Dugan Urges Consumer Protection in Reverse Mortgages
Comptroller of the Currency John Dugan urged late yesterday for regulators to tackle the "significant" compliance risks associated with reverse mortgages, including predatory lending and coercive sales. Regulators must address these issues before real problems develop, so that these loans are made "in a way that is prudent for both lenders and borrowers," Dugan said. Reverse mortgages have been in existence for over 20 years. Recently, however, controversy has brewed around the product as older American's find themselves strapped for cash in a troubled economy and turn to reverse mortgages for additional cash flow. Reverse Mortgages can provide a source of income or line of credit to those elderly homeowners -- over the age of 62 -- by allowing them to tap the equity in their home without having to sell or move out of the home. The underwriting on these loans is nontraditional since no repayment is required until the homeowner dies, permanently moves out of the home, or fails to maintain the property or pay property taxes. "While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages -- and that should set off alarm bells," Dugan said. With access to large lump sums upon closing a reverse mortgage, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long term care insurance products that aren't necessarily appropriate to their needs, Dugan explains. Lenders may also simultaneously and aggressively market investment, insurance or annuity products or even attempt to condition loan approval on the purchase of such products. These products' incentives and fees often put more of a premium on making the loan than on ensuring it is appropriate for the borrower, critics claim. "In these circumstances, more definitive regulatory standards may need to be adopted, and the OCC is prepared to do that - even if the standards we advocate initially apply only to reverse mortgage lending by national banks," Dugan said in a speech to a regulatory compliance conference sponsored by the American Bankers Association. Dugan also urged the Department for Housing and Urban Development, which insures 90% of all reverse mortgages, to issue guidelines addressing escrow issues. The nonpayment of taxes or insurance can trigger foreclosure, he says. However, the new Federal Reserve Board escrow requirements for "higher-priced" mortgages do not apply to reverse mortgages, and HUD does not require escrows to be established in connection with HECMs. "While much attention still needs to be focused on dealing with the economic downturn, regulators can't afford to ignore consumer issues," Dugan concluded. "We need to be on constant alert to emerging risks and vigilant in our regulatory compliance responsibilities." Despite consumer protection concerns set forth by Dugan, lenders of the product say there are "incredible" safeguards in place for seniors with reverse mortgages. Before a potential borrower is allowed to take on a reverse mortgage, for instance, he or she must by law speak with a counselor from a third party, separate and distinct from the lending institution. And in the end, the satisfaction rate for Americans who opt into a reverse mortgae sits near 92%, said David Bancroft, president of Omni Reverse Mortgage. For more in-depth coverage on reverse mortgages, see the June issue of Housing Wire Magazine. Write to Kelly Curran.