On August 16, the The Federal Financial Institutions Examination Council (FFIEC) [an organization which includes the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision, the National Credit Union Administration, and the State Liaison Committee] formally issued guidance to the reverse mortgage industry. The guidance is not in fact legally binding, and in fact, it mentioned the handful of existing laws which already govern reverse mortgages. Rather, its purpose was “to address compliance and reputation risks associated with reverse mortgages…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.”

The FFIEC identified four overarching concerns:
1) Misleading advertisements and a related lack of borrower understanding of the “costs, terms, risks, and other consequences” of reverse mortgages. Borrower misinformation is still a serious problem, and lenders deserve some of the blame. For example, some lenders continue to perpetrate the myth that a reverse mortgage is “riskless” and/or a government benefit.
2) Inadequate or Biased Counseling. It is problematic that certain counselors might have ties to particular lenders, and that other counselors do not adequately address suitable alternatives to reverse mortgages and the complete financial and legal implications of obtaining a reverse mortgage.
3) Lender Failure to Guarantee the payment of Taxes and Homeowners Insurance. Perhaps the lenders should take it upon themselves to ensure payment, since failure to do so could result in foreclosure.
4) Potential conflicts of interest that may create incentives to cross-sell ancillary investment and insurance products. While this has already been banned by existing legislation, it’s important for lenders to be reminded to always avoid the appearance of impropriety,

Based on these issue, the FFIEC formulated a handful of guidelines. With regard to misleading advertisements, it encouraged the use of “promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgage products.” It should include information about “borrower and property eligibility,” determination of principal limits, payout option, the conditions that would cause foreclosure, fees, and hopefully, alternatives to reverse mortgages. In order to minimize the possibility of foreclosure, lenders are encouraged to either set up escrow accounts for the payment of property taxes and homeowners insurance, or issue stern reminders to borrowers of the importance of making such payments.

Counselors, meanwhile, are charged with informing borrowers primarily of “the availability of other housing, social service, health, and financial options…other than reverse mortgages, including other mortgage products, sale-leaseback financing, and deferred payment loans.” Counselors should also explain “the differences between HECM loans and proprietary reverse mortgages, the financial implications and tax consequences of entering into a reverse mortgage, the impact of a reverse mortgage on eligibility for federal and state needs-based assistance programs, including Supplemental Security Income, and the impact of the reverse mortgage on the estate and heirs.” Finally, lenders themselves need to make sure that they have strong “written policies and internal controls,” in order to avoid the arising of any conflicts of interest.

Overall, I think the FFIEC hit the nail right on the head. It identified all of the main concerns regarding reverse mortgages without denigrating their appeal or unnecessarily vilifying the industry. The solutions that it proposed or both practical and reasonable, and serve to limit deception, cross-selling, and foreclosure. If these reforms are implemented, I think that both borrower suitability and satisfaction will increase.