June 8, 2009
Comptroller Dugan Urges More Consumer Protections for Reverse Mortgages
ORLANDO — Comptroller of the Currency John C. Dugan warned today that reverse mortgages pose significant compliance risks and said regulators should get out in front of this issue, before real problems develop, so that these loans are made "in a way that is prudent for both lenders and borrowers."
"While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages – and that should set off alarm bells," Comptroller Dugan said. The experience with subprime mortgages "clearly demonstrates the link between compliance and safety and soundness."
The Comptroller said the regulatory agencies should ensure that interagency guidance being worked on is sufficiently robust to ensure that consumers are adequately protected, and he said the OCC would examine national banks to ensure compliance with the guidance as well as relevant existing regulations. But he said it may turn out that guidance alone is not enough to address the consumer protection issues surrounding this new product.
"In these circumstances, more definitive regulatory standards may need to be adopted, and the OCC is prepared to do that – even if the standards we advocate initially apply only to reverse mortgage lending by national banks," he said in a speech to a regulatory compliance conference sponsored by the American Bankers Association.
Reverse mortgages provide a source of income or line of credit to elderly homeowners by allowing them to tap the equity in their home without having to sell or move out of the home. The underwriting on these loans is nontraditional since no repayment is required until the homeowner dies, permanently moves out of the home, or fails to maintain the property or pay property taxes. If the home is sold to repay the loan, the borrower is not responsible for any loan amount above the value of the home. Any remaining equity above the amount due belongs to the borrower or the borrower's heirs.
While some lenders offer their own proprietary products, 90 percent of all reverse mortgages are insured by the Department of Housing and Urban Development's Federal Housing Administration, and known as "home equity conversion mortgages," or "HECMs."
Mr. Dugan said the ability of consumers to access their home equity through immediate and large lump sum payments can pose substantial risks. For example, lenders may simultaneously and aggressively market investment, insurance, or annuity products or, worse, attempt to condition loan approval on the purchase of such products. Likewise, with access to large lump sums upon closing, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long term care insurance products that are expensive and may not be appropriate to their needs.
"Another risk is that reverse mortgage borrowers, because they have no immediate repayment obligations, may overlook substantial fees that are attached to the loan," Mr. Dugan said. "And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, with disastrous consequences: the failure to make those payments can result in foreclosure."
The Comptroller also expressed concern about misleading marketing claims, especially if the product's incentives and fees put more of a premium on making the loan than on ensuring it is appropriate for the borrower.
"Even when consumers are not subject to misleading or deceptive marketing, they still may have a hard time understanding the complex nature and costs associated with reverse mortgages," he said. "If a consumer doesn't fully understand how much the loan will cost, how much can be borrowed, or all the circumstances under which the loan can become due, then the risk increases for a transaction that is not appropriate to the consumer's needs."
The OCC already has regulations in place to deal with deceptive marketing, the Comptroller said, and the OCC "will use this authority to require immediate correction of any potentially misleading marketing claims by a bank in connection with reverse mortgage products."
The OCC will also use existing authority to ensure that national banks do not condition the availability of a reverse mortgage on the borrower's purchase of certain nonbanking products, such as an annuity or life insurance.
Mr. Dugan said one area that deserves particular attention is whether to impose additional requirements with respect to escrows of taxes and insurance. Nonpayment of taxes or insurance can trigger foreclosure. However, the new Federal Reserve Board escrow requirements for "higher-priced" mortgages do not apply to reverse mortgages, and HUD does not require escrows to be established in connection with HECMs.
"Given the predominance of the HECM product in reverse mortgage lending, I think it would be a major step forward for HUD to issue guidelines or requirements addressing the escrow issue for HECMs, and I would like to begin a dialogue with them on the issue," he said. "Once they set the standards for escrows, we would ensure that they are followed by national banks for HECM products, and would ensure – by regulation, if necessary – that comparable standards apply in connection with proprietary reverse mortgages offered by national banks."
In closing, Comptroller Dugan said that while much attention still needs to be focused on dealing with the economic downturn, regulators can't afford to ignore consumer issues. "We need to be on constant alert to emerging risks and vigilant in our regulatory compliance responsibilities," he said.