QUESTION
I am a compliance analyst for a mortgage lender. Until
recently, we didn’t originate many reverse mortgages. In the last few weeks, there
has been quite an increase in applications for reverses.
Our loan officers tell
us that most of the applicants want reverses because they are scared of not
having enough money to make it through the pandemic crisis, and some of them
are very concerned that they are going to get sick or maybe even die. So, they
want to take the equity out now.
The question that keeps coming up that
I would like you to discuss involves the APR calculation. We have customers who say
that we are not disclosing the APR correctly because we’re calculating on an
annual basis.
Our question is, what is the unit measurement for calculating APR
on reverse mortgages?
ANSWER
Some of our clients have told me that there is increasing
interest in reverse mortgages by seniors who want to be sure they have money to
get through the COVID-19 Pandemic and also have sufficient funds available in
case they get sick.
Regulation Z, the implementing regulation of the
Truth-in-Lending Act (TILA) requires creditors to disclose the annual
percentage rate (APR) in accordance with either the actuarial method or the
U.S. Rule method.
To explain, the explanations, equations, and instructions
for determining the APR in accordance with the actuarial method are set forth
in Appendix J to Regulation Z. Appendix J provides that the unit-period for a
single advance, single payment transaction, for the purposes of determining the
APR, must be the term of the transaction, not to exceed one year. In all other
transactions, the unit-period must be the common period that occurs most frequently
in the transaction unless an exception applies.
Generally, by its terms, a closed-end reverse mortgage is a
single advance, single payment transaction because it includes a single
lump-sum advance at origination and a single payment due at the end of the loan
term. Pursuant to Regulation Z, the unit-period for the purposes of determining
the APR for the closed-end reverse mortgage, with a term greater than a year,
is one year.
However, in addition to a single lump-sum advance at
origination, some closed-end reverse mortgages may have multiple advances
throughout the loan term. For example, a closed-end reverse mortgage with a Life
Expectancy Set Aside (LESA) typically has a set number of semiannual advances
for the payment of property taxes, and flood and hazard insurance premiums.
According to Regulation Z, the unit-period for the purposes of determining the
APR for this kind of loan would be six months because that would be the common
period that occurs most frequently in the transaction.
Regulation Z states that the APR is considered accurate for
a regular transaction if it is not more than 1/8 of one percentage point above
or below the APR determined pursuant to §1026.22(a)(1). The APR is considered
accurate for an irregular transaction if it is not more than 1/4 of one
percentage point above or below the APR determined pursuant to § 1026.22(a)(1).
In the CFPB’s Summer 2019 issue of Supervisory Highlights,
the Bureau reported that, in one or more examinations, its examiners
observed that creditors were disclosing inaccurate APRs for closed-end reverse mortgages. [Supervisory
Highlights, Summer 2019, 84 Federal Register 49250 (Sept. 19, 2019), Consumer
Financial Protection Bureau.]
Specifically, while conducting loan file reviews, examiners
observed creditors using a unit-period of one month instead of one year to calculate
the APR, leading to inaccurate calculations outside Regulation Z’s permissible
tolerances. In response to this finding, the creditors agreed to revise their
calculation methodology to reflect the correct unit-period and provided
affected consumers with reimbursements.
Examiners also found creditors disclosing
inaccurate APRs for closed-end reverse mortgages with a LESA. While conducting
loan file reviews, examiners observed creditors using a unit-period of one
month instead of six months to calculate the APR, leading to inaccurate
calculations outside Regulation Z’s permissible tolerances. In response to this
finding, the creditors agreed to revise their calculation methodologies to
reflect the correct unit-period.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
