The current federal regulatory landscape for reverse lenders is in a “wait and see” mode. The broad obligations and implications imposed upon the mortgage lending industry by the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) are currently focused on the forward and secondary markets. Dodd-Frank has clearly put reverse lending on the road map by specifically identifying and earmarking reverse lending as subject to future study and potential regulations that may result from the study, which will be conducted by a special office within the newly created CFPB.
While Dodd-Frank has not had much of an immediate and direct impact on reverse lending, there have been indirect implications that have affected reverse lending originators based upon changes to LO compensation and concerns about steering.
The CFPB and the Office of Older Americans The newly formed CFPB, a federal agency that was established under Dodd-Frank, is dedicated to the protection of consumers from predatory practices and other abuses in the lending industry. With the creation of the CFPB, Dodd-Frank effectually consolidates into a single agency (with it’s authority commencing on July 21, 2011), an accountability that was historically spread among seven different federal agencies. The primary focus of this agency is consumer protection and shall have both rulemaking and enforcement authority that will help to better protect seniors from predatory lending and what may perceived as banking and securities practices that, in their determination, have led to many elderly consumers losing their homes.
As a mandate issued within Dodd-Frank, the CFPB prior to January 21, 2012, shall create the Office of Financial Protection for Older Americans (Office of Older Americans). The Office of Older Americans is to be created to focus on financial products and deceptive practices that will affect older Americans. This Office of Older Americans shall be ultimately responsible for providing the development, implementation and evaluation of the CFPB’s programs, policies and systems necessary to address the needs of older Americans with respect to financial products.
SEC. 1076 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Subtitle G, Section 1076 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provides two directives for reverse lending: a reverse lending study and possible resulting regulations.
The Study The CFPB, most likely through the Office of Older Americans, shall conduct a study on reverse mortgage lending practices prior to July 21, 2012. The purpose of this study appears to be threefold. First, it will attempt to identify any potential unfair, deceptive or abusive practices in the origination of reverse mortgage that would be necessary to protect unsuspecting seniors. Secondly, the study may address circumstances surrounding a potential product suitability standard for the reverse product as it applies to the individual borrower’s circumstance. Third, the study will attempt to address potential issues that may exist in the practice originating reverse mortgages that are ultimately used to fund investments, annuities, and other investment products. A portion of the study focuses on the use of reverse mortgages as investment collateral. This is consistent with the overarching theme of the other mortgage lending provisions of Dodd-Frank, specifically “Risk Retention and the categorization of the Qualified Residential Mortgage. Dodd-Frank is clearly attempting to create more responsible mortgage products and lending practices by putting pressure and risk on the secondary market investors.
The Regulations According to Section 1076, the bureau shall provide for an integrated disclosure standard and model disclosures for reverse mortgage transactions that combines the relevant disclosures required under the Truth in Lending Act (15U.S.C. 1601 et seq.) and the Real Estate Settlement Procedures Act, with the disclosures provided to consumers for Home Equity Conversion Mortgages under section 255 of the National Housing Act. On May 18, 2011 the CFPB submitted two prototype disclosure examples as part of the Know Before You Owe Project to the industry for comment. These two prototype disclosures combined the Good Faith Estimate disclosure, as required by the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et. seq.) and the Truth in Lending Act Disclosure as required by the Truth in Lending Act (15U.S.C. 1601 et. seq.). While it was not explicit, these disclosures were clearly intended to apply to the forward lending market, as they did not specifically address reverse mortgages. It is currently assumed that the CFPB will undertake the creation of the model disclosures as described in Section 1076 separately for the reverse products.
Results from the Study Depending on what the Office of Older Americans finds in its reverse lending study, the CFPB may issue regulations that remediate any potential unfair, deceptive or abusive practices that would be identified. Also, there is a chance of guidelines that may attempt to define suitability, and the circumstances where a reverse mortgage may be suitable for potentially qualified borrowers. And finally, should there be a nexus between the investment products that the reverse loans fund and any potential abusive practices and/or suitability concerns, be confident that there will be proposed requirements that address this as well. Effectively, Dodd-Frank has set the stage for a potential overhaul of reverse lending requirements, from disclosure requirements to underwriting practices and product guidelines.
So, there should be no surprise from the CFPB in subject matter of the first round of rulemaking as it applies to reverse lending, depending on the results of the research provided by the study conducted by the Office of Older Americans. Note that the earliest that the bureau may seek to promulgate any rules anticipated by this section 1076 of Dodd-Frank will be in late 2012 or early 2013, giving the industry plenty of time for commentary, and preparation in anticipation of the final regulations.
Dodd-Frank’s Negative Impact on Reverse Lending – Loan Originator Compensation Effective April 6, 2011, reverse mortgage brokers could no longer assist cash-strapped HECM borrowers by offering closing cost credits. The Dodd-Frank Loan Originator Compensation requirements effectively eliminated the ability of brokers to offset expensive closing costs, crippling the brokers’ ability to compete with larger retail entities that can absorb origination costs. Coincidentally, the deal Congress struck to avoid a governmental shutdown in April included the FY 2011 Continuing Appropriations Act (H.R. 1473), cutting off $88 million from the Department of Housing and Urban Development’s budget for loan counseling programs. As a result, reverse mortgage counseling will lose its funding starting in fiscal year 2012 (October 1, 2011), negatively impacting counseling agencies that can no longer afford to waive the counseling fees for HECM applicants, thus forcing the borrower to pay even more closing costs. This combination of the Dodd-Frank Loan Originator Compensation limits, with the loss of funding for counseling, may severely impact borrowers that need to access equity in their property and do not have the cash to cover closing costs.
Dodd-Frank’s Indirect Contribution to Reverse Lending - Title XIV and Installment Sales Restrictions It is not all bad news on the reverse lending front when it comes to Dodd-Frank. Another indirect result of Dodd-Frank that has a potentially positive impact on the reverse lending market is the new restriction on an owner-financed sale or installment sale. Dodd-Frank is not merely targeted to reel in the practices of banks and lenders; Dodd-Frank is bold enough to restrict how private property owners can finance the sale of their own home. Title XIV Section 1401(2)(E) Mortgage Loan Origination Standards, effectively restricts private property owners who want to sell their own property using owner financing through an installment sale. Dodd-Frank requires any homeowner who sells their property using owner financing to fully amortize the installment sale note, eliminating the ability for a balloon note to be negotiated between the buyer and seller. For seniors who seek to downsize and sell their home to a borrower that may not qualify under today’s strict credit guidelines by using owner financing, a 30-year, (or in some cases a 20-year) full amortization term is not really practical because the equity realization will not be timely for the senior, as it might have been with a balloon note.
So as a result, in this slow real estate market, a senior may be forced to stay in their oversized home while they try to sell it, or mark down the price and lose valuable equity. The positive here is that a reverse loan would be a valuable way for the seniors to subsidize their cost of living while they wait ever so patiently for the market to rebound and for credit guidelines to loosen, but as with everything else in life, time is money.
In Conclusion While reverse lenders eagerly await the impending CFPB reverse lending study and the resulting potential regulatory impact, the bottom line is that the industry has time on its side. The broad and sweeping obligations and implications imposed on the mortgage lending industry by the Wall Street Reform and Consumer Protection Act of 2010 may be whittled down as the mortgage lending and banking industry focus their energies on risk retention and the qualified residential mortgage. By the time the Office of Older Americans is obligated to submit its reverse lending study, Dodd-Frank may look significantly different. Once the CFPB director is appointed and confirmed, the CFPB officially takes its authority, has the opportunity to respond to comments submitted on behalf of the proposed regulations, and finally promulgates the regulations, there might be a considerable amount of distractions that push the attention away from the reverse lending industry, potentially adding further delays to any impact.
As of this exact moment, Dodd-Frank has not had a significant impact on reverse lending, but there have been some indirect implications that are not overly burdensome. This does not mean the reverse market can breathe a collective sigh of relief. It is the responsibility of every single reverse lender to have their “best practices” compliance model in full effect. Do not be the bad actor that the CFPB uses as an example that will reflect poorly on the industry and create burdensome obligations for those who have done their best to provide the seniors of our nation with a means of affordably accessing the equity in what might possibly be the single largest asset they have ever owned.