OCC's Dugan Warns of Reverse Mortgage Compliance CrisisThe Comptroller of the Currency says that reverse mortgages pose significant compliance risks, and regulators should get proactive on this issue before real problems develop.
John Dugan warned bankers 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," Dugan states. The experience with subprime mortgages "clearly demonstrates the link between compliance and safety and soundness."
Dugan spoke at the American Bankers Association's regulatory compliance conference.
Dugan says regulatory agencies should ensure that interagency guidance being worked on is sufficiently robust to ensure that consumers are adequately protected, and he adds the OCC will examine national banks to ensure compliance with the guidance as well as relevant existing regulations. But he warns it may turn out that more than guidance will be needed 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 says.
Reverse mortgages give income or a credit line to older homeowners and allow them to draw from 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."
Dugan notes 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. Also, 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 reverse mortgage borrowers, because they don't have immediate repayment obligations, may overlook substantial fees that are attached to the loan," Dugan explains. 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.
Dugan also says he is concerned 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 notes.
The OCC already has regulations in place to deal with deceptive marketing, and Dugan pledges 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. One area deserving particular attention is whether to impose additional requirements with respect to escrows of taxes and insurance, Dugan notes. 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. Dugan says HUD should consider issuing guidelines to address the escrow issue for HECMs.
Dugan says 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 says. (http://www.occ.gov/ftp/release/2009-61a.pdf)