com/ccds/publications.
This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to a specific fact situation.
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[1] 74 Fed. Reg. 66652-66660 (Dec. 16, 2009) (available at http://edocket.access.gpo.gov/2009/pdf/E9-29882.pdf).
[2] The six members of the FFIEC are the federal financial institution regulatory agencies (the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corporation; the Office of Thrift Supervision; and the National Credit Union Administration), along with the State Liaison Committee of the FFIEC.