Shortly after completing the application, borrowers would then receive transaction-specific disclosures that reflect the actual terms of the reverse mortgage being offered. For reverse mortgages, the proposal would also:
Prohibit lenders from conditioning the reverse mortgage on the borrower’s purchase of another financial product. Require that borrowers receive counseling about reverse mortgages before the lender imposes nonrefundable fees or closes the loan.
The Fed has provided model forms and sample language that credit unions and others may use to satisfy the disclosure and notice requirements that are outlined in the proposal. Click here for a compilation of these forms and samples or refer to the document that accompanied this Comment Call. Below is more information about these disclosures and the substantive provisions that are addressed in the proposed rule. Reverse Mortgages Disclosure Requirements The proposal would require new disclosures for reverse mortgages, which are products for borrowers who are at least 62 years of age who receive their home equity in cash that is then repaid at a later time, such as when the borrower dies or moves into a new home. Before the earlier of when the borrower applies for such a loan or when the borrower pays a nonrefundable fee (except for a fee for reverse mortgage counseling, as described below), the lender must provide a new, two-page notice that has been prepared by the Fed that summarizes basic information about reverse mortgages, titled “Key Questions to Ask about Reverse Mortgage Loans.” This would replace the current application disclosures that are provided for mortgage loans. Also, the notice and consent provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) would not apply to this disclosure in certain situations, such as when the borrower is accessing an online application or advertisement. Within three business days of application, and again before the loan is consummated, disclosures must be provided regarding the loan costs, which replaces the current disclosures. In addition to information about rates and fees, these new disclosures would include a table that shows how the dollar amount of the reverse mortgage balance grows over time. This would include the amount that has been advanced to the borrower, the total of all costs and charges that are imposed, and the total amount the borrower will have to repay. These would be outlined for loan periods of one, five, and ten years. The calculation of the balance growth would include certain assumptions, such as the balance will grow based on the initial interest rate, no repayments are made during the term of the reverse mortgage, and closing and other costs are financed by the lender, unless agreed otherwise. Also, any amounts set aside for the borrower’s benefit, such as for making repairs, would be treated as amounts advanced to the borrower, and any shared equity or appreciation with the lender must be added to the amount owed by the borrower. For shared appreciation, there would be an assumption that the home value will rise by 4 percent per year, and the disclosure in these situations must include a numerical example of how the appreciation is shared, based on a hypothetical $100,000 increase in the home’s value. For purposes of the balance growth table that is included in the disclosures, the lender must assume that no further advances are made if the borrower elects to receive at least 50 percent of the available loan amount. Otherwise, the lender must assume that the entire loan amount is advanced at closing. The applicable APR would have to be in 16-point type size, but this type size requirement would not apply to any minimum, maximum, or other rates that could apply in other situations. Certain other information would be in bold type. For variable rates, there would need to be additional information about the index and margin that is used and how the rate is calculated, including any minimum and maximum rates that could apply. Information about the highest and lowest value of the index and margin over the past 15 years would also be required. If there is an introductory rate, the disclosure must include the rate that
would otherwise apply and how long the introductory rate would be in effect. The word “introductory” or “intro” would have to be in close proximity to the introductory rate. These disclosures would also include the following information: Notification to the borrower that he or she is not obligated to complete the transaction merely because the borrower has received the disclosures or signed the application. The appraised property value, age of the each borrower, along with the borrower’s name, address, and account number. The amount the borrower may receive, along with a statement that the borrower does not have to make payments while in the home and will receive payments even if the loan balance exceeds the home’s value. There must also be a statement that interest charges will be added to the loan balance that will be collected when the loan is due. Description of the types of payments the borrower will receive, such as an initial advance, monthly payment, or discretionary cash advances in which the borrower controls the timing. Statement that the reverse mortgage will be secured by the home, but the borrower will retain title to the home and must pay the property taxes and insurance. Events that will cause the loan to be due and payable, which include the borrower failing to maintain collateral, if the home is no longer used as the principal dwelling, and failure to pay taxes and insurance. This will also include the actions the lender may take, such as foreclosure or requiring the borrower to leave the home, cease making payments under the reverse mortgage, or terminate the mortgage and require payment of the balance with termination fees. Information about the fees imposed by the lender and third parties. A range may be disclosed for the early disclosures that are provided three business days after the application is submitted. Limitations on the borrower’s liability, such as when the borrower’s liability is limited to the net proceeds from the sale of the home. This is the amount after the costs to sell the home, and the lender will assume these will equal 7 percent of the projected sales price. If there is no limitation, then borrowers must be informed that they will be liable for the loan amount, even if it exceeds the proceeds. The repayment options when the loan is due, which would be for the borrower or the heirs to: 1) pay the loan balance and keep the home; or 2) sell the home and use the proceeds to pay off the loan. The borrower and heirs would be informed that they may retain the proceeds that exceed the loan balance, minus amounts due to the lender as a result of any shared appreciation or shared equity arrangements. Indicate the borrower should ask questions if he or she does not understand the disclosures, along with the website of the Fed that would provide additional information. Again, there are model forms that would be used for these reverse mortgage disclosures that prescribe the content and the format. There are separate forms for closed-end and open-end reverse mortgages to reflect certain differences between these disclosure requirements. As for timing requirements, the early disclosures for open-end reverse mortgages would be provided at the earlier of three business days after application or three business days before the first transaction. This differs somewhat from the timing requirement for HELOCs that was included in the proposal last year. The timing of the disclosures for closed-end reverse mortgages would be the same as the timing requirements that were included in the closed-end proposal last year, which requires early disclosures at least seven business days before closing and requires corrected disclosures at least three business days before closing. This proposal would clarify the provisions that allow borrowers to waive these waiting periods for “bona fide” personal financial emergencies, and the rules above with regard to waiving the rescission rights would also apply here. Counseling Requirements Before receiving a reverse mortgage loan, the borrower would be required to obtain independent counseling from a counselor who meets the qualification standards established by the Department of Housing and Urban Development (HUD), or substantially similar standards, although lenders would be
able to accept and process applications before the borrower has obtained counseling. The counseling may be provided by telephone, in a face-to-face meeting, or though an Internet connection that allows persons to see one another and communicate in real time. The proposal would require that the counseling convey to the borrower the same or substantially similar information and topics that are required under HUD’s Home Equity Conversion Mortgage (HECM) Program. The counseling must occur no earlier than 180 calendar days prior to the lender’s receipt of the borrower’s application. Nonrefundable fees may not be imposed on borrowers until three business days after the borrower receives counseling, except for the counseling fee itself, as long as the fee is reasonable. “Business days” for these provisions would be defined as any day except Sundays and federal holidays. However, this would not prevent fees from being collected earlier, as long as the lender refunds the fees if the borrower decides not to enter into the reverse mortgage transaction. Lenders would also be prohibited from steering borrowers to specific counselors or compensating counselors or counseling agencies. The lender would not be in violation of this anti-steering requirement if it provides to the borrower a list of at least five HUD-approved counselors. To confirm that the borrower received the required counseling, lenders may rely on a certificate of counseling, which could be either the HUD-approved form or a substantially similar form, and must include information sufficient to confirm that the borrower received qualified counseling and the date of the counseling session. For purposes of determining the beginning of the three-day time period in which fees are refundable, lenders may rely on the counseling date as indicated on the certificate. Prohibition on Requiring the Purchase of Other Products and Services Lenders would be prohibited from requiring the borrower to purchase another financial product as a condition of obtaining the reverse mortgage loan. This would also include purchases from third-parties if the lender receives compensation for the purchase. The official staff commentary would provide numerous examples of prohibited products and services. This prohibition would include loans and certificates of deposit and other accounts in which there would be a penalty for early withdrawal. It would not include savings and checking accounts that are established for purposes of disbursing the reverse mortgage proceeds, and would not include products and services that protect the lender’s investment; such as mortgage, title, flood, and other hazard insurance; property inspections; and appraisals or other types of valuation services. The prohibition would also not include products purchased voluntarily as part of the transaction, such as annuities, although the costs must be included in the disclosures, and advances received from annuities must be disclosed as part of the advances received. There would be no violation of these provisions if the financial product is sold at least ten days after the loan closing and if the borrower receives the “Key Questions to Ask about Reverse Mortgage Loans,” as described above. Also, whether a borrower is obligated to purchase a financial product would be based on the surrounding facts. Two examples of when there would be an obligation would be when the borrower signs an agreement, even if the purchase occurs in the future, and when the borrower makes a purchase, even if there is the option to cancel for a period of time afterwards. Advertising Rules for Reverse Mortgages The proposal would revise the advertising rules for reverse mortgages, which include new requirements that would supplement the current requirements, rather than replace them. Specifically, the proposal would require a reverse mortgage advertisement to include clarifying disclosures if the advertisement contains certain statements. The specific statements and clarifying disclosures are as follows: A reverse mortgage is a “government benefit” or other government aid. The clarifying disclosure would be that a reverse mortgage is a loan that must be repaid. Also, the statement may not be made unless the mortgage is associated with a government program, such as HUD’s HECM Program.
A reverse mortgage provides payments “for life” or a borrower need not repay a reverse mortgage “during your lifetime.” The clarifying disclosure would be that payments may end and repayment may be required if the borrower sells the home or lives elsewhere for a specified period longer than the permitted time period, to the extent these statements are applicable. A borrower “cannot lose” or there is “no risk” to the home with a reverse mortgage. The clarifying disclosure would be that foreclosure could occur if the borrower lives elsewhere for longer than the permitted time period or if the borrower does not pay property taxes or insurance payments, to the extent these statements are applicable. A borrower or heirs “cannot owe” or will “never repay” more than the value of the home. The clarifying disclosure would be that the borrower or heirs must repay the reverse mortgage when due in order to keep the home and that the balance may be greater than the value of the home. Payments are not required for a reverse mortgage. The clarifying disclosure would be that the borrower must make payments for taxes and insurance premiums, to the extent applicable. Government fee limits apply to a reverse mortgage. The clarifying disclosure would be that costs may vary among lenders and loan types and that less expensive options may be available. A reverse mortgage does not affect a borrower’s eligibility for benefits under a government program. The clarifying disclosure would be that a reverse mortgage may affect the borrower’s eligibility for certain government programs, such as Social Security and Medicaid.
The above disclosures must be made with equal prominence and in close proximity to the applicable statements and must be at least as conspicuous. This means the disclosures must be a type-size at least as large as the applicable statements and must be immediately next to or directly above or below the applicable statements, without intervening text or graphical displays. Footnotes would also not be permissible. The official staff commentary would provide specific examples for making these disclosures. Also, any reference to housing or credit counseling must state a telephone number and website for counseling resources maintained by HUD, with the telephone number and website being as conspicuous as the reference to the counseling. However, the telephone number and website would not have to be included with each reference to the counseling. Questions to consider: For the final reverse mortgage disclosures that would include transaction-specific information, are there any items that would need to be estimated? Should these reverse mortgage disclosures assume that the borrower draws the entire amount at the account opening or loan closing in all cases? Do you have any other thoughts regarding the reverse mortgage disclosures and the assumptions used? For example, should there be a uniform assumption for determining the age eligibility of the borrower and, if so, what should the method be? If the borrower has not chosen the type of payment he or she wishes to receive through a reverse mortgage, the proposal would require lenders to disclose how much the borrower may receive through discretionary advances, or the initial advance if a discretionary advance is not an option. What other approaches are there for disclosing how much the borrower may receive if he or she has not chosen a payment type? For reverse mortgages, lenders would have to disclose the lowest and highest value of the index and margin used over the past 15 years. Should a range be required instead? Should there be an additional requirement that loan proceeds be disbursed directly to the borrower? Disclosures for reverse mortgages would not include the minimum amount outstanding as it would not appear to be applicable. Would this information be applicable and should it be disclosed? These disclosures would include the amount advanced to the borrower, the total of all costs and charges imposed, and the total amount the borrower will have to repay. These would be outlined for loan periods of one, five, and ten years. Would other time periods be more appropriate? Should there be a disclosure that the amount owed would be limited by the eventual net sale proceeds of the home, since any appreciated value would not be reflected in the disclosure, in which case this
disclosure may understate the borrower’s eventual liability? Also, net proceeds would be the amount after the costs to sell the home, and the lender would assume these will equal 7 percent of the projected sales price. Is 7 percent a reasonable assumption? Should any assumptions of net proceeds be used or should the disclosure indicate that the total amount owed would be limited by the appraised value of the home? For the loan balance growth disclosure, it would be assumed that no repayments are made during the term and that closing and other costs are being financed. Do you agree with these and what other assumptions should be made? For a shared appreciation or equity arrangement, the lender must use a 4 percent per year appreciation assumption. Do you agree or should another rate be assumed? The disclosure would propose a hypothetical example using a $100,000 appreciation amount. Would another amount better help borrowers to understand this information? For the reverse mortgage advertisements, certain statements would require specific clarifying disclosures, as described above. Do you agree with these and what, if any, changes should be made? Under the proposal, lenders would be prohibited from requiring the borrower to purchase another financial product as a condition for obtaining the reverse mortgage loan. Do you agree with this prohibition and do you have suggestions with regard to these provisions? Should this apply to others besides lenders and loan originators? Do you have any comments or concerns with regard to the proposed exceptions, as described above? Are there any other products that should be included in this prohibition? For the prohibition described in the preceding question, whether a borrower is obligated to purchase a financial product would be based on the surrounding facts. Two examples of when there would be an obligation would be when the borrower signs an agreement, even if the purchase occurs in the future, and when the borrower makes a purchase, even if there is the option to cancel for a period of time afterwards. Do you agree with this and are there additional examples that would be appropriate? Also, there would be no violation of these provisions if the financial product is sold at least ten days after the loan closing. Do you agree with this? Do you agree with the proposed provisions with regard to the counseling requirements for reverse mortgage loans? Are you concerned there may not be enough qualified counselors to meet demand? Do you agree with the proposed provisions allowing counselors to meet standards that are “substantially similar” to HUD’s, such as those developed by states? Do you agree lenders should be allowed to rely on certificates of counseling similar to those used in the HECM program? For reverse mortgages, the proposal would prohibit nonrefundable fees until three business days after the borrower has received counseling, other than the counseling fee itself. Are these provisions clear and what additional guidance is needed? The content of the counseling must be the same or substantially the same as required under the HECM program. Do you agree with this content requirement or how should it be changed? Also, counseling must occur no earlier than 180 days prior to the lender receiving the borrower’s application. Is this timeframe appropriate? If not, what should the timeframe be? The proposal would permit either face-to-face, telephone, or face-to-face Internet counseling that accommodates twoway communication. Do you agree or should only certain types of counseling be permitted? For reverse mortgages, do you agree with the proposal that would prohibit lenders from compensating counselors, while permitting the costs to be financed? What other restrictions should there be in this area? Lenders would also be prohibited from steering borrowers to specific counselors, although there would be an exception if a lender provides a list of at least five counselors to choose from. Should there be other exceptions? Should the list require more or less than five counselors? What other restrictions should there be with regard to communications between counselors and lenders? Should all those on the deed be required to receive counseling? Should there be suitability standards for borrowers for reverse mortgages? If so, what should those be? What problems or concerns have there been with regard to borrowers who default due to failure to pay expenses, such as taxes and insurance premiums? How can these be addressed?