How are reverse mortgages regulated
Because of their complexity and federal government involvement, reverse mortgages are heavily regulated to help protect consumers.
Home Equity Conversion Mortgages (HECMs) aka reverse mortgages are insured by the Federal Housing Administration (FHA) by both the U.S. Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB).
The FHA approves lenders who can participate in the HECM program and establishes guidelines for HECM reverse mortgages.
In the last several years, the FHA and CFPB have added several provisions to the HECM for additional consumer protection, including:
A limit on how much borrowers can obtain from a reverse mortgage in the first year. Typically, a homeowner can only receive 60 percent of the overall principal limit in the first year of the reverse mortgage.
Stricter income assessments. In the past, most homeowners with enough equity in their homes could typically get a reverse mortgage without an assessment of their income and credit. But a rise in defaults due to unpaid property taxes and homeowners insurance led the FHA to impose a requirement that lenders must assess a potential borrower’s income, cash flow, and credit history.
More powerful spousal protections. It used to be that if one partner was under the age of 62 at the time of getting a reverse mortgage, the younger partner was left off the contract. What used to happen often is that the old partner expired, and the demand and loan repayment would close. Unless the surviving partner had enough cash to repay the loan, she or he would be compelled to move out and sell the house, per the conditions of the contract.
A change in the law in 2014 supplied increased protection to partners who aren’t named on a reverse mortgage contract. Now, partners who aren’t recorded on the reverse mortgage can stay in their houses after the passing of the borrower by being designated Eligible Non-Borrowing Partners.
In addition to federal oversight, state governments also impose regulations on reverse mortgage transactions. State laws are typically administered by the state’s housing and development or housing finance agencies.
All reverse mortgages, regardless of whether they are HECMs or proprietary loans, are subject to the same lender regulations and requirements that apply to traditional real estate lending, including:
Federal Trade Commission Act
Section 5 of the Federal Trade Commission Act forbids ‘‘ deceptive or unjust acts or practices in or affecting trade.” This applies to all business, including banks.
Where it an act or practice is unjust:
• will probably result in significant harm to consumers or Causes,
• Cannot be sensibly prevented by consumers, and
Isn’t outweighed by countervailing benefits to consumers or to competition.
A deceptive act or practice is defined as:
• A representation, omission, or practice that misleads or will probably mislead the consumer;
• A customer’s interpretation of the representation, omission, or practice and
• The misleading representation, omission, or practice is material.
Truth in Lending Act (TILA)
This law requires lenders to provide you with interest rate information and the overall cost of credit so that you can comparison shop for mortgages. For reverse mortgages, since the interest rates and finance charges will vary over the life of the loan, the lender will have to provide estimates.
TILA also provides consumers with a right of rescission, which lets you reconsider your choice and back out of the loan procedure without losing any cash. This right helps protect you against high-pressure sales tactics used by unscrupulous lenders.
Real Estate Settlement Procedures Act (RESPA)
Enacted in 1975, RESPA requires lenders to disclose fees and charges related to real estate settlements. It prohibits kickbacks between service providers, such as situations in which a bank makes a referral to another lender. The law was updated in 2008 so that lenders have to be approved by the FHA to participate in the HECM program.
National Flood Insurance Program
Lenders are required to determine if a property is located in a designated flood hazard zone before making a loan. If so, the property must be covered by flood insurance during the entire loan term. In the case of reverse mortgages, not maintaining flood insurance on a property located in a designated flood zone can lead to a default on the loan and immediate repayment owed.
Keep in mind that even if you were not required to buy flood insurance when you originally bought your home, you could be required to buy flood insurance when you obtain a reverse mortgage. The Federal Emergency Management Agency constantly updates its flood zone designations, especially when there is new development in an area, updated flood data, or completed flood-zone projects.