By John Levonick

The Reverse Mortgage lending industry has begun to attract the attention of Federal and State Regulators, and, as a result, national and local lending institutions now have the obligation to build a strong Compliance and Risk Mitigation program to properly manage and assess risks associated with reverse lending products in order to meet all regulatory obligations.

While much of the reverse industry is currently focused on Home Equity Conversion Mortgage (HECM) production, the current legislative and regulatory attention is moving toward creating clear lending requirements aimed at protecting consumers as the proprietary reverse product market grows. There is significant concern that reverse mortgages are highly complex products and are growing in popularity as more homeowners reach the age of eligibility. Since reverse products are becoming a primary source of retirement income to an ever increasing demographic, Federal and State Regulators are seeking to establish rules that will impose specific disclosure and counseling obligations on financial institutions that originate proprietary reverse products in order to educate and protect vulnerable elderly homeowners who may fall prey to misleading sales and marketing techniques.

Pending State Legislation
States such as Florida (SB 1532), Pennsylvania (HR 4419), Nebraska (LB 892) and Arizona (HB 2242) have pending legislation (as of the time of this article) that will clearly define what a reverse mortgage is, create restrictions on product terms and obligations, create express reverse product disclosures with specific content and timing requirements, impose homeowner counseling requirements through preapproved agencies and finally create the proper authority within each of these states to enforce reverse lending requirements.

Pending Federal Guidance
In December 2009, the Federal Financial Institutions Examination Council (FFIEC) proposed to the Federal financial institution regulatory agencies guidance on managing compliance and reputation risks presented by reverse mortgage products. The FFIEC is currently reviewing the approximately twenty-one public comment letters submitted prior to the February 16th deadline, and once completed, the FFIEC will issue its final supervisory guidance to the member institutions they supervise (OCC, OTS, FDIC, FRB, & NCUA) as well as to the State Liaison Committee (SLC) of the FFIEC that will encourage state regulators to adopt the guidance.

The FFIEC guidance addresses the following compliance and reputational risks concerns:

• Consumers shall enter into a reverse mortgage loan understanding
  the costs, terms, risks and other consequences of these products
  and may not be misled by marketing and advertisements promoting
  reverse mortgage products.
• Counseling shall be provided to properly educate borrowers and
  remove any confusion or misunderstanding about the product.
• Proper steps shall be taken to determine that consumers will be able
  to pay required taxes and insurance.
• To protect against potential conflicts of interest and abusive practices
  that may arise in connection with reverse mortgage transactions,
  including the targeted use of loan proceeds and the sale of ancillary
  investment and insurance products.