Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks, 50801-50812 [2010-20286]

Download as PDF jdjones on DSK8KYBLC1PROD with NOTICES Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices The collections of information in part 16 are as follows: Form for Registration. A national bank offering or selling its own securities to the public is required to make such offer or sale through the use of a prospectus that has been filed with the OCC as part of a registration statement. Abbreviated Form for Registration. A national bank that is a subsidiary of a company that has securities registered under the Securities Exchange Act of 1934 (Exchange Act) may offer and sell securities (nonconvertible debt) only to accredited investors upon meeting conditions in 12 CFR 16.6 and by providing an abbreviated information statement in a form for registration. Small Issues. A national bank may offer and sell securities publicly in a limited dollar amount by using an Offering Statement meeting the requirements of SEC’s Regulation A (17 CFR 230.251 et seq.). Regulation D. A national bank may offer or sell its own securities in a private placement to accredited or sophisticated investors in compliance with 12 CFR 16.7. Form 144. A national bank must file Form 144, which contains information on resales of securities originally sold through the private placement exemption, only in certain circumstances. These information collection requirements ensure bank compliance with applicable Federal law, promote bank safety and soundness, provide protections for banks, and further public policy interests. Affected Public: Businesses or other for-profit. Burden Estimates: Estimated Number of Respondents: 48. Estimated Number of Responses: 48. Estimated Annual Burden: 450 hours. Frequency of Response: On occasion. Comments: Comments submitted in response to this notice will be summarized and included in the request for OMB approval. All comments will become a matter of public record. Comments are invited on: (a) Whether the collection of information is necessary for the proper performance of the functions of the OCC, including whether the information has practical utility; (b) The accuracy of the OCC’s estimate of the information collection burden; (c) Ways to enhance the quality, utility, and clarity of the information to be collected; (d) Ways to minimize the burden of the collection on respondents, including VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 through the use of automated collection techniques or other forms of information technology; and (e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. Dated: August 10, 2010. Michele Meyer, Assistant Director, Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency. [FR Doc. 2010–20236 Filed 8–16–10; 8:45 am] BILLING CODE 4810–33–P DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency [Docket ID OCC–2010–0015] FEDERAL RESERVE SYSTEM FEDERAL DEPOSIT INSURANCE CORPORATION DEPARTMENT OF THE TREASURY Office of Thrift Supervision [Docket ID OTS–2010–24] NATIONAL CREDIT UNION ADMINISTRATION Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (FRB); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); and National Credit Union Administration (NCUA). ACTION: Final Guidance. AGENCY: The OCC, FRB, FDIC, OTS, and NCUA (the Agencies) are issuing this final guidance entitled, ‘‘Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks’’ (guidance). The Agencies developed this guidance, in conjunction with the State Liaison Committee of the Federal Financial Institutions Examination Council (FFIEC), to address compliance and reputation risks associated with reverse mortgages, which are complex loan products typically offered to elderly consumers. Institutions are expected to use the guidance in their efforts to ensure that their risk management and consumer protection practices adequately address SUMMARY: PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 50801 the compliance and reputation risks raised by reverse mortgage lending. DATES: This final guidance is effective on October 18, 2010. Comments on the Paperwork Reduction Act burden estimates only may be submitted on or before September 16, 2010. FOR FURTHER INFORMATION CONTACT: OCC: Karen Tucker, National Bank Examiner and Senior Compliance Specialist, or Jesse Butler, Bank Examiner and Compliance Specialist, Compliance Policy, (202) 874- 4428; Stephen Van Meter, Assistant Director, or Nancy Worth, Counsel, Community and Consumer Law Division, (202) 874– 5750, Office of the Comptroller of the Currency, 250 E Street SW., Washington, DC 20219. FRB: Kathleen Conley, Senior Supervisory Consumer Financial Services Analyst, (202) 452–2389; Brent Lattin, Senior Attorney, (202) 452–3667, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263– 4869. FDIC: Michael R. Evans, Fair Lending Specialist, Compliance Policy Section, Division of Supervision and Consumer Protection, (202) 898–6611; or Richard M. Schwartz, Counsel, (202) 898–7424, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DNC 20429. OTS: David Adkins, Fair Lending Specialist, (202) 906–6716, or Richard Bennett, Senior Compliance Counsel, (202) 906–7409, Office of Thrift Supervision, 1700 G Street NW., Washington, DC 20552. NCUA: Robert C. Leonard, Program Officer, 703–518–6396, Office of Examination & Insurance, National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314. SUPPLEMENTARY INFORMATION: I. Background Information Institutions under the Agencies’ supervision currently provide two basic types of reverse mortgage products: lenders’ own proprietary reverse mortgage products and reverse mortgages offered under the Home Equity Conversion Mortgage (HECM) program.1 Both HECMs and proprietary products are subject to various laws governing mortgage lending including 1 A HECM is a reverse mortgage product insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), and subject to a range of federal consumer protection and other requirements. See 12 U.S.C. 1715z–20; 24 CFR Part 206. E:\FR\FM\17AUN1.SGM 17AUN1 jdjones on DSK8KYBLC1PROD with NOTICES 50802 Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Federal Trade Commission Act (FTC Act), and the fair lending laws. HECMs are also subject to an extensive regulatory regime established by HUD, including provisions for FHA insurance of HECM loans that protect both lenders and reverse mortgage borrowers. Reverse mortgages enable eligible borrowers to remain in their homes while accessing their home equity in order to meet emergency needs, supplement their incomes, or, in some cases, purchase a new home—without subjecting borrowers to ongoing repayment obligations during the life of the loan. The use of reverse mortgages could expand significantly in coming years as the U.S. population ages and more homeowners become eligible for reverse mortgage products. If prudently underwritten and used appropriately, these products have the potential to become an increasingly important credit product for addressing certain credit needs of an aging population. However, reverse mortgages can be highly complex loan products, and it is particularly important to provide adequate information and other consumer protections. Typically, elderly borrowers are securing a reverse mortgage with their primary asset—their home. Thus, borrowers may depend on the reverse mortgage proceeds for the cash flow needed to pay for health care and other living expenses. For these reasons, it is critical that institutions and other entities subject to the Agencies’ supervision (hereafter ‘‘institutions’’) manage the compliance and reputation risks associated with reverse mortgages. To assist institutions in their efforts to manage these risks, the Agencies published for comment Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks (proposed guidance), 74 FR 66652 (December 16, 2009). The proposed guidance discussed the general features of, certain legal provisions applicable to, and consumer protection concerns raised by reverse mortgage products. In addition, it focused on the need to provide adequate information to consumers about reverse mortgage products; to provide qualified independent counseling to consumers considering these products; and to avoid potential conflicts of interest. The proposed guidance also addressed related policies, procedures, and internal controls and third party risk management. The Agencies received 18 comments on the proposed guidance. Comments were received from financial institutions (institutions); industry- VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 related trade associations (industry groups); counselors, consumer and community organizations (consumer organizations); government officials; and members of the public. II. Overview of Public Comments The commenters were generally supportive of the proposed guidance. In general, institutions and industry groups sought additional clarity and flexibility in implementing the guidance, while consumer organizations and government commenters sought to adopt stronger standards, particularly with respect to policies designed to avoid conflicts of interest. A majority of institutions and industry groups sought more clarity on the extent to which HUD rules (such as those relating to fees) should be applied to proprietary reverse mortgages. They also sought additional clarity or flexibility regarding particular recommendations in the proposed guidance, including with respect to the information that should be provided to reverse mortgage borrowers in promotional materials, the conduct of counseling by telephone, and the restrictions on cross-selling. Institution and industry group commenters generally sought clarification that implementation of the guidance would be consistent with forthcoming changes to the HECM counseling protocols and the FRB’s Regulation Z, the regulation that implements TILA. Consumer organizations and a government commenter generally supported the provision of balanced information about reverse mortgage alternatives, and avoidance of deceptive marketing by loan originators or brokers. Among the recommendations made by these commenters were to establish a suitability standard, engage in consumer testing of any new disclosures, strengthen the requirement for in-person counseling, and adopt stronger policies to avoid conflicts of interests. Several commenters made suggestions for additional topics that were not included in the proposed guidance; these related to data collection on the volume of reverse mortgages, anti-fraud provisions, test design for the HECM counseling roster, and other HECM program rules. III. Revisions To Address Public Comments on the Guidance The Agencies made a number of changes to the proposal to respond to commenters’ concerns and to provide additional clarity. Significant comments on the specific provisions of the proposed guidance, the Agencies’ responses, and changes to the guidance are discussed below. PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 Communications With Consumers Commenters generally asked for a number of clarifications with respect to the proposed guidance on communications between institutions and potential reverse mortgage borrowers. Consumer organizations and a government commenter generally supported the provision of balanced information about reverse mortgages and alternatives, and avoidance of deceptive marketing by loan originators and brokers. One government commenter suggested consumer testing of new disclosures, if any, to improve communications. Some consumer organization and government commenters urged a strong role for lenders in determining the suitability of the loan for the borrower. In particular, these commenters suggested that it should be the duty of any lender or broker to articulate and match the consumer’s needs, objectives, and circumstances to the terms of the loan and to reveal any interest that the lender or broker has in arranging the loan. This reverse mortgage guidance does not, and is not intended to, impose suitability obligations on lenders. The Agencies believe, however, that the provision of clear and balanced information and qualified independent counseling in accordance with the guidance will help to ensure that reverse mortgage borrowers do not enter into transactions that are not appropriate for their financial circumstances and needs. With regard to the commenter’s recommendations for consumer testing, as noted in the preamble to the proposed guidance, the Agencies are considering whether to issue illustrations of consumer information for reverse mortgages. The Agencies will consider the commenter’s consumer testing recommendations in connection with these illustrations. Before adopting any illustrations, the Agencies will issue them for notice and comment. Institution and industry group commenters generally sought clarification that implementation of the guidance would be consistent with changes to the HECM counseling protocols and the FRB’s Regulation Z. One industry commenter asked that the Agencies clarify whether Regulation Z or FTC Act standards for proper disclosures would be applied to advertisements and promotional materials for reverse mortgages. These commenters also sought clarification of specific points regarding the list of the information items that should be E:\FR\FM\17AUN1.SGM 17AUN1 jdjones on DSK8KYBLC1PROD with NOTICES Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices provided to reverse mortgage borrowers in promotional materials. As a general matter, the Agencies believe that the guidance is consistent with the HECM protocols and Regulation Z, as now in effect. The current HECM counseling protocols require that counselors provide to borrowers the same information that is listed in the proposed guidance. The Agencies are not aware of any proposed changes to the HECM requirement that counselors provide this information. While the FRB is reviewing Regulation Z disclosures for reverse mortgages, this project is not final. In light of this review, the Agencies are not addressing technical requirements that may be addressed in Regulation Z, and do not anticipate that the general recommendations in the guidance will conflict with any specific disclosure requirements for reverse mortgages adopted by the FRB. In response to a commenter’s inquiry concerning whether Regulation Z standards would be applied to all marketing materials, the Agencies did not intend to incorporate—in stating that information should be provided clearly and conspicuously—Regulation Z’s standard for ‘‘clear and conspicuous’’ disclosures. Rather, the Agencies sought to convey simply that important information should be presented in a clear and prominent manner. The final guidance has been clarified accordingly. Advertisements and other marketing materials, of course, will continue to be subject to any relevant requirements under Regulation Z, the FTC Act, and other applicable laws and regulations. In regard to the more specific issues raised by commenters, the Agencies have clarified the guidance by acknowledging that institutions may not be able to provide all of the information recommended in this guidance when advertising reverse mortgages through certain forms of media, such as radio, television, or billboards. In these circumstances, however, institutions should provide clear and balanced information about the risks of these products.2 The Agencies also clarified the meaning of ‘‘clear and balanced information’’ in the final guidance; in particular, information is balanced when it fairly presents risks and costs as well as potential benefits. The Agencies clarified in the final guidance when more comprehensive information should be provided, and that promotional materials should address 2 These clarifications are consistent with other interagency guidance relating to nontraditional mortgages. Interagency Guidance on Nontraditional Mortgage Product Risks, 71 FR 58609, 58617 n.19 (Oct. 4, 2006). VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 how disbursements from the reverse mortgage may affect the borrower’s ability to obtain public benefits. Information provided in promotional materials may cross-reference other materials, and may refer borrowers to tax or financial advisors. Qualified Independent Counseling Commenters supported the recommendation in the guidance that consumers seeking any reverse mortgage should consult a qualified independent counselor. Commenters disagreed on the extent to which the guidance should encourage in-person counseling (as opposed to telephonic counseling). They also disagreed on certain procedures related to counseling—for example, how to inform borrowers about counselors and whether lenders should contact counselors directly. A majority of institutions and industry groups noted the disadvantages of requiring in-person counseling, including the shortage of qualified counselors and the logistical and other challenges that may make it difficult to bring the borrower(s) and their advisors to an in-person counseling session. One counseling agency also supported telephonic counseling, and noted that telephonic counseling may be more feasible, in particular, when a multilingual counselor is needed to provide counseling in the borrower’s own language. Consumer group and government commenters, however, strongly supported in-person counseling, and advocated that it be used in all but rare cases. These commenters stated that in-person counseling sessions are longer, foster greater understanding, and give counselors a better opportunity to assess the borrower’s needs and understanding of the transaction. In order for institutions to best promote consumer comprehension and manage compliance risks, the Agencies intend that the guidance reflect and be consistent with HUD’s stated preference for in-person counseling whenever possible, and have modified the guidance to clarify that intention. Industry groups and financial institutions also requested greater clarification with respect to how institutions should refer borrowers to counselors and ensure that counselors have appropriate knowledge of proprietary products. Commenters also asked whether the Agencies expected institutions to ensure that counseling covered all of the topics noted in the guidance. Several commenters also referred to the fact that HUD is expected to release new protocols for HECM counseling and that these protocols PO 00000 Frm 00061 Fmt 4703 Sfmt 4703 50803 would likely cover many of the topics discussed in the guidance. The Agencies have modified the guidance to address some of these specific concerns. In particular the guidance now indicates that lenders may provide borrowers with a list of reverse mortgage counselors, consistent with HUD guidelines for HECM counseling, and may provide borrowers with a substantial array of materials— including information about proprietary products—before the borrower meets with a reverse mortgage counselor. The guidance also has been modified to clarify that institutions are not expected to supervise or monitor the activities of qualified independent counselors. The Agencies expect that counselors’ activities would conform to new HUD protocols when they are released. Avoidance of Potential Conflicts Generally, consumer organizations and one regulatory agency supported the guidance’s view that institutions should take all reasonably necessary steps to avoid any appearance of a conflict of interest, though some consumer organizations urged the adoption of stricter standards than proposed. Institution and industry groups sought additional clarifications to this portion of the proposed guidance. The proposed guidance recommended that policies prohibit the reverse mortgage from being conditioned on the purchase of ‘‘any other financial or other product’’ from the lender (‘‘anti-tying provision’’). Consumer organizations urged stricter standards, including the adoption of further restrictions prohibiting yield spread premiums (YSPs) and limiting sales of other products by lenders or their affiliates. Industry commenters noted that this provision, as stated, was broader than applicable federal anti-tying rules, and would prohibit, for example, restricting the availability of reverse mortgages to consumers having a deposit relationship with the institution. In response to these comments, the Agencies are clarifying the anti-tying and conflict avoidance provisions so that they more clearly address applicable federal rules, including the anti-tying rules contained in the Bank Holding Company Act Amendments of 1970 and the Home Owners’ Loan Act; the rules relating to insurance sales adopted by the OCC, FRB, FDIC, and OTS; and the provisions applicable to HECMs. The Agencies provide, as an example, that an institution may risk violations, depending on the specific law that applies, if it requires consumers to obtain annuity products— E:\FR\FM\17AUN1.SGM 17AUN1 jdjones on DSK8KYBLC1PROD with NOTICES 50804 Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices or any other product that is not a traditional banking product—in order to obtain a reverse mortgage or varies the price of the reverse mortgage based on a condition that the borrower purchase such other product from the institution or affiliate. The Agencies believe that this example will help prevent violations of rules, as applicable. The guidance also clarifies the Agencies’ expectation that institutions’ policies and procedures will be designed to ensure that brokers with whom they do business as agents also will not condition or vary the price of the loan on the consumer’s obtaining some additional product or service (other than a traditional banking product). The Agencies also have added a related recommendation that institutions’ policies and procedures will be designed to ensure that neither lenders nor brokers require the borrower to obtain any insurance, annuity, or similar product (other than appropriate title, flood, or hazard insurance as permitted or required by applicable law). This recommendation reflects insurance sales restrictions currently applicable to HECMs. The proposed guidance also contained recommendations to guard against inappropriate incentives for the origination of reverse mortgages or the sale of other products. Several commenters sought clarification on the extent to which they could offer or refer consumers to other products, particularly where those products are provided by third parties or are typically required in connection with mortgage settlements. The Agencies believe that the clarifications described above help to address these commenters’ concerns. The final guidance stresses that institutions must comply with relevant anti-tying rules, and, further, should consider other appropriate measures necessary to guard against improper incentives or potential conflicts of interest. The Agencies also removed an example included in the proposed guidance to address commenters’ concerns that it exceeded the scope of the anti-tying rules by implying that the Agencies wished to ban the offering of any other products or any referral to providers of other products in connection with a reverse mortgage. In addition, the Agencies emphasized in the final guidance that policies relating to cross-selling—offering or referring consumers to other products—should be designed to ensure that the activities are clearly consistent with FTC Act standards. VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 Other Issues Fees. An industry commenter requested clarification on what limitations the Agencies intended by recommending in the proposed guidance that institutions adopt relevant HECM requirements for proprietary mortgages, including requirements with respect to ‘‘affordable origination fees.’’ The Agencies note that HECM origination fees are expressly limited by statute. In response to this comment, the Agencies have deleted the specific reference to affordable origination fees. The Agencies do not intend to set fee limits in this guidance. However, the Agencies expect institutions offering proprietary reverse mortgages to reasonably price such products, including with respect to origination fees, consistent with safe and sound banking practices, and with appropriate consideration of costs, risks, and returns. Consistent with safe and sound banking practices in setting interest rates, fees, and other charges, an institution should consider, among other factors, the costs incurred in originating the loan and the risks associated with the loan. While HECM origination fees are expressly limited by statute, the costs and risks of proprietary loans may be different from those of HECMs. For example, the lack of FHA insurance on proprietary loans will mean that the institution (and not HUD) bears the risk that the borrower lives longer than expected, that the interest rates are higher than expected, or that the collateral value does not increase as rapidly as projected. The Agencies also note that HECMs may carry substantial other costs—principally insurance premiums—that proprietary reverse mortgages may lack. In addition to considering safe and sound banking practices in setting fees, institutions should comply with any applicable law or regulation, and follow guidance governing fees. Taxes and Insurance. Financial institutions and industry group commenters requested clarification regarding the Agencies’ expressed concern about ensuring borrowers’ ability to pay taxes and insurance. These commenters were concerned that this requirement would require them to set traditional credit underwriting standards for reverse mortgages and deny loans to consumers if these standards were not met. The Agencies are not imposing a credit underwriting standard in this guidance. There are a number of other ways that institutions can take appropriate steps to determine or ensure that a consumer has the ability to pay taxes and insurance. These PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 include escrows, in compliance with applicable laws,3 and set-aside arrangements. Third Party Risk Management. One consumer organization commenter urged that loan originators should ensure that brokers do not advertise reverse mortgages as ‘‘government benefits.’’ In this regard, the Agencies note that lender due diligence and monitoring activities should include a review of promotional materials used by third parties to ensure compliance with TILA, the FTC Act, and other laws, as applicable. The guidance has been modified to clarify this position. Other. One consumer organization recommended that the Agencies collect data on reverse mortgages. Later in 2010, the Agencies will begin collecting data on reverse mortgages on the Call Report and Thrift Financial Report.4 Several commenters requested that HUD change certain requirements relating to the HECM counseling roster or the origination or termination of HECMs. These matters relate to HUD’s operation of the HECM program and it would not be appropriate for the Agencies to address these issues in the guidance. IV. Paperwork Reduction Act In accordance with section 3512 of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501–3521 (PRA), the Agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. To implement this information collection contained in this guidance, the OCC, FDIC, OTS, and NCUA will seek OMB approval. The FRB has approved this information collection under its delegated authority from OMB. On December 16, 2009,5 the agencies sought comment on the burden estimates for this information collection. No comments were received regarding the burden estimates. Comments continue to be invited on: (a) Whether the collection of information is necessary for the proper performance of the Federal banking agencies’ functions, including whether the information has practical utility; (b) The accuracy of the estimates of the burden of the information collection, including the validity of the methodology and assumptions used; (c) Ways to enhance the quality, utility, and clarity of the information to be collected; 3 See 24 CFR 206.205(e)(1) and 24 CFR 3500.17. 74 FR 68314 (Dec. 23, 2009) and 74 FR 68326 (Dec. 23, 2009). 5 74 FR 66652. 4 See E:\FR\FM\17AUN1.SGM 17AUN1 jdjones on DSK8KYBLC1PROD with NOTICES Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices (d) Ways to minimize the burden of the information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) Estimates of capital or start up costs and costs of operation, maintenance, and purchase of services to provide information. Comments on these questions should be directed to: OCC: Communications Division, Office of the Comptroller of the Currency, Mailstop 2–3, Attention 1557–NEW, 250 E Street, SW., Washington, DC 20219. In addition comments may be sent by fax to (202) 874–5274, or by electronic mail to regs.comments@occ.treas.gov. You may personally inspect and photocopy comments at the OCC, 250 E Street, SW., Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 874–4700. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments. FRB: You may submit comments, identified by Docket No. OP–1362, by any of the following methods: • Agency Web Site: https:// www.federalreserve.gov. Follow the instructions for submitting comments at https://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm. • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. • E-mail: regs.comments@federalreserve.gov. Include the docket number in the subject line of the message. • Fax: (202) 452–3819 or (202) 452– 3102. • Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. All public comments are available from the FRB’s Web site at www.federalreserve.gov/generalinfo/ foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed in electronic or paper form in Room MP–500 of the FRB’s Martin Building (20th and C Streets, NW.) between 9 a.m. and 5 p.m. on weekdays. FDIC: Interested parties are invited to submit written comments. All VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 comments should refer to the name of the collection, ‘‘Reverse Mortgage Products Guidance.’’ Comments may be submitted by any of the following methods: • https://www.FDIC.gov/regulations/ laws/federal/propose.html. • E-mail: comments@fdic.gov. Include the name and number of the collection in the subject line of the message. • Mail: Leneta G. Gregorie (202) 898.3719, Counsel, Federal Deposit Insurance Corporation, PA1730–3000, 550 17th Street, NW., Washington, DC 20429. • Hand Delivery: Comments may be hand-delivered to the guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7 a.m. and 5 p.m. OTS: Send comments, referring to the collection by title of the proposal or by OMB approval number, to OMB and OTS at these addresses: Office of Information and Regulatory Affairs, Attention: Desk Officer for OTS, U.S. Office of Management and Budget, 725—17th Street, NW., Room 10235, Washington, DC 20503, or by fax to (202) 395–6974; and Information Collection Comments, Chief Counsel’s Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, by fax to (202) 906–6518, or by e-mail to infocollection.comments@ots.treas.gov. OTS will post comments and the related index on the OTS Internet Site at www.ots.treas.gov. In addition, interested persons may inspect comments at the Public Reading Room, 1700 G Street, NW., by appointment. To make an appointment, call (202) 906– 5922, send an e-mail to public.info@ots.treas.gov, or send a facsimile transmission to (202) 906– 7755. NCUA: You may submit comments by any of the following methods (Please send comments by one method only): • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. • NCUA Web Site: https:// www.ncua.gov/Resources/ RegulationsOpinionsLaws/ ProposedRegulations.aspx. Follow the instructions for submitting comments. • E-mail: Address to regcomments@ncua.gov. Include ‘‘[Your name] Comments on Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks,’’ in the e-mail subject line. • Fax: (703) 518–6319. Use the subject line described above for e-mail. • Mail: Address to Mary F. Rupp, Secretary of the Board, National Credit PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 50805 Union Administration, 1775 Duke Street, Alexandria, Virginia 22314– 3428. • Hand Delivery/Courier: Same as mail address. Public inspection: All public comments are available on the agency’s Web site at https://www.ncua.gov/ Resources/RegulationsOpinionsLaws/ ProposedRegulations.aspx as submitted, except as may not be possible for technical reasons. Public comments will not be edited to remove any identifying or contact information. Paper copies of comments may be inspected in NCUA’s law library, at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, call (703) 518–6546 or send an e-mail to OGC Mail @ncua.gov. You should send a copy of your comments to the OMB Desk Officer for the agencies, by mail to U.S. Office of Management and Budget, 725 17th Street, NW., #10235, Washington, DC 20503, or by fax to (202) 395–6974. Title of Information Collection: Reverse Mortgage Products. OMB Control Numbers: New collection; to be assigned by OMB. Abstract: The Agencies previously determined that certain provisions of the guidance contain information collections. However, a number of the guidance provisions are currently standard business practice for proprietary and HECM reverse mortgages and, therefore, under the ‘‘usual and customary’’ standard, PRA clearance is not warranted. There are also requirements currently covered under approved TILA-related information collections for proprietary and HECM reverse mortgages, and an approved HUD information collection for HECM reverse mortgages. Proprietary reverse mortgage products, however, are not subject to the consumer protection provisions of the HECM program, so these guidance provisions would normally be submitted for approval under PRA. However, recent research has shown that, despite the significant growth in reverse mortgages since inception of the HECM program in 1989, currently the market for proprietary reverse mortgages has dissipated to the point that, industry-wide, there are fewer than 10 lenders offering such products.6 This is likely due to the recent decline in 6 See the FRB’s Divisions of Research & Statistics and Monetary Affairs Finance and Economics Discussion Series paper ‘‘Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market,’’ https://www.federalreserve.gov/pubs/feds/2009/ 200942/200942pap.pdf. E:\FR\FM\17AUN1.SGM 17AUN1 50806 Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices housing values, resulting in decreased equity in homes. Given the minimal number of lenders currently offering proprietary reverse mortgages, the agencies are not now seeking OMB approval for the consumer protection provisions in the guidance applicable to proprietary reverse mortgages. The agencies will, however, seek PRA approval once this sector of the market recovers. Lastly, there are provisions in the guidance that apply to both proprietary and HECM reverse mortgages that do not meet the ‘‘usual and customary’’ standard, are not covered by already approved information collections and, therefore, require PRA clearance. jdjones on DSK8KYBLC1PROD with NOTICES Proprietary Reverse Mortgages Institutions offering proprietary reverse mortgages are encouraged under the guidance to follow or adopt relevant HECM requirements for mandatory counseling, disclosures, restrictions on cross-selling of ancillary products, and reliable appraisals. Proprietary and HECM Reverse Mortgages Institutions offering either HECMs or proprietary reverse mortgages are encouraged to develop clear and balanced product descriptions and make them available to consumers shopping for a mortgage. They should set forth a description of how disbursements can be received and include timely information to supplement the TILA and other disclosures. Promotional materials and product descriptions should include information about the costs, terms, features, and risks of reverse mortgage products. Institutions should adopt policies and procedures that prohibit directing a consumer to a particular counseling agency or contacting a counselor on the consumer’s behalf. They should adopt clear written policies and establish internal controls specifying that neither the lender nor any broker will require the borrower to purchase any other product from the lender in order to obtain the mortgage. Policies should be clear so that originators do not have an inappropriate incentive to sell other products that appear linked to the granting of a mortgage. Legal and compliance reviews should include oversight of compensation programs so that lending personnel are not improperly encouraged to direct consumers to particular products. Institutions making, purchasing, or servicing reverse mortgages through a third party should conduct due diligence and establish criteria for third party relationships and compensation. VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 They should set requirements for agreements and establish systems to monitor compliance with the agreement and applicable laws and regulations. They should also take corrective action if a third party fails to comply. Third party relationships should be structured in a way that does not conflict with RESPA. Affected Public: OCC: National banks, their subsidiaries, and federal branches or agencies of foreign banks. FRB: Bank holding companies, state member banks, branches and agencies of foreign banks (other than federal branches, federal agencies, and insured state branches of foreign banks), commercial lending companies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act. FDIC: Insured state nonmember banks. OTS: Savings associations and savings and loan holding companies. NCUA: Federally-insured credit unions. Type of Review: Regular. Estimated Burden: OCC: Number of respondents: 77. Burden per respondent: 40 hours to implement policies and procedures and to provide training; 8 hours annually to maintain program. Total estimated annual burden: 3,696 hours. FRB: Number of respondents: 18. Burden per respondent: 40 hours to implement policies and procedures and to provide training; 8 hours annually to maintain program. Total estimated annual burden: 864 hours. FDIC: Number of respondents: 48. Burden per respondent: 40 hours to implement policies and procedures and to provide training; 8 hours annually to maintain program. Total estimated annual burden: 2,304 hours. OTS: Number of respondents: 20. Burden per respondent: 40 hours to implement policies and procedures and to provide training; 8 hours annually to maintain program. Total estimated annual burden: 960. NCUA: Number of respondents: 85. Burden per respondent: 40 hours to implement policies and procedures and to provide training; 8 hours annually to maintain program. Total estimated annual burden: 4,080 hours. PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 The text of the final guidance follows: V. Guidance Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks Introduction The Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA) (the Agencies) are issuing this guidance to assist their regulated financial institutions 1 in managing risks presented by reverse mortgage products. Reverse mortgages are home-secured loans, typically offered to elderly consumers, which present consumer protection issues that raise compliance and reputation risks for the institutions offering them. Expected increases in the elderly population of the United States and other factors suggest that the use of reverse mortgages could expand significantly in coming years as more homeowners become eligible for reverse mortgage products. These loan products enable eligible borrowers to access the equity in their homes in order to meet emergency needs, to supplement their incomes, or to purchase a new home.2 Reverse mortgages can meet these objectives without subjecting borrowers to ongoing repayment obligations during the life of the loan, while enabling borrowers to remain in their homes. As a result, the Agencies believe that reverse mortgages, offered appropriately, could become an increasingly important mechanism for institutions to address credit needs of an aging population. Nevertheless, reverse mortgages are complex loan products that present a wide range of complicated options to borrowers. Moreover, the need to provide adequate information about reverse mortgages and to ensure appropriate consumer protections is 1 This guidance applies to all banks and their subsidiaries, bank holding companies (other than foreign banks) and their nonbank subsidiaries, savings associations and their subsidiaries, savings and loan holding companies and their subsidiaries, credit unions, U.S. branches and agencies of foreign banks engaged in reverse mortgage transactions, and any other entity supervised by those adopting the guidance. The guidance refers to all of those covered as ‘‘institutions.’’ 2 The Federal Housing Administration (FHA) has a program that enables eligible borrowers to use the proceeds of a federally-insured reverse mortgage for the purchase of a new principal residence. See U.S. Department of Housing and Urban Development (HUD) Mortgagee Letter 2008–23 (October 20, 2008) and HUD Mortgagee Letter 2009–11 (March 27, 2009). E:\FR\FM\17AUN1.SGM 17AUN1 Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices jdjones on DSK8KYBLC1PROD with NOTICES particularly high. This is because reverse mortgages are typically secured by the borrower’s primary asset—his or her home. Consequently, a reverse mortgage may provide the only funds available to a consumer to pay for health care needs and other living expenses.3 For these and other reasons, reverse mortgages present substantial risks both to institutions and to consumers, and, as with any type of loan that is secured by a consumer’s home, it is crucial that consumers understand the terms of the product and the nature of their obligations. While this guidance addresses consumer protection concerns that raise compliance and reputation risks, the Agencies recognize that reverse mortgage products may present other risks to lenders, too, such as credit, interest rate, and liquidity risks,4 especially for proprietary reverse mortgage products lacking the insurance offered under the federal Home Equity Conversion Mortgage (HECM) program.5 As explained in further detail below, the complex nature of reverse mortgages presents the risk that consumers will not understand the costs, terms, and consequences of the products. Consumers also may be harmed by any conflicts of interest or abusive or fraudulent practices related to the sale of ancillary products or services. In contrast to HECM reverse mortgages, proprietary reverse mortgages also present the risk that lenders will be unable to meet their obligations to make payments due to consumers.6 As with other lending products, institutions should manage the compliance and reputation risks associated with reverse mortgages. This guidance is intended to assist institutions in their efforts to manage these risks. This guidance focuses on ways an institution may provide 3 In 2007, the typical reverse mortgage borrower was 73 years old, had a home valued at $261,500, and had financial assets of less than $33,000. AARP, Reverse Mortgage: Niche Product or Mainstream Solution, Dec. 2007 (available at https://assets.aarp.org/rgcenter/consume/ 2007_22_revmortgage.pdf). 4 Institutions also should manage these other risks appropriately. In this regard, institutions are advised to conform their reverse mortgage lending activities to any applicable guidance from their respective supervisory agencies, and to consult with those agencies with respect to any such safety and soundness issues. 5 A HECM is a reverse mortgage product insured by the FHA, part of HUD, and is subject to a range of consumer protection and other requirements. See 12 U.S.C. 1715z–20; 24 CFR 206. A lender making a HECM loan may assign it to HUD when the outstanding balance reaches 98% of the maximum claim amount. See 24 CFR 206.107(a)(1). 6 Under the FHA insurance program for HECM loans, HUD will make payments to a consumer if a HECM lender fails to make a payment due to the consumer. See 24 CFR 206.117 and 206.121. VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 adequate information about reverse mortgage products and qualified independent counseling to consumers and on ways to avoid potential conflicts of interest. The guidance also addresses related policies, procedures, internal controls, and third party risk management for institutions. This guidance may be particularly useful for institutions that offer proprietary reverse mortgage products that are not subject to the regulatory requirements applicable to reverse mortgages offered under the HECM program. Depending on how they are structured, proprietary reverse mortgage products may contain a higher degree of risk than HECMs. Therefore, to address these risks effectively, proprietary products may warrant careful scrutiny under the principles, considerations, and risks discussed in this guidance. The Agencies expect institutions to use this guidance to ensure that risk management practices adequately address compliance and reputation risks associated with reverse mortgages. Failure to address the risks discussed in this guidance could significantly affect the overall effectiveness of an institution’s compliance and risk management efforts with respect to reverse mortgages. The Agencies will review risk management processes in this area during examinations of regulated institutions and will request remedial actions if institutions do not adequately manage these risks. Background The reverse mortgage market currently consists of two basic types of reverse mortgage products: proprietary products offered by an individual institution and FHA-insured reverse mortgages offered under the HECM program. HECM reverse mortgages have accounted for approximately 90% of all reverse mortgages.7 Reverse mortgages generally are nonrecourse, home-secured loans that provide one or more cash advances to borrowers and require no repayments until a future time. Both HECMs and proprietary reverse mortgages generally must be repaid only when the last surviving borrower dies, all borrowers permanently move to a new principal residence, or the loan is in default. For example, repayment would be required when the borrower sells the home or has not resided in the home for a year. A borrower may be in default on a reverse mortgage when the borrower fails to pay 7 AARP, Reverse Mortgage: Niche Product or Mainstream Solution, Dec. 2007, at 1 (available at https://assets.aarp.org/rgcenter/consume/ 2007_22_revmortgage.pdf). PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 50807 property taxes, fails to maintain hazard insurance, or lets the property fall into unreasonable disrepair. When a reverse mortgage becomes due, the home must be sold or the borrower (or surviving heirs) must repay the full amount of the loan (including accrued interest), even if the balance is greater than the property value. If the home is sold, the borrower or estate generally would not be liable to the lender for any amounts in excess of the value of the home.8 To obtain a reverse mortgage, the borrower must occupy the home as a principal residence and generally be at least 62 years of age. Reverse mortgages are typically structured as first lien mortgages, and generally require that any prior mortgage be paid off either before obtaining the reverse mortgage or with the funds from the reverse mortgage.9 The funds from a reverse mortgage may be disbursed in several different ways: • A single lump sum 10 that distributes up to the full amount of the principal limit 11 in one payment; • A credit line that permits the borrower to decide the timing and amount of the loan advances; • A monthly cash advance, either for a fixed number of years selected by the borrower or for as long as the borrower lives in the home; or • Any combination of the above selected by the borrower. Generally, the size of the loan will be larger when the borrower is older, the home is more valuable, or interest rates are lower. Interest rates on a reverse mortgage may be fixed or variable. Legal Considerations Both HECMs and proprietary reverse mortgage products are subject to laws and regulations governing mortgage lending. The following are particularly 8 For a further explanation of the non-recourse features of a HECM, see HUD Mortgagee Letter 2008–38. 9 HECMs must be first lien mortgages. 12 U.S.C. 1715z–20(b)(3). Only certain subordinate liens are permissible in connection with HECM loans. See HUD Mortgagee Letter 2009–49. 10 While HECM payment plans do not include a separate ‘‘lump sum’’ option, HECMs provide an effective substitute for such an option through a line of credit that can be fully drawn at consummation. 11 The principal limit is the maximum payment that can be made to the borrower. The principal limit depends on the age of the youngest borrower, the expected interest rate, and the ‘‘maximum claim amount.’’ The maximum claim amount is either (1) the lower of the actual value or FHA loan limit (for HECMs) or (2) the loan-to-value ratio established by the lender (for proprietary mortgages). The maximum claim amount includes the principal limit (cash available to the borrower), accrued interest, and any set-asides for repairs or servicing fees required by the loan terms. E:\FR\FM\17AUN1.SGM 17AUN1 50808 Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices jdjones on DSK8KYBLC1PROD with NOTICES relevant to the issues addressed in this guidance: • Federal Trade Commission Act (FTC Act). Section 5 of the FTC Act prohibits unfair or deceptive acts or practices.12 The OCC, the FRB, the FDIC, and the OTS enforce this provision of the FTC Act and any applicable regulations under authority granted in the FTC Act and section 8 of the Federal Deposit Insurance Act. The NCUA enforces this provision of the FTC Act and any applicable regulations under authority granted in the FTC Act and sections 120 and 206 of the Federal Credit Union Act.13 Practices may be found to be deceptive and thereby unlawful under section 5 of the FTC Act if: (1) There is a representation, omission, act, or practice that is likely to mislead the consumer; (2) the act or practice would be deceptive from the perspective of a reasonable consumer; and (3) the representation, omission, act, or practice is material.14 A practice may be found to be unfair and thereby unlawful under section 5 of the FTC Act if (1) the practice causes or is likely to cause substantial consumer injury; (2) the injury is not outweighed by benefits to the consumer or to competition; and (3) the injury caused by the practice is one that consumers could not reasonably have avoided.15 • Truth in Lending Act (TILA). TILA and the FRB’s implementing Regulation Z contain rules governing disclosures that institutions must provide for mortgages in advertisements, with an application, before loan consummation, and when interest rates change. Reverse mortgage borrowers must receive all disclosures that are required under 12 Supervisory guidance to financial institutions has been issued concerning unfair or deceptive acts or practices. See OCC Advisory Letter 2002–3— Guidance on Unfair or Deceptive Acts or Practices, March 22, 2002; Joint FRB and FDIC Guidance on Unfair or Deceptive Acts or Practices by StateChartered Banks, March 11, 2004; and OTS CEO Mem. # 347, ‘‘Unfair or Deceptive Acts or Practices: Examination Procedures,’’ May 7, 2010. Federally insured credit unions are prohibited from using any advertising or promotional material that is inaccurate, misleading, or deceptive in any way concerning its products, services, or financial condition. 12 CFR 740.2. The OTS also has a regulation that prohibits savings associations from using advertisements or other representations that are inaccurate or misrepresent the services or contracts offered. 12 CFR 563.27. This regulation supplements its authority under the FTC Act. 13 12 U.S.C. 1766 and 1786. 14 These principles are derived from the Policy Statement on Deception, issued by the Federal Trade Commission on October 14, 1983. 15 15 U.S.C. 45(n). See also the Policy Statement on Unfairness, issued by the Federal Trade Commission on December 17, 1980. VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 TILA,16 including notice of their right to rescind the loan, where applicable.17 Reverse mortgages may be structured as open-end credit or as closed-end credit within the meaning of Regulation Z. Disclosures required by TILA relating to open-end or closed-end mortgages must be provided, as appropriate.18 For closed-end, variable rate loans, lenders must provide the variable rate program disclosures,19 as well as required notices of interest rate adjustments.20 In addition, TILA requires that a loan cost disclosure form be provided to reverse mortgage borrowers.21 The total annual loan cost shown on the form includes the upfront costs (e.g., origination fee, third-party closing fee, and any upfront mortgage insurance premium), interest, and ongoing charges (e.g., monthly service fee and any annual mortgage insurance premium). • Real Estate Settlement Procedures Act (RESPA). RESPA and HUD’s implementing Regulation X contain rules that, among other things, require disclosure of early estimated and final settlement costs and prohibit referral fees and other charges that are not for services actually performed. As a general matter, an institution may neither pay nor accept any fee or other thing of value in exchange for the referral of business related to a reverse mortgage transaction. Institutions that offer reverse mortgage products must ensure that they do so in a manner that complies with the foregoing and all other applicable laws and regulations, including the following Federal laws: • Equal Credit Opportunity Act; • Fair Housing Act; and • National Flood Insurance Act. State laws, including laws regarding unfair or deceptive acts or practices, also may apply to reverse mortgage transactions. Currently, more than twenty states have laws or regulations governing various aspects of reverse mortgages. In addition, all state financial institution regulators have the authority to supervise the mortgagerelated activities of entities subject to 16 See 12 CFR 226.33(b), 226.5b(d), 226.18, and 226.19 17 12 CFR 226.15 and 226.23. Requirements related to rescission rights and notices are not applicable, however, for home purchase transactions. 18 See 12 CFR 226.33(b), 226.5b(d), 226.18, and 226.19. 19 12 CFR 226.19(b)(1). 20 12 CFR 226.20(c). 21 See 15 U.S.C. 1648; 12 CFR 226.33(b)(2) and 226.33(c)(1) and related commentary in Supplement I to 12 CFR 226; and 12 CFR 226, Appendix K. PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 their respective jurisdictions, including activities related to reverse mortgages.22 HECM reverse mortgages also are subject to the consumer protections and other special provisions set forth in HUD regulations.23 HECM consumer protections include information provided to consumers through qualified independent counselors. Before obtaining a HECM reverse mortgage, the borrower must receive counseling from a HUD-approved housing counseling agency.24 The counseling agency is required to discuss with the borrower: (1) Alternatives to HECMs, (2) the financial implications of entering into a HECM (including tax consequences), (3) the effect on eligibility for assistance under Federal and State programs, and (4) the impact on the estate and heirs of the homeowner.25 HUD encourages, but does not require, that HECM counseling be conducted in person.26 HECMs also carry particular disclosure requirements under HUD rules, including a requirement that the lender provide copies of the mortgage, note, and loan agreement to the borrower at the time that the borrower’s application is completed. Recent statutory changes to the HECM program established additional consumer protections.27 For example, Congress adopted consumer protections to guard against potential conflicts of interest, including: (1) Special requirements for HECM lenders that are associated with any other ‘‘financial or insurance activity,’’ (2) a prohibition on lenders’ conditioning the availability of the HECM on the purchase of other financial or insurance products (with limited exceptions), and (3) a requirement that the HECM borrower receive adequate counseling from an independent third party who is not compensated by or associated with a party connected to the transaction. 22 Federal financial institution regulators also have the authority to supervise entities subject to their respective jurisdictions. 23 HUD also provides model forms for HECMs. See Home Equity Conversion Mortgage Handbook 4235.1 (available at https://www.hud.gov/offices/ adm/hudclips/handbooks/hsgh/4235.1/index.cfm). 24 Counselors are required to pass an examination to be included on a HUD roster before they can provide counseling on HECMs. See 24 CFR 206.300 et seq. 25 See 12 U.S.C. 1715z–20. 26 Applicable state laws, however, may have other requirements pertaining to counseling for reverse mortgages, including requirements that counseling be conducted in person. 27 Housing and Economic Recovery Act of 2008 (HERA), Public Law 110–289, § 2122(a)(9) (July 30, 2008). E:\FR\FM\17AUN1.SGM 17AUN1 Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices Compliance and Reputation Risks While reverse mortgages may provide a valuable source of funds for some borrowers, they are complex homesecured loans offered to borrowers who typically have limited income and few assets other than the home securing the loan.28 Thus, lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the institutions themselves. These concerns and risks are especially pronounced with respect to proprietary products that are not subject to the core consumer protection provisions of the HECM program. The Agencies are concerned that: (1) Consumers may enter into reverse mortgage loans without understanding the costs,29 terms, risks, and other consequences of these products, or may be misled by marketing and advertisements promoting reverse mortgage products; (2) Counseling may not be provided to borrowers or may not be adequate to remedy any misunderstandings; (3) Appropriate steps may not be taken to determine and to assure that consumers will be able to pay required taxes and insurance; and (4) Potential conflicts of interest and abusive practices may arise in connection with reverse mortgage transactions, including with the use of loan proceeds and the sale of ancillary investment and insurance products. Consumer Information and Understanding—Litigation, consumer complaints, and testimony before Congress about reverse mortgage products have provided both anecdotal evidence of misrepresentations to consumers and clear indications that borrowers do not consistently understand the terms, features, and risks of their loans.30 For example, consumers are not always adequately informed that reverse mortgages are loans that must be repaid (and not merely ways to access home equity). In fact, some marketing material has prominently stated that the consumer is not incurring a mortgage, even though the fine print states otherwise. Consumer misunderstanding 28 See note 3, supra. a HECM borrower finances his or her closing costs, the closing costs are included in the outstanding balance of the loan. Costs of a HECM loan include an origination fee, third-party closing costs, a monthly servicing fee, and mortgage insurance premiums determined by an FHA formula. 30 See Testimony presented at Hearings of the U.S. Senate Special Committee on Aging conducted on December 12, 2007, available on the internet at https://aging.senate.gov/ hearing_detail.cfm?id=296507. See also AARP report reference in note 7, above. jdjones on DSK8KYBLC1PROD with NOTICES 29 If VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 about these matters also may be the result of advertisements declaring that reverse mortgage borrowers have no risk of losing their homes or are guaranteed to retain ownership of their homes for life. These advertisements do not clearly indicate the circumstances in which the reverse mortgage becomes immediately due and payable or in which borrowers may lose their homes. For example, advertisements that are potentially misleading include ‘‘income for life,’’ ‘‘you’ll never owe more than the value of your home,’’ ‘‘no payments ever,’’ and ‘‘no risk.’’ Consumer misunderstanding also may be the result of misrepresentations that reverse mortgages constitute ‘‘government benefits’’ or a ‘‘government program,’’ with no explanation that the products are loans made by private entities and that the only government program for reverse mortgages is the federallyinsured HECM program.31 In addition, consumers may not be provided sufficient information about alternatives to reverse mortgages that may be more appropriate for their circumstances. Such alternative products include home equity lines of credit, sale-leaseback financing (under which the consumer sells the home and then leases it from the purchaser), and deferred payment loans. Consumers may not be aware that the fees for both HECMs and proprietary reverse mortgages—particularly up-front costs— may be higher than those for other types of mortgages, such as home equity lines of credit, that can be used to access a consumer’s home equity.32 Borrowers also may not receive sufficient information about other potential alternatives to reverse mortgages that may meet their financial needs, including state property tax relief programs, other public benefits, and community service programs. The complex structure of reverse mortgages may prevent a borrower from fully understanding the products. For example, the ability to access the loan proceeds in a variety of ways may provide flexibility for a borrower. However, some payment options may 31 Regulation Z prohibits misrepresentations about government endorsements in advertisements for closed-end credit secured by a dwelling. 12 CFR 226.24. 32 For example, HECMs carry upfront origination and mortgage insurance fees that may total four percent of the loan amount (in addition to other closing costs and ongoing insurance and servicing fees). In HERA, Congress required the U.S. Government Accountability Office (GAO) to study ways of reducing borrower costs and insurance premiums. See GAO report entitled: ‘‘Reverse Mortgages: Policy Changes Have Had Mostly Positive Effects on Lenders and Borrowers, but These Changes and Market Developments have Increased HUD’s Risk’’ (GAO–09–836). PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 50809 adversely affect a borrower’s ability to qualify for needs-based public benefits, such as Supplemental Security Income. In addition, reverse mortgages are not typically structured with a requirement to escrow for taxes and hazard insurance (or for the lender to pay these amounts and add them to the loan balance). If the borrower does not pay taxes and insurance, the reverse mortgage itself may become due, which could result in the borrower losing the home. Without adequate analysis of the borrower’s ability to make these required payments through available assets or loan proceeds, or the establishment of a set-aside or an escrow, in compliance with applicable laws,33 both the borrower and the lender can face substantial risks. To ensure consumer understanding, institutions offering reverse mortgages should clearly advise consumers about their obligation to make direct payments for taxes and insurance if there is no provision for an escrow or set aside to pay these obligations. Existence and Effectiveness of Consumer Counseling—Another risk to the consumer is that consumer counseling may not be effective. Further, while counseling is considered an integral part of the reverse mortgage process and is mandatory for HECM transactions, it may not be required for proprietary products, depending on applicable state law. Even when provided, consumer counseling may not be fully effective in helping borrowers make informed decisions about reverse mortgage products. Counseling conducted over the telephone, in particular, may not be adequate in all cases, in part because it may be more difficult for counselors to assess a borrower’s understanding of the product over the telephone. More generally, counseling may not always provide all the relevant information or answer all questions and concerns raised by homeowners. For example, at least one study has suggested that a significant proportion of HECM borrowers who received counseling did not understand the costs and other features of their loans.34 Conflicts of Interest and Abusive Practices—The potential for inappropriate sales tactics and other abusive practices in connection with reverse mortgages is greater where the lender or another party involved in the transaction has conflicts of interest, or 33 See 24 CFR 206.205(e)(1) and 24 CFR 3500.17. AARP, Reverse Mortgage: Niche Product or Mainstream Solution, Dec. 2007, at 72, 98 (available at https://assets.aarp.org/rgcenter/consume/ 2007_22_revmortgage.pdf). 34 See E:\FR\FM\17AUN1.SGM 17AUN1 50810 Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices jdjones on DSK8KYBLC1PROD with NOTICES has an incentive to market other products and services. For example, when a consumer obtains funds through a reverse mortgage, the consumer could also be offered financial products, such as annuities, or non-financial products, such as home repair services. Such products and services may be inconsistent with consumers’ needs, and, on occasion, have been known to be associated with fraud. The risk is especially strong where, for example: (1) The lender or its affiliate engages in cross-marketing of another financial product; (2) the other product is sold at the same time as the reverse mortgage product; (3) a significant portion of the proceeds of the reverse mortgage is used to purchase another product; or (4) in contrast to the reverse mortgage itself, the other product would not provide the consumer with funds to meet emergency needs or to pay ordinary living expenses. Guidance The consumer protection concerns discussed above raise compliance and reputation risks for institutions offering reverse mortgages. The Agencies have developed the guidance set forth below to assist institutions in managing these risks effectively. Institutions should manage the compliance and reputation risks raised by reverse mortgage lending through implementation of communication, disclosure, and counseling practices such as those discussed below and by taking actions to avoid potential conflicts of interest. The Agencies will assess whether institutions have taken adequate steps to address the risks discussed in this guidance. Lenders offering proprietary products should be especially diligent regarding effective compliance risk management since proprietary reverse mortgages are not subject to the consumer protection requirements applicable to HECM reverse mortgages.35 Institutions offering proprietary reverse mortgage products should follow or adopt as appropriate, relevant HECM requirements, as amended from time to time, in the general areas of mandatory counseling, disclosures, restrictions on cross-selling of other products, and reliable appraisals. In addition, the Agencies expect institutions offering proprietary reverse mortgages to reasonably price such products, including with respect to origination 35 HECM lenders must comply with requirements of the HECM program. This guidance is intended to supplement, and not conflict with, existing guidance and rules for HECM lenders. It is also intended to provide HECM lenders guidance on managing compliance and reputation risks. VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 fees, consistent with safe and sound banking practices, and appropriate consideration of costs, risks, and returns. Taking these steps would help to ensure that institutions are addressing the full range of consumer protection concerns raised by reverse mortgages. Moreover, the Agencies expect institutions to take appropriate steps to determine or ensure that consumers will be able to pay required taxes and insurance. Communications with Consumers— Many of the consumer protection concerns regarding reverse mortgages relate to the adequacy of information provided to consumers. Institutions offering reverse mortgage products should take steps to manage compliance and reputation risks by providing consumers with information designed to help them make informed decisions when selecting financial products, including reverse mortgages and the options for receiving loan advances from them. To promote effective risk management, institutions should review advertisements and other marketing materials to ensure that important information is disclosed clearly and prominently. For example, institutions should review the prominence of marketing claims and any related clarifying statements to ensure that potential borrowers are not misled or deceived. Institutions also are responsible for ensuring that marketing materials do not provide misleading information about product features, loan terms, or product risks, or about the borrower’s obligations with respect to taxes, insurance, and home maintenance. The Agencies will evaluate potentially misleading marketing materials and take appropriate action to address any marketing that violates the FTC Act prohibition on deception or any other applicable law. Institutions also should be attentive to the timing, content, and clarity of all information presented to consumers, from the moment a consumer begins shopping for a loan to the time a loan is closed. For example, institutions should develop clear and balanced product descriptions and make them available when a consumer is shopping for a mortgage—such as when the consumer makes an inquiry to the institution about a reverse mortgage and receives information about reverse mortgages, or when marketing materials relating to reverse mortgage are provided by the institution to the consumer—not just upon the submission of an application or at PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 consummation.36 Information is balanced when it fairly presents the risks and costs as well as the potential benefits of the product. The provision of timely and descriptive information would serve as an important supplement to the disclosures required by specific laws and regulations. The Agencies will review any information provided to consumers and take appropriate action to address any marketing that violates the FTC Act prohibition on deception or any other applicable law. Accordingly, in order to assist consumers in their product selection decisions, an institution should use promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgage products. This information would normally include but need not be limited to: • Borrower and property eligibility; • When marketing proprietary products, the fact that these reverse mortgages are not government insured and the resulting risks to consumers; • Determination of principal limits, or maximum loan limits, based on home value, borrower age, expected interest rates, and program limitations; • Lump sum and other disbursement options and their possible implications for the borrower’s ability to obtain public benefits; • The circumstances under which the loan must be repaid; • The actions the borrower must take to prevent the loan from becoming in default and therefore due and payable, including the need to continue to pay taxes and insurance on the property and to maintain the property as required; • Fees and charges associated with reverse mortgages; • The requirement to make direct payments for real estate taxes and insurance if there is no provision for an escrow or a set-aside to pay these obligations; • Alternatives to reverse mortgage products that are offered by the institution and may address the homeowner’s needs; and • The importance of reverse mortgage counseling and information about how to find a qualified independent counselor so that the borrower is 36 When developing consumer information, institutions should: (1) Focus on information that is important to consumer decision making; (2) highlight key information so it will be noticed; (3) employ a user-friendly and readily navigable format for presenting the information; and (4) use plain language, with concrete and realistic examples. A consumer may benefit from comparative tables describing key features of reverse mortgages (including the different draw options). E:\FR\FM\17AUN1.SGM 17AUN1 jdjones on DSK8KYBLC1PROD with NOTICES Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices informed about possible alternatives to a reverse mortgage, the potential consequences of entering into a reverse mortgage, and the potential effect on eligibility for needs-based public benefits. The Agencies recognize that institutions may not be able to incorporate all of the practices recommended in this guidance when advertising reverse mortgages through certain forms of media, such as radio, television, or billboards. Nevertheless, institutions should seek to provide clear and balanced information about the risks and costs as well as the benefits of these products in all forms of advertising. An advertisement that says ‘‘We offer reverse mortgages to borrowers who are 62 or older. Call us for more information’’ is clear and balanced because it does not make any representations about the benefits or risks of the product, and is not deceptive or misleading. Qualified Independent Counseling— To further promote consumer understanding and manage compliance risks, reverse mortgage lenders offering proprietary products should require that the consumer obtain counseling from qualified independent counselors before an institution processes an application for a reverse mortgage loan or charges an application fee. Before counseling, institutions may provide information to consumers that both consumers and counselors may find useful in evaluating proprietary and HECM reverse mortgages. For example, the institution may explain the difference between proprietary and HECM products; discuss whether the borrower is eligible; provide information on fees; and provide a copy of a sample mortgage, note, and loan agreement. In addition, if an institution does not charge a fee to the consumer, it may use an automated valuation model to perform a preliminary assessment of the value of the consumer’s property. 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. For example, institutions could provide a list of counseling agencies that provide reverse mortgage counseling.37 Similarly, an institution’s policies should prohibit the institution from contacting a counselor to discuss a particular consumer, a particular transaction, or the timing or 37 HECM lenders must provide a list of 10 counselors for reverse mortgages. HUD Mortgagee Letter 2009–10. VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 content of a counseling session unless the consumer is involved. Institutions should also strongly encourage borrowers to obtain counseling in person, whenever possible, 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. Institutions should be aware that the purpose of the counseling session is to provide adequate time to discuss these matters in detail and to address questions and concerns raised by homeowners, and 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; 38 • The financial implications and tax consequences of entering into a reverse mortgage; • The impact of a reverse mortgage on eligibility for federal and state needsbased assistance programs, including Supplemental Security Income; and • The impact of the reverse mortgage on the estate and heirs. The Agencies note that the provision of such information would be consistent with HUD guidance regarding consumer counseling in connection with HECM loans. Avoidance of Potential Conflicts—To manage the compliance and reputation risks associated with reverse mortgages, institutions should take all reasonably necessary steps to avoid any appearance of a conflict of interest and violation of applicable laws and rules. For example, an institution should: • Adopt clear written policies and internal controls designed to ensure that the institution does not violate any applicable anti-tying restrictions.39 For 38 Because counselors may not be knowledgeable on all proprietary products, an institution may provide relevant information about its proprietary products to a consumer before the counseling session in order to facilitate the counseling session. 39 The anti-tying provisions of Section 106(b) of the Bank Holding Company Act of 1970 for banks and their subsidiaries, as applicable, and comparable anti-tying provisions for savings associations, savings and loan holding companies, and their affiliates prohibit these institutions from, among other things, requiring a customer to purchase certain nonbanking products or services, including insurance and annuity products, from the institution or an affiliate as a condition to obtaining or varying the price of credit. Exceptions from these anti-tying prohibitions are permitted if the required PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 50811 example, an institution risks violations if it: (1) Requires the borrower to purchase any annuity, insurance or any product other than a traditional banking product in order to obtain the reverse mortgage from the institution or an affiliate, or (2) varies the price of the reverse mortgage based on a condition that the borrower purchase such other product. Further, the Agencies expect that institutions will not do either of these things indirectly through brokers acting as agents; • Adopt clear written policies and internal controls designed to ensure that the institution complies with restrictions designed to avoid conflicts of interest.40 For example, an institution risks violations if it requires the borrower to purchase any annuity, insurance (other than appropriate title, flood or hazard insurance), or similar financial product from the institution or third party in order to obtain the reverse mortgage from the institution or broker; • Adopt clear policies designed to ensure that loan originators and brokers acting on behalf of an institution do not have an inappropriate incentive to sell other products that may appear to be linked to the granting of a reverse mortgage or to engage in inappropriate cross-marketing of other products. Such policies should ensure that any such cross-selling is clearly consistent with the FTC Act standards; and • Adopt clear compensation policies to guard against other inappropriate incentives for loan officers and third parties, such as mortgage brokers and correspondents, to make a loan. In addition, conflicts are less likely to be a concern if the borrower has received information and access to independent counseling as described above. Policies, Procedures, and Internal Controls—Institutions should have policies and procedures to address the concerns expressed in this guidance, including those involving conflicts of interest and the provision of consumer information. In addition, institutions products are loans, discounts, deposits, or trust services (i.e., traditional banking products). See 12 U.S.C. 1464(q), 1467a(n), and 1972. 12 CFR 225.7. In addition, banks and savings associations that offer insurance and annuities are specifically prohibited from engaging in practices that would cause a consumer to believe that an extension of credit is conditioned on the purchase of insurance or an annuity from the creditor. See 12 U.S.C. 1831x and Consumer Protection in Sales of Insurance Rules, 12 CFR 14.30, 208.83, 343.30, and 536.30. The Agencies examine institutions for compliance with these legal requirements and will take appropriate action to address any violations. Tying arrangements also remain subject to the general antitrust laws. 40 See 12 U.S.C. 1715z–20(n)–(o) for anti-tying provisions related to HECMs. E:\FR\FM\17AUN1.SGM 17AUN1 50812 Federal Register / Vol. 75, No. 158 / Tuesday, August 17, 2010 / Notices jdjones on DSK8KYBLC1PROD with NOTICES should have effective internal controls to monitor whether actual practices are consistent with their policies and operating procedures relating to reverse mortgages. To achieve these objectives, training should be designed so that relevant lending personnel are able to convey information to consumers about product terms and risks in a timely, accurate, and balanced manner. Furthermore, institutions’ independent monitoring should assess how well lending personnel are following internal policies and procedures and evaluate the nature and extent of policy exceptions. Findings should be reported to relevant management. In addition, institutions’ legal and compliance reviews should include oversight of compensation programs to ensure that lending personnel are not improperly encouraged to direct consumers to particular products. Finally, institutions should also review consumer complaints to identify potential compliance and reputation risks. Third Party Risk Management—When making, purchasing, or servicing reverse mortgages through a third party, such as a mortgage broker or correspondent, institutions should take steps to manage the compliance and reputation risks presented by such relationships. These VerDate Mar<15>2010 15:16 Aug 16, 2010 Jkt 220001 steps would include: (1) Conducting due diligence and establishing criteria for entering into and maintaining relationships with such third parties; (2) establishing criteria for third-party compensation that are designed to avoid providing incentives for originations inconsistent with the institution’s policies and procedures; (3) setting requirements for agreements with such third parties; (4) establishing internal procedures and systems to monitor ongoing compliance with applicable agreements, institution policies, and laws and regulations; and (5) implementing appropriate corrective actions in the event that the third party fails to comply with such agreements, policies, or laws and regulations. Due diligence and monitoring activities should include a review of promotional materials used by third parties to ensure compliance with the TILA, the FTC Act, and other laws, as applicable. In addition, institutions should structure third party relationships so as not to contravene RESPA’s general prohibition against paying or receiving any fee or other thing of value in exchange for the referral of business related to a reverse mortgage transaction. Fees must be paid only for the permissible services provided by the PO 00000 Frm 00070 Fmt 4703 Sfmt 9990 third party, consistent with the provisions of Section 8 of RESPA. Moreover, institutions should not accept fees from any third party without providing appropriate services to warrant any such fee. Dated: July 26, 2010. John C. Dugan, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, August 3, 2010. Jennifer J. Johnson, Secretary of the Board. By order of the Federal Deposit Insurance Corporation. Dated: July 21, 2010. Valerie J. Best, Assistant Executive Secretary. Dated: August 11, 2010. By the Office of Thrift Supervision. John E. Bowman, Acting Director. Dated: July 27, 2010. By the National Credit Union Administration. Debbie Matz, Chairman. [FR Doc. 2010–20286 Filed 8–16–10; 8:45 am] BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P; 6720–01–P; 753501–P E:\FR\FM\17AUN1.SGM 17AUN1

Agencies

[Federal Register Volume 75, Number 158 (Tuesday, August 17, 2010)]
[Notices]
[Pages 50801-50812]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20286]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2010-0015]

FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket ID OTS-2010-24]

NATIONAL CREDIT UNION ADMINISTRATION

Reverse Mortgage Products: Guidance for Managing Compliance and
Reputation Risks

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (FRB); Federal Deposit
Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury
(OTS); and National Credit Union Administration (NCUA).

ACTION: Final Guidance.

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SUMMARY: The OCC, FRB, FDIC, OTS, and NCUA (the Agencies) are issuing
this final guidance entitled, ``Reverse Mortgage Products: Guidance for
Managing Compliance and Reputation Risks'' (guidance). The Agencies
developed this guidance, in conjunction with the State Liaison
Committee of the Federal Financial Institutions Examination Council
(FFIEC), to address compliance and reputation risks associated with
reverse mortgages, which are complex loan products typically offered to
elderly consumers. Institutions are 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.

DATES: This final guidance is effective on October 18, 2010. Comments
on the Paperwork Reduction Act burden estimates only may be submitted
on or before September 16, 2010.

FOR FURTHER INFORMATION CONTACT: OCC: Karen Tucker, National Bank
Examiner and Senior Compliance Specialist, or Jesse Butler, Bank
Examiner and Compliance Specialist, Compliance Policy, (202) 874- 4428;
Stephen Van Meter, Assistant Director, or Nancy Worth, Counsel,
Community and Consumer Law Division, (202) 874-5750, Office of the
Comptroller of the Currency, 250 E Street SW., Washington, DC 20219.
FRB: Kathleen Conley, Senior Supervisory Consumer Financial
Services Analyst, (202) 452-2389; Brent Lattin, Senior Attorney, (202)
452-3667, Board of Governors of the Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551. For users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
FDIC: Michael R. Evans, Fair Lending Specialist, Compliance Policy
Section, Division of Supervision and Consumer Protection, (202) 898-
6611; or Richard M. Schwartz, Counsel, (202) 898-7424, Legal Division,
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington,
DNC 20429.
OTS: David Adkins, Fair Lending Specialist, (202) 906-6716, or
Richard Bennett, Senior Compliance Counsel, (202) 906-7409, Office of
Thrift Supervision, 1700 G Street NW., Washington, DC 20552.
NCUA: Robert C. Leonard, Program Officer, 703-518-6396, Office of
Examination & Insurance, National Credit Union Administration, 1775
Duke Street, Alexandria, VA 22314.

SUPPLEMENTARY INFORMATION:

I. Background Information

Institutions under the Agencies' supervision currently provide two
basic types of reverse mortgage products: lenders' own proprietary
reverse mortgage products and reverse mortgages offered under the Home
Equity Conversion Mortgage (HECM) program.\1\ Both HECMs and
proprietary products are subject to various laws governing mortgage
lending including

[[Page 50802]]

the Truth in Lending Act (TILA), the Real Estate Settlement Procedures
Act (RESPA), the Federal Trade Commission Act (FTC Act), and the fair
lending laws. HECMs are also subject to an extensive regulatory regime
established by HUD, including provisions for FHA insurance of HECM
loans that protect both lenders and reverse mortgage borrowers.
---------------------------------------------------------------------------

\1\ A HECM is a reverse mortgage product insured by the Federal
Housing Administration (FHA), which is part of the U.S. Department
of Housing and Urban Development (HUD), and subject to a range of
federal consumer protection and other requirements. See 12 U.S.C.
1715z-20; 24 CFR Part 206.
---------------------------------------------------------------------------

Reverse mortgages enable eligible borrowers to remain in their
homes while accessing their home equity in order to meet emergency
needs, supplement their incomes, or, in some cases, purchase a new
home--without subjecting borrowers to ongoing repayment obligations
during the life of the loan. The use of reverse mortgages could expand
significantly in coming years as the U.S. population ages and more
homeowners become eligible for reverse mortgage products. If prudently
underwritten and used appropriately, these products have the potential
to become an increasingly important credit product for addressing
certain credit needs of an aging population.
However, reverse mortgages can be highly complex loan products, and
it is particularly important to provide adequate information and other
consumer protections. Typically, elderly borrowers are securing a
reverse mortgage with their primary asset--their home. Thus, borrowers
may depend on the reverse mortgage proceeds for the cash flow needed to
pay for health care and other living expenses.
For these reasons, it is critical that institutions and other
entities subject to the Agencies' supervision (hereafter
``institutions'') manage the compliance and reputation risks associated
with reverse mortgages. To assist institutions in their efforts to
manage these risks, the Agencies published for comment Reverse Mortgage
Products: Guidance for Managing Compliance and Reputation Risks
(proposed guidance), 74 FR 66652 (December 16, 2009). The proposed
guidance discussed the general features of, certain legal provisions
applicable to, and consumer protection concerns raised by reverse
mortgage products. In addition, it focused on the need to provide
adequate information to consumers about reverse mortgage products; to
provide qualified independent counseling to consumers considering these
products; and to avoid potential conflicts of interest. The proposed
guidance also addressed related policies, procedures, and internal
controls and third party risk management.
The Agencies received 18 comments on the proposed guidance.
Comments were received from financial institutions (institutions);
industry-related trade associations (industry groups); counselors,
consumer and community organizations (consumer organizations);
government officials; and members of the public.

II. Overview of Public Comments

The commenters were generally supportive of the proposed guidance.
In general, institutions and industry groups sought additional clarity
and flexibility in implementing the guidance, while consumer
organizations and government commenters sought to adopt stronger
standards, particularly with respect to policies designed to avoid
conflicts of interest.
A majority of institutions and industry groups sought more clarity
on the extent to which HUD rules (such as those relating to fees)
should be applied to proprietary reverse mortgages. They also sought
additional clarity or flexibility regarding particular recommendations
in the proposed guidance, including with respect to the information
that should be provided to reverse mortgage borrowers in promotional
materials, the conduct of counseling by telephone, and the restrictions
on cross-selling. Institution and industry group commenters generally
sought clarification that implementation of the guidance would be
consistent with forthcoming changes to the HECM counseling protocols
and the FRB's Regulation Z, the regulation that implements TILA.
Consumer organizations and a government commenter generally
supported the provision of balanced information about reverse mortgage
alternatives, and avoidance of deceptive marketing by loan originators
or brokers. Among the recommendations made by these commenters were to
establish a suitability standard, engage in consumer testing of any new
disclosures, strengthen the requirement for in-person counseling, and
adopt stronger policies to avoid conflicts of interests. Several
commenters made suggestions for additional topics that were not
included in the proposed guidance; these related to data collection on
the volume of reverse mortgages, anti-fraud provisions, test design for
the HECM counseling roster, and other HECM program rules.

III. Revisions To Address Public Comments on the Guidance

The Agencies made a number of changes to the proposal to respond to
commenters' concerns and to provide additional clarity. Significant
comments on the specific provisions of the proposed guidance, the
Agencies' responses, and changes to the guidance are discussed below.

Communications With Consumers

Commenters generally asked for a number of clarifications with
respect to the proposed guidance on communications between institutions
and potential reverse mortgage borrowers. Consumer organizations and a
government commenter generally supported the provision of balanced
information about reverse mortgages and alternatives, and avoidance of
deceptive marketing by loan originators and brokers. One government
commenter suggested consumer testing of new disclosures, if any, to
improve communications.
Some consumer organization and government commenters urged a strong
role for lenders in determining the suitability of the loan for the
borrower. In particular, these commenters suggested that it should be
the duty of any lender or broker to articulate and match the consumer's
needs, objectives, and circumstances to the terms of the loan and to
reveal any interest that the lender or broker has in arranging the
loan.
This reverse mortgage guidance does not, and is not intended to,
impose suitability obligations on lenders. The Agencies believe,
however, that the provision of clear and balanced information and
qualified independent counseling in accordance with the guidance will
help to ensure that reverse mortgage borrowers do not enter into
transactions that are not appropriate for their financial circumstances
and needs.
With regard to the commenter's recommendations for consumer
testing, as noted in the preamble to the proposed guidance, the
Agencies are considering whether to issue illustrations of consumer
information for reverse mortgages. The Agencies will consider the
commenter's consumer testing recommendations in connection with these
illustrations. Before adopting any illustrations, the Agencies will
issue them for notice and comment.
Institution and industry group commenters generally sought
clarification that implementation of the guidance would be consistent
with changes to the HECM counseling protocols and the FRB's Regulation
Z. One industry commenter asked that the Agencies clarify whether
Regulation Z or FTC Act standards for proper disclosures would be
applied to advertisements and promotional materials for reverse
mortgages. These commenters also sought clarification of specific
points regarding the list of the information items that should be

[[Page 50803]]

provided to reverse mortgage borrowers in promotional materials.
As a general matter, the Agencies believe that the guidance is
consistent with the HECM protocols and Regulation Z, as now in effect.
The current HECM counseling protocols require that counselors provide
to borrowers the same information that is listed in the proposed
guidance. The Agencies are not aware of any proposed changes to the
HECM requirement that counselors provide this information.
While the FRB is reviewing Regulation Z disclosures for reverse
mortgages, this project is not final. In light of this review, the
Agencies are not addressing technical requirements that may be
addressed in Regulation Z, and do not anticipate that the general
recommendations in the guidance will conflict with any specific
disclosure requirements for reverse mortgages adopted by the FRB.
In response to a commenter's inquiry concerning whether Regulation
Z standards would be applied to all marketing materials, the Agencies
did not intend to incorporate--in stating that information should be
provided clearly and conspicuously--Regulation Z's standard for ``clear
and conspicuous'' disclosures. Rather, the Agencies sought to convey
simply that important information should be presented in a clear and
prominent manner. The final guidance has been clarified accordingly.
Advertisements and other marketing materials, of course, will continue
to be subject to any relevant requirements under Regulation Z, the FTC
Act, and other applicable laws and regulations.
In regard to the more specific issues raised by commenters, the
Agencies have clarified the guidance by acknowledging that institutions
may not be able to provide all of the information recommended in this
guidance when advertising reverse mortgages through certain forms of
media, such as radio, television, or billboards. In these
circumstances, however, institutions should provide clear and balanced
information about the risks of these products.\2\ The Agencies also
clarified the meaning of ``clear and balanced information'' in the
final guidance; in particular, information is balanced when it fairly
presents risks and costs as well as potential benefits. The Agencies
clarified in the final guidance when more comprehensive information
should be provided, and that promotional materials should address how
disbursements from the reverse mortgage may affect the borrower's
ability to obtain public benefits. Information provided in promotional
materials may cross-reference other materials, and may refer borrowers
to tax or financial advisors.
---------------------------------------------------------------------------

\2\ These clarifications are consistent with other interagency
guidance relating to nontraditional mortgages. Interagency Guidance
on Nontraditional Mortgage Product Risks, 71 FR 58609, 58617 n.19
(Oct. 4, 2006).
---------------------------------------------------------------------------

Qualified Independent Counseling

Commenters supported the recommendation in the guidance that
consumers seeking any reverse mortgage should consult a qualified
independent counselor. Commenters disagreed on the extent to which the
guidance should encourage in-person counseling (as opposed to
telephonic counseling). They also disagreed on certain procedures
related to counseling--for example, how to inform borrowers about
counselors and whether lenders should contact counselors directly.
A majority of institutions and industry groups noted the
disadvantages of requiring in-person counseling, including the shortage
of qualified counselors and the logistical and other challenges that
may make it difficult to bring the borrower(s) and their advisors to an
in-person counseling session. One counseling agency also supported
telephonic counseling, and noted that telephonic counseling may be more
feasible, in particular, when a multilingual counselor is needed to
provide counseling in the borrower's own language. Consumer group and
government commenters, however, strongly supported in-person
counseling, and advocated that it be used in all but rare cases. These
commenters stated that in-person counseling sessions are longer, foster
greater understanding, and give counselors a better opportunity to
assess the borrower's needs and understanding of the transaction.
In order for institutions to best promote consumer comprehension
and manage compliance risks, the Agencies intend that the guidance
reflect and be consistent with HUD's stated preference for in-person
counseling whenever possible, and have modified the guidance to clarify
that intention.
Industry groups and financial institutions also requested greater
clarification with respect to how institutions should refer borrowers
to counselors and ensure that counselors have appropriate knowledge of
proprietary products. Commenters also asked whether the Agencies
expected institutions to ensure that counseling covered all of the
topics noted in the guidance. Several commenters also referred to the
fact that HUD is expected to release new protocols for HECM counseling
and that these protocols would likely cover many of the topics
discussed in the guidance.
The Agencies have modified the guidance to address some of these
specific concerns. In particular the guidance now indicates that
lenders may provide borrowers with a list of reverse mortgage
counselors, consistent with HUD guidelines for HECM counseling, and may
provide borrowers with a substantial array of materials--including
information about proprietary products--before the borrower meets with
a reverse mortgage counselor. The guidance also has been modified to
clarify that institutions are not expected to supervise or monitor the
activities of qualified independent counselors. The Agencies expect
that counselors' activities would conform to new HUD protocols when
they are released.

Avoidance of Potential Conflicts

Generally, consumer organizations and one regulatory agency
supported the guidance's view that institutions should take all
reasonably necessary steps to avoid any appearance of a conflict of
interest, though some consumer organizations urged the adoption of
stricter standards than proposed. Institution and industry groups
sought additional clarifications to this portion of the proposed
guidance.
The proposed guidance recommended that policies prohibit the
reverse mortgage from being conditioned on the purchase of ``any other
financial or other product'' from the lender (``anti-tying
provision''). Consumer organizations urged stricter standards,
including the adoption of further restrictions prohibiting yield spread
premiums (YSPs) and limiting sales of other products by lenders or
their affiliates. Industry commenters noted that this provision, as
stated, was broader than applicable federal anti-tying rules, and would
prohibit, for example, restricting the availability of reverse
mortgages to consumers having a deposit relationship with the
institution.
In response to these comments, the Agencies are clarifying the
anti-tying and conflict avoidance provisions so that they more clearly
address applicable federal rules, including the anti-tying rules
contained in the Bank Holding Company Act Amendments of 1970 and the
Home Owners' Loan Act; the rules relating to insurance sales adopted by
the OCC, FRB, FDIC, and OTS; and the provisions applicable to HECMs.
The Agencies provide, as an example, that an institution may risk
violations, depending on the specific law that applies, if it requires
consumers to obtain annuity products--

[[Page 50804]]

or any other product that is not a traditional banking product--in
order to obtain a reverse mortgage or varies the price of the reverse
mortgage based on a condition that the borrower purchase such other
product from the institution or affiliate. The Agencies believe that
this example will help prevent violations of rules, as applicable.
The guidance also clarifies the Agencies' expectation that
institutions' policies and procedures will be designed to ensure that
brokers with whom they do business as agents also will not condition or
vary the price of the loan on the consumer's obtaining some additional
product or service (other than a traditional banking product). The
Agencies also have added a related recommendation that institutions'
policies and procedures will be designed to ensure that neither lenders
nor brokers require the borrower to obtain any insurance, annuity, or
similar product (other than appropriate title, flood, or hazard
insurance as permitted or required by applicable law). This
recommendation reflects insurance sales restrictions currently
applicable to HECMs.
The proposed guidance also contained recommendations to guard
against inappropriate incentives for the origination of reverse
mortgages or the sale of other products. Several commenters sought
clarification on the extent to which they could offer or refer
consumers to other products, particularly where those products are
provided by third parties or are typically required in connection with
mortgage settlements.
The Agencies believe that the clarifications described above help
to address these commenters' concerns. The final guidance stresses that
institutions must comply with relevant anti-tying rules, and, further,
should consider other appropriate measures necessary to guard against
improper incentives or potential conflicts of interest. The Agencies
also removed an example included in the proposed guidance to address
commenters' concerns that it exceeded the scope of the anti-tying rules
by implying that the Agencies wished to ban the offering of any other
products or any referral to providers of other products in connection
with a reverse mortgage. In addition, the Agencies emphasized in the
final guidance that policies relating to cross-selling--offering or
referring consumers to other products--should be designed to ensure
that the activities are clearly consistent with FTC Act standards.

Other Issues

Fees. An industry commenter requested clarification on what
limitations the Agencies intended by recommending in the proposed
guidance that institutions adopt relevant HECM requirements for
proprietary mortgages, including requirements with respect to
``affordable origination fees.'' The Agencies note that HECM
origination fees are expressly limited by statute. In response to this
comment, the Agencies have deleted the specific reference to affordable
origination fees. The Agencies do not intend to set fee limits in this
guidance. However, the Agencies expect institutions offering
proprietary reverse mortgages to reasonably price such products,
including with respect to origination fees, consistent with safe and
sound banking practices, and with appropriate consideration of costs,
risks, and returns. Consistent with safe and sound banking practices in
setting interest rates, fees, and other charges, an institution should
consider, among other factors, the costs incurred in originating the
loan and the risks associated with the loan. While HECM origination
fees are expressly limited by statute, the costs and risks of
proprietary loans may be different from those of HECMs. For example,
the lack of FHA insurance on proprietary loans will mean that the
institution (and not HUD) bears the risk that the borrower lives longer
than expected, that the interest rates are higher than expected, or
that the collateral value does not increase as rapidly as projected.
The Agencies also note that HECMs may carry substantial other costs--
principally insurance premiums--that proprietary reverse mortgages may
lack. In addition to considering safe and sound banking practices in
setting fees, institutions should comply with any applicable law or
regulation, and follow guidance governing fees.
Taxes and Insurance. Financial institutions and industry group
commenters requested clarification regarding the Agencies' expressed
concern about ensuring borrowers' ability to pay taxes and insurance.
These commenters were concerned that this requirement would require
them to set traditional credit underwriting standards for reverse
mortgages and deny loans to consumers if these standards were not met.
The Agencies are not imposing a credit underwriting standard in this
guidance. There are a number of other ways that institutions can take
appropriate steps to determine or ensure that a consumer has the
ability to pay taxes and insurance. These include escrows, in
compliance with applicable laws,\3\ and set-aside arrangements.
---------------------------------------------------------------------------

\3\ See 24 CFR 206.205(e)(1) and 24 CFR 3500.17.
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Third Party Risk Management. One consumer organization commenter
urged that loan originators should ensure that brokers do not advertise
reverse mortgages as ``government benefits.'' In this regard, the
Agencies note that lender due diligence and monitoring activities
should include a review of promotional materials used by third parties
to ensure compliance with TILA, the FTC Act, and other laws, as
applicable. The guidance has been modified to clarify this position.
Other. One consumer organization recommended that the Agencies
collect data on reverse mortgages. Later in 2010, the Agencies will
begin collecting data on reverse mortgages on the Call Report and
Thrift Financial Report.\4\ Several commenters requested that HUD
change certain requirements relating to the HECM counseling roster or
the origination or termination of HECMs. These matters relate to HUD's
operation of the HECM program and it would not be appropriate for the
Agencies to address these issues in the guidance.
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\4\ See 74 FR 68314 (Dec. 23, 2009) and 74 FR 68326 (Dec. 23,
2009).
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IV. Paperwork Reduction Act

In accordance with section 3512 of the Paperwork Reduction Act of
1995, 44 U.S.C. 3501-3521 (PRA), the Agencies may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. To implement this
information collection contained in this guidance, the OCC, FDIC, OTS,
and NCUA will seek OMB approval. The FRB has approved this information
collection under its delegated authority from OMB.
On December 16, 2009,\5\ the agencies sought comment on the burden
estimates for this information collection. No comments were received
regarding the burden estimates.
---------------------------------------------------------------------------

\5\ 74 FR 66652.
---------------------------------------------------------------------------

Comments continue to be invited on:
(a) Whether the collection of information is necessary for the
proper performance of the Federal banking agencies' functions,
including whether the information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;

[[Page 50805]]

(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.
Comments on these questions should be directed to:
OCC: Communications Division, Office of the Comptroller of the
Currency, Mailstop 2-3, Attention 1557-NEW, 250 E Street, SW.,
Washington, DC 20219. In addition comments may be sent by fax to (202)
874-5274, or by electronic mail to regs.comments@occ.treas.gov. You may
personally inspect and photocopy comments at the OCC, 250 E Street,
SW., Washington, DC. For security reasons, the OCC requires that
visitors make an appointment to inspect comments. You may do so by
calling (202) 874-4700. Upon arrival, visitors will be required to
present valid government-issued photo identification and to submit to
security screening in order to inspect and photocopy comments.
FRB: You may submit comments, identified by Docket No. OP-1362, by
any of the following methods:
Agency Web Site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the FRB's Web site at
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons. Accordingly, your comments will
not be edited to remove any identifying or contact information. Public
comments may also be viewed in electronic or paper form in Room MP-500
of the FRB's Martin Building (20th and C Streets, NW.) between 9 a.m.
and 5 p.m. on weekdays.
FDIC: Interested parties are invited to submit written comments.
All comments should refer to the name of the collection, ``Reverse
Mortgage Products Guidance.'' Comments may be submitted by any of the
following methods:
https://www.FDIC.gov/regulations/laws/federal/propose.html.
E-mail: comments@fdic.gov. Include the name and number of
the collection in the subject line of the message.
Mail: Leneta G. Gregorie (202) 898.3719, Counsel, Federal
Deposit Insurance Corporation, PA1730-3000, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery: Comments may be hand-delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street), on business days between 7 a.m. and 5 p.m.
OTS: Send comments, referring to the collection by title of the
proposal or by OMB approval number, to OMB and OTS at these addresses:
Office of Information and Regulatory Affairs, Attention: Desk Officer
for OTS, U.S. Office of Management and Budget, 725--17th Street, NW.,
Room 10235, Washington, DC 20503, or by fax to (202) 395-6974; and
Information Collection Comments, Chief Counsel's Office, Office of
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, by fax to
(202) 906-6518, or by e-mail to infocollection.comments@ots.treas.gov.
OTS will post comments and the related index on the OTS Internet Site
at www.ots.treas.gov. In addition, interested persons may inspect
comments at the Public Reading Room, 1700 G Street, NW., by
appointment. To make an appointment, call (202) 906-5922, send an e-
mail to public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to
(202) 906-7755.
NCUA: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web Site: https://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the
instructions for submitting comments.
E-mail: Address to regcomments@ncua.gov. Include ``[Your
name] Comments on Reverse Mortgage Products: Guidance for Managing
Compliance and Reputation Risks,'' in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
Mail: Address to Mary F. Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public inspection: All public comments are available on the
agency's Web site at https://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx as submitted, except
as may not be possible for technical reasons. Public comments will not
be edited to remove any identifying or contact information. Paper
copies of comments may be inspected in NCUA's law library, at 1775 Duke
Street, Alexandria, Virginia 22314, by appointment weekdays between 9
a.m. and 3 p.m. To make an appointment, call (703) 518-6546 or send an
e-mail to OGC Mail @ncua.gov.
You should send a copy of your comments to the OMB Desk Officer for
the agencies, by mail to U.S. Office of Management and Budget, 725 17th
Street, NW., 10235, Washington, DC 20503, or by fax to (202)
395-6974.
Title of Information Collection: Reverse Mortgage Products.
OMB Control Numbers: New collection; to be assigned by OMB.
Abstract: The Agencies previously determined that certain
provisions of the guidance contain information collections. However, a
number of the guidance provisions are currently standard business
practice for proprietary and HECM reverse mortgages and, therefore,
under the ``usual and customary'' standard, PRA clearance is not
warranted. There are also requirements currently covered under approved
TILA-related information collections for proprietary and HECM reverse
mortgages, and an approved HUD information collection for HECM reverse
mortgages.
Proprietary reverse mortgage products, however, are not subject to
the consumer protection provisions of the HECM program, so these
guidance provisions would normally be submitted for approval under PRA.
However, recent research has shown that, despite the significant growth
in reverse mortgages since inception of the HECM program in 1989,
currently the market for proprietary reverse mortgages has dissipated
to the point that, industry-wide, there are fewer than 10 lenders
offering such products.\6\ This is likely due to the recent decline in

[[Page 50806]]

housing values, resulting in decreased equity in homes.
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\6\ See the FRB's Divisions of Research & Statistics and
Monetary Affairs Finance and Economics Discussion Series paper
``Reversing the Trend: The Recent Expansion of the Reverse Mortgage
Market,'' https://www.federalreserve.gov/pubs/feds/2009/200942/200942pap.pdf.
---------------------------------------------------------------------------

Given the minimal number of lenders currently offering proprietary
reverse mortgages, the agencies are not now seeking OMB approval for
the consumer protection provisions in the guidance applicable to
proprietary reverse mortgages. The agencies will, however, seek PRA
approval once this sector of the market recovers.
Lastly, there are provisions in the guidance that apply to both
proprietary and HECM reverse mortgages that do not meet the ``usual and
customary'' standard, are not covered by already approved information
collections and, therefore, require PRA clearance.

Proprietary Reverse Mortgages

Institutions offering proprietary reverse mortgages are encouraged
under the guidance to follow or adopt relevant HECM requirements for
mandatory counseling, disclosures, restrictions on cross-selling of
ancillary products, and reliable appraisals.

Proprietary and HECM Reverse Mortgages

Institutions offering either HECMs or proprietary reverse mortgages
are encouraged to develop clear and balanced product descriptions and
make them available to consumers shopping for a mortgage. They should
set forth a description of how disbursements can be received and
include timely information to supplement the TILA and other
disclosures. Promotional materials and product descriptions should
include information about the costs, terms, features, and risks of
reverse mortgage products.
Institutions should adopt policies and procedures that prohibit
directing a consumer to a particular counseling agency or contacting a
counselor on the consumer's behalf. They should adopt clear written
policies and establish internal controls specifying that neither the
lender nor any broker will require the borrower to purchase any other
product from the lender in order to obtain the mortgage. Policies
should be clear so that originators do not have an inappropriate
incentive to sell other products that appear linked to the granting of
a mortgage. Legal and compliance reviews should include oversight of
compensation programs so that lending personnel are not improperly
encouraged to direct consumers to particular products.
Institutions making, purchasing, or servicing reverse mortgages
through a third party should conduct due diligence and establish
criteria for third party relationships and compensation. They should
set requirements for agreements and establish systems to monitor
compliance with the agreement and applicable laws and regulations. They
should also take corrective action if a third party fails to comply.
Third party relationships should be structured in a way that does not
conflict with RESPA.
Affected Public:
OCC: National banks, their subsidiaries, and federal branches or
agencies of foreign banks.
FRB: Bank holding companies, state member banks, branches and
agencies of foreign banks (other than federal branches, federal
agencies, and insured state branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act.
FDIC: Insured state nonmember banks.
OTS: Savings associations and savings and loan holding companies.
NCUA: Federally-insured credit unions.
Type of Review: Regular.
Estimated Burden:
OCC:
Number of respondents: 77.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 3,696 hours.
FRB:
Number of respondents: 18.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 864 hours.
FDIC:
Number of respondents: 48.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 2,304 hours.
OTS:
Number of respondents: 20.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 960.
NCUA:
Number of respondents: 85.
Burden per respondent: 40 hours to implement policies and
procedures and to provide training; 8 hours annually to maintain
program.
Total estimated annual burden: 4,080 hours.
The text of the final guidance follows:

V. Guidance

Reverse Mortgage Products:

Guidance for Managing Compliance and Reputation Risks

Introduction

The Office of the Comptroller of the Currency (OCC), Office of
Thrift Supervision (OTS), Board of Governors of the Federal Reserve
System (FRB), Federal Deposit Insurance Corporation (FDIC), National
Credit Union Administration (NCUA) (the Agencies) are issuing this
guidance to assist their regulated financial institutions \1\ in
managing risks presented by reverse mortgage products. Reverse
mortgages are home-secured loans, typically offered to elderly
consumers, which present consumer protection issues that raise
compliance and reputation risks for the institutions offering them.
---------------------------------------------------------------------------

\1\ This guidance applies to all banks and their subsidiaries,
bank holding companies (other than foreign banks) and their nonbank
subsidiaries, savings associations and their subsidiaries, savings
and loan holding companies and their subsidiaries, credit unions,
U.S. branches and agencies of foreign banks engaged in reverse
mortgage transactions, and any other entity supervised by those
adopting the guidance. The guidance refers to all of those covered
as ``institutions.''
---------------------------------------------------------------------------

Expected increases in the elderly population of the United States
and other factors suggest that the use of reverse mortgages could
expand significantly in coming years as more homeowners become eligible
for reverse mortgage products. These loan products enable eligible
borrowers to access the equity in their homes in order to meet
emergency needs, to supplement their incomes, or to purchase a new
home.\2\ Reverse mortgages can meet these objectives without subjecting
borrowers to ongoing repayment obligations during the life of the loan,
while enabling borrowers to remain in their homes. As a result, the
Agencies believe that reverse mortgages, offered appropriately, could
become an increasingly important mechanism for institutions to address
credit needs of an aging population.
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\2\ The Federal Housing Administration (FHA) has a program that
enables eligible borrowers to use the proceeds of a federally-
insured reverse mortgage for the purchase of a new principal
residence. See U.S. Department of Housing and Urban Development
(HUD) Mortgagee Letter 2008-23 (October 20, 2008) and HUD Mortgagee
Letter 2009-11 (March 27, 2009).
---------------------------------------------------------------------------

Nevertheless, reverse mortgages are complex loan products that
present a wide range of complicated options to borrowers. Moreover, the
need to provide adequate information about reverse mortgages and to
ensure appropriate consumer protections is

[[Page 50807]]

particularly high. This is because reverse mortgages are typically
secured by the borrower's primary asset--his or her home. Consequently,
a reverse mortgage may provide the only funds available to a consumer
to pay for health care needs and other living expenses.\3\
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\3\ In 2007, the typical reverse mortgage borrower was 73 years
old, had a home valued at $261,500, and had financial assets of less
than $33,000. AARP, Reverse Mortgage: Niche Product or Mainstream
Solution, Dec. 2007 (available at https://assets.aarp.org/rgcenter/consume/2007_22_revmortgage.pdf).
---------------------------------------------------------------------------

For these and other reasons, reverse mortgages present substantial
risks both to institutions and to consumers, and, as with any type of
loan that is secured by a consumer's home, it is crucial that consumers
understand the terms of the product and the nature of their
obligations. While this guidance addresses consumer protection concerns
that raise compliance and reputation risks, the Agencies recognize that
reverse mortgage products may present other risks to lenders, too, such
as credit, interest rate, and liquidity risks,\4\ especially for
proprietary reverse mortgage products lacking the insurance offered
under the federal Home Equity Conversion Mortgage (HECM) program.\5\
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\4\ Institutions also should manage these other risks
appropriately. In this regard, institutions are advised to conform
their reverse mortgage lending activities to any applicable guidance
from their respective supervisory agencies, and to consult with
those agencies with respect to any such safety and soundness issues.
\5\ A HECM is a reverse mortgage product insured by the FHA,
part of HUD, and is subject to a range of consumer protection and
other requirements. See 12 U.S.C. 1715z-20; 24 CFR 206. A lender
making a HECM loan may assign it to HUD when the outstanding balance
reaches 98% of the maximum claim amount. See 24 CFR 206.107(a)(1).
---------------------------------------------------------------------------

As explained in further detail below, the complex nature of reverse
mortgages presents the risk that consumers will not understand the
costs, terms, and consequences of the products. Consumers also may be
harmed by any conflicts of interest or abusive or fraudulent practices
related to the sale of ancillary products or services. In contrast to
HECM reverse mortgages, proprietary reverse mortgages also present the
risk that lenders will be unable to meet their obligations to make
payments due to consumers.\6\
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\6\ Under the FHA insurance program for HECM loans, HUD will
make payments to a consumer if a HECM lender fails to make a payment
due to the consumer. See 24 CFR 206.117 and 206.121.
---------------------------------------------------------------------------

As with other lending products, institutions should manage the
compliance and reputation risks associated with reverse mortgages. This
guidance is intended to assist institutions in their efforts to manage
these risks. This guidance focuses on ways an institution may provide
adequate information about reverse mortgage products and qualified
independent counseling to consumers and on ways to avoid potential
conflicts of interest. The guidance also addresses related policies,
procedures, internal controls, and third party risk management for
institutions.
This guidance may be particularly useful for institutions that
offer proprietary reverse mortgage products that are not subject to the
regulatory requirements applicable to reverse mortgages offered under
the HECM program. Depending on how they are structured, proprietary
reverse mortgage products may contain a higher degree of risk than
HECMs. Therefore, to address these risks effectively, proprietary
products may warrant careful scrutiny under the principles,
considerations, and risks discussed in this guidance.
The Agencies expect institutions to use this guidance to ensure
that risk management practices adequately address compliance and
reputation risks associated with reverse mortgages. Failure to address
the risks discussed in this guidance could significantly affect the
overall effectiveness of an institution's compliance and risk
management efforts with respect to reverse mortgages. The Agencies will
review risk management processes in this area during examinations of
regulated institutions and will request remedial actions if
institutions do not adequately manage these risks.

Background

The reverse mortgage market currently consists of two basic types
of reverse mortgage products: proprietary products offered by an
individual institution and FHA-insured reverse mortgages offered under
the HECM program. HECM reverse mortgages have accounted for
approximately 90% of all reverse mortgages.\7\
---------------------------------------------------------------------------

\7\ AARP, Reverse Mortgage: Niche Product or Mainstream
Solution, Dec. 2007, at 1 (available at https://assets.aarp.org/rgcenter/consume/2007_22_revmortgage.pdf).
---------------------------------------------------------------------------

Reverse mortgages generally are non-recourse, home-secured loans
that provide one or more cash advances to borrowers and require no
repayments until a future time. Both HECMs and proprietary reverse
mortgages generally must be repaid only when the last surviving
borrower dies, all borrowers permanently move to a new principal
residence, or the loan is in default. For example, repayment would be
required when the borrower sells the home or has not resided in the
home for a year. A borrower may be in default on a reverse mortgage
when the borrower fails to pay property taxes, fails to maintain hazard
insurance, or lets the property fall into unreasonable disrepair. When
a reverse mortgage becomes due, the home must be sold or the borrower
(or surviving heirs) must repay the full amount of the loan (including
accrued interest), even if the balance is greater than the property
value. If the home is sold, the borrower or estate generally would not
be liable to the lender for any amounts in excess of the value of the
home.\8\
---------------------------------------------------------------------------

\8\ For a further explanation of the non-recourse features of a
HECM, see HUD Mortgagee Letter 2008-38.
---------------------------------------------------------------------------

To obtain a reverse mortgage, the borrower must occupy the home as
a principal residence and generally be at least 62 years of age.
Reverse mortgages are typically structured as first lien mortgages, and
generally require that any prior mortgage be paid off either before
obtaining the reverse mortgage or with the funds from the reverse
mortgage.\9\
---------------------------------------------------------------------------

\9\ HECMs must be first lien mortgages. 12 U.S.C. 1715z-
20(b)(3). Only certain subordinate liens are permissible in
connection with HECM loans. See HUD Mortgagee Letter 2009-49.
---------------------------------------------------------------------------

The funds from a reverse mortgage may be disbursed in several
different ways:
A single lump sum \10\ that distributes up to the full
amount of the principal limit \11\ in one payment;
---------------------------------------------------------------------------

\10\ While HECM payment plans do not include a separate ``lump
sum'' option, HECMs provide an effective substitute for such an
option through a line of credit that can be fully drawn at
consummation.
\11\ The principal limit is the maximum payment that can be made
to the borrower. The principal limit depends on the age of the
youngest borrower, the expected interest rate, and the ``maximum
claim amount.'' The maximum claim amount is either (1) the lower of
the actual value or FHA loan limit (for HECMs) or (2) the loan-to-
value ratio established by the lender (for proprietary mortgages).
The maximum claim amount includes the principal limit (cash
available to the borrower), accrued interest, and any set-asides for
repairs or servicing fees required by the loan terms.
---------------------------------------------------------------------------

A credit line that permits the borrower to decide the
timing and amount of the loan advances;
A monthly cash advance, either for a fixed number of years
selected by the borrower or for as long as the borrower lives in the
home; or
Any combination of the above selected by the borrower.
Generally, the size of the loan will be larger when the borrower is
older, the home is more valuable, or interest rates are lower. Interest
rates on a reverse mortgage may be fixed or variable.

Legal Considerations

Both HECMs and proprietary reverse mortgage products are subject to
laws and regulations governing mortgage lending. The following are
particularly

[[Page 50808]]

relevant to the issues addressed in this guidance:
Federal Trade Commission Act (FTC Act). Section 5 of the
FTC Act prohibits unfair or deceptive acts or practices.\12\ The OCC,
the FRB, the FDIC, and the OTS enforce this provision of the FTC Act
and any applicable regulations under authority granted in the FTC Act
and section 8 of the Federal Deposit Insurance Act. The NCUA enforces
this provision of the FTC Act and any applicable regulations under
authority granted in the FTC Act and sections 120 and 206 of the
Federal Credit Union Act.\13\ Practices may be found to be deceptive
and thereby unlawful under section 5 of the FTC Act if: (1) There is a
representation, omission, act, or practice that is likely to mislead
the consumer; (2) the act or practice would be deceptive from the
perspective of a reasonable consumer; and (3) the representation,
omission, act, or practice is material.\14\ A practice may be found to
be unfair and thereby unlawful under section 5 of the FTC Act if (1)
the practice causes or is likely to cause substantial consumer injury;
(2) the injury is not outweighed by benefits to the consumer or to
competition; and (3) the injury caused by the practice is one that
consumers could not reasonably have avoided.\15\
---------------------------------------------------------------------------

\12\ Supervisory guidance to financial institutions has been
issued concerning unfair or deceptive acts or practices. See OCC
Advisory Letter 2002-3--Guidance on Unfair or Deceptive Acts or
Practices, March 22, 2002; Joint FRB and FDIC Guidance on Unfair or
Deceptive Acts or Practices by State-Chartered Banks, March 11,
2004; and OTS CEO Mem. 347, ``Unfair or Deceptive Acts or
Practices: Examination Procedures,'' May 7, 2010. Federally insured
credit unions are prohibited from using any advertising or
promotional material that is inaccurate, misleading, or deceptive in
any way concerning its products, services, or financial condition.
12 CFR 740.2. The OTS also has a regulation that prohibits savings
associations from using advertisements or other representations that
are inaccurate or misrepresent the services or contracts offered. 12
CFR 563.27. This regulation supplements its authority under the FTC
Act.
\13\ 12 U.S.C. 1766 and 1786.
\14\ These principles are derived from the Policy Statement on
Deception, issued by the Federal Trade Commission on October 14,
1983.
\15\ 15 U.S.C. 45(n). See also the Policy Statement on
Unfairness, issued by the Federal Trade Commission on December 17,
1980.
---------------------------------------------------------------------------

Truth in Lending Act (TILA). TILA and the FRB's
implementing Regulation Z contain rules governing disclosures that
institutions must provide for mortgages in advertisements, with an
application, before loan consummation, and when interest rates change.
Reverse mortgage borrowers must receive all disclosures that are
required under TILA,\16\ including notice of their right to rescind the
loan, where applicable.\17\
---------------------------------------------------------------------------

\16\ See 12 CFR 226.33(b), 226.5b(d), 226.18, and 226.19
\17\ 12 CFR 226.15 and 226.23. Requirements related to
rescission rights and notices are not applicable, however, for home
purchase transactions.
---------------------------------------------------------------------------

Reverse mortgages may be structured as open-end credit or as
closed-end credit within the meaning of Regulation Z. Disclosures
required by TILA relating to open-end or closed-end mortgages must be
provided, as appropriate.\18\ For closed-end, variable rate loans,
lenders must provide the variable rate program disclosures,\19\ as well
as required notices of interest rate adjustments.\20\
---------------------------------------------------------------------------

\18\ See 12 CFR 226.33(b), 226.5b(d), 226.18, and 226.19.
\19\ 12 CFR 226.19(b)(1).
\20\ 12 CFR 226.20(c).
---------------------------------------------------------------------------

In addition, TILA requires that a loan cost disclosure form be
provided to reverse mortgage borrowers.\21\ The total annual loan cost
shown on the form includes the upfront costs (e.g., origination fee,
third-party closing fee, and any upfront mortgage insurance premium),
interest, and ongoing charges (e.g., monthly service fee and any annual
mortgage insurance premium).
---------------------------------------------------------------------------

\21\ See 15 U.S.C. 1648; 12 CFR 226.33(b)(2) and 226.33(c)(1)
and related commentary in Supplement I to 12 CFR 226; and 12 CFR
226, Appendix K.
---------------------------------------------------------------------------

Real Estate Settlement Procedures Act (RESPA). RESPA and
HUD's implementing Regulation X contain rules that, among other things,
require disclosure of early estimated and final settlement costs and
prohibit referral fees and other charges that are not for services
actually performed. As a general matter, an institution may neither pay
nor accept any fee or other thing of value in exchange for the referral
of business related to a reverse mortgage transaction.
Institutions that offer reverse mortgage products must ensure that
they do so in a manner that complies with the foregoing and all other
applicable laws and regulations, including the following Federal laws:
Equal Credit Opportunity Act;
Fair Housing Act; and
National Flood Insurance Act.
State laws, including laws regarding unfair or deceptive acts or
practices, also may apply to reverse mortgage transactions. Currently,
more than twenty states have laws or regulations governing various
aspects of reverse mortgages. In addition, all state financial
institution regulators have the authority to supervise the mortgage-
related activities of entities subject to their respective
jurisdictions, including activities related to reverse mortgages.\22\
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\22\ Federal financial institution regulators also have the
authority to supervise entities subject to their respective
jurisdictions.
---------------------------------------------------------------------------

HECM reverse mortgages also are subject to the consumer protections
and other special provisions set forth in HUD regulations.\23\ HECM
consumer protections include information provided to consumers through
qualified independent counselors. Before obtaining a HECM reverse
mortgage, the borrower must receive counseling from a HUD-approved
housing counseling agency.\24\ The counseling agency is required to
discuss with the borrower: (1) Alternatives to HECMs, (2) the financial
implications of entering into a HECM (including tax consequences), (3)
the effect on eligibility for assistance under Federal and State
programs, and (4) the impact on the estate and heirs of the
homeowner.\25\ HUD encourages, but does not require, that HECM
counseling be conducted in person.\26\ HECMs also carry particular
disclosure requirements under HUD rules, including a requirement that
the lender provide copies of the mortgage, note, and loan agreement to
the borrower at the time that the borrower's application is completed.
---------------------------------------------------------------------------

\23\ HUD also provides model forms for HECMs. See Home Equity
Conversion Mortgage Handbook 4235.1 (available at https://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4235.1/index.cfm).
\24\ Counselors are required to pass an examination to be
included on a HUD roster before they can provide counseling on
HECMs. See 24 CFR 206.300 et seq.
\25\ See 12 U.S.C. 1715z-20.
\26\ Applicable state laws, however, may have other requirements
pertaining to counseling for reverse mortgages, including
requirements that counseling be conducted in person.
---------------------------------------------------------------------------

Recent statutory changes to the HECM program established additional
consumer protections.\27\ For example, Congress adopted consumer
protections to guard against potential conflicts of interest,
including: (1) Special requirements for HECM lenders that are
associated with any other ``financial or insurance activity,'' (2) a
prohibition on lenders' conditioning the availability of the HECM on
the purchase of other financial or insurance products (with limited
exceptions), and (3) a requirement that the HECM borrower receive
adequate counseling from an independent third party who is not
compensated by or associated with a party connected to the transaction.
---------------------------------------------------------------------------

\27\ Housing and Economic Recovery Act of 2008 (HERA), Public
Law 110-289, Sec. 2122(a)(9) (July 30, 2008).

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[[Page 50809]]

Compliance and Reputation Risks

While reverse mortgages may provide a valuable source of funds for
some borrowers, they are complex home-secured loans offered to
borrowers who typically have limited income and few assets other than
the home securing the loan.\28\ Thus, lenders must institute controls
to protect consumers and to minimize the compliance and reputation
risks for the institutions themselves. These concerns and risks are
especially pronounced with respect to proprietary products that are not
subject to the core consumer protection provisions of the HECM program.
---------------------------------------------------------------------------

\28\ See note 3, supra.
---------------------------------------------------------------------------

The Agencies are concerned that:
(1) Consumers may enter into reverse mortgage loans without
understanding the costs,\29\ terms, risks, and other consequences of
these products, or may be misled by marketing and advertisements
promoting reverse mortgage products;
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\29\ If a HECM borrower finances his or her closing costs, the
closing costs are included in the outstanding balance of the loan.
Costs of a HECM loan include an origination fee, third-party closing
costs, a monthly servicing fee, and mortgage insurance premiums
determined by an FHA formula.
---------------------------------------------------------------------------

(2) Counseling may not be provided to borrowers or may not be
adequate to remedy any misunderstandings;
(3) Appropriate steps may not be taken to determine and to assure
that consumers will be able to pay required taxes and insurance; and
(4) Potential conflicts of interest and abusive practices may arise
in connection with reverse mortgage transactions, including with the
use of loan proceeds and the sale of ancillary investment and insurance
products.
Consumer Information and Understanding--Litigation, consumer
complaints, and testimony before Congress about reverse mortgage
products have provided both anecdotal evidence of misrepresentations to
consumers and clear indications that borrowers do not consistently
understand the terms, features, and risks of their loans.\30\
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\30\ See Testimony presented at Hearings of the U.S. Senate
Special Committee on Aging conducted on December 12, 2007, available
on the internet at https://aging.senate.gov/hearing_detail.cfm?id=296507. See also AARP report reference in note 7,
above.
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For example, consumers are not always adequately informed that
reverse mortgages are loans that must be repaid (and not merely ways to
access home equity). In fact, some marketing material has prominently
stated that the consumer is not incurring a mortgage, even though the
fine print states otherwise. Consumer misunderstanding about these
matters also may be the result of advertisements declaring that reverse
mortgage borrowers have no risk of losing their homes or are guaranteed
to retain ownership of their homes for life. These advertisements do
not clearly indicate the circumstances in which the reverse mortgage
becomes imme

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