(9/10/2010) ERATE Exclusive - The reverse mortgage is the latest home loan product in line
for greater consumer protections from federal regulators.
The Federal Reserve Board has proposed a slate of new rules
to improve disclosures and to stop unfair practices that can cost older,
more vulnerable consumers more than the already high cost of the special
loans.
With a reverse mortgage, borrowers 62 and older can turn home
equity into a stream of cash they don't have to repay until they sell and
move out, die or otherwise no longer own the home. The loaned money could
come in handy, say for those with fixed or falling incomes and those who
need cash quickly, especially if there are no living heirs.
Most reverse mortgages are federally-insured Home Equity Conversion Mortgages (HECM), but there are
also private lender-insured and uninsured loans available for a variety of
costs, terms and conditions.
The loans are not for everyone and typically come with a requirement that
the borrower obtain counseling before signing on the dotted line, because
loans can be expensive, complex, confusing and predatory when consumers are sold
a package that includes a reverse mortgage and other financial products.
The federal proposal for new regulations will be open for public comment
until November. Final rules, with significant changes to Regulation Z (Truth
in Lending) may not be on the books until next year.
• Improve the disclosures consumers receive for reverse mortgages
and impose rules for reverse mortgage advertising to ensure advertisements
contain accurate and balanced information.
• Improve the disclosures that explain a consumer's right to rescind
certain mortgage transactions and clarify the responsibilities of the
creditor if a consumer exercises the right.
• Ensure that consumers receive new disclosures when the parties
agree to modify the key terms of an existing closed-end mortgage loan.
The Fed said consumers currently receive lengthy and confusing
disclosures when applying for reverse mortgages and the disclosures often
don't explain the features unique to reverse mortgages.
That will change.
Consumers will receive disclosures on or with the
application form, using simple language to highlight the basic features and
risks of reverse mortgages. Shortly after filling out the application,
consumers would receive transaction-specific disclosures that reflect the
actual terms of the reverse mortgage being offered.
Recognizing disclosures often aren't enough to protect consumers, the
proposed rules address concerns consumers have been forced to buy, along
with the reverse mortgage, supplemental financial products that can be
costly and often unnecessary and not beneficial, such as annuities or
long-term care insurance.
The rules would also:
• Prohibit creditors from conditioning a reverse mortgage on the
consumer's purchase of another financial or insurance product.
• Require that a consumer receive counseling about reverse mortgages
before a creditor can impose nonrefundable fees for a reverse mortgage or
close the loan.
