Consumer Compliance Outlook: Fourth Quarter 2010

Compliance Alert

Interagency Guidance on Reverse Mortgage Products

On August 17, 2010, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration (the agencies) issued final guidance on reverse mortgages for the institutions they supervise to assist them in addressing the compliance and reputation risks for this complex product.* Americans aged 65 or older are projected to make up 19 percent of the U.S. population in 2030, an increase from 12.4 percent in 2000. As a result, reverse mortgages have the potential to become an increasingly important credit product for this aging population if they are prudently underwritten and used appropriately. However, because of the risk that consumers will not understand the costs, terms, and consequences of this complex product, lenders must provide consumers with adequate information and other protections. To facilitate this, the reverse mortgage guidance discusses the following issues: legal considerations, consumer communications and counseling, conflicts of interest, abusive practices, and third-party relationships.

Legal Considerations

The guidance discusses the laws and regulations most relevant to reverse mortgages, including:

  • the Federal Trade Commission Act
  • the Truth in Lending Act/Regulation Z
  • the Real Estate Settlement Procedures Act/Regulation X
  • the Equal Credit Opportunity Act/Regulation B
  • the Fair Housing Act
  • the National Flood Insurance Act
  • HUD's regulation for HECM mortgages, 24 C.F.R. §206, and
  • state laws that may apply, including specific laws for reverse mortgages.

Consumer Communications and Counseling

The guidance emphasizes the importance of ensuring that marketing materials and communications with consumers are balanced and refrain from providing misleading information about product features, loan terms, product risks, or a borrower's obligations. The guidance also discusses providing independent counseling to consumers, similar to the counseling provided for HECMs.

Conflicts of Interest, Abusive Practices, and Third-Party Relationships

The guidance recommends that institutions adopt policies designed to ensure that loan originators and brokers do not have an inappropriate incentive to sell other products that appear to be linked to the granting of a reverse mortgage and to guard against tying the purchase of certain nonbanking products from an affiliate to the granting or pricing of credit. The guidance also recommends that institutions monitor compliance by third parties and implement appropriate corrective actions against third parties for compliance violations.

The agencies' announcement and the guidance are available on the Federal Financial Institutions Examination Council's website External Link. In connection with the guidance, the Board has issued CA Letter 10-11 (Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks), which is available on the Board's website External Link.

  • * Reverse mortgages generally fall into two categories: lenders' proprietary products and the home equity conversion mortgage (HECM) insured by the Federal Housing Administration (FHA). The guidance applies to both categories.