QUESTION
We thought we knew what a Reverse Mortgage was until one of our investors rejected our policy and procedure for several defects, one of which was they didn’t accept our definition of a Reverse Mortgage.
Now we are scrambling to rewrite the Reverse Mortgage policy but need a really good definition. We’ve spoken with our attorneys and a few companies that sell this policy. But we are unsatisfied with all of them. Our CEO told us to contact you to see how you would define a Reverse Mortgage. He told us you would provide the kind of guidance we would need.
So, we’re writing you to get a good definition of a Reverse Mortgage that will hopefully meet our investor’s expectations.
What is the definition of a Reverse Mortgage?
ANSWER
Please thank your CEO for the kind words! Your question is a good one. My rule of thumb in developing a policy document is to begin with definitions.
In answering your question, I will
provide a definition of a reverse mortgage that should assist you in drafting a
dependable outline. There are specific procedural rules and disclosure requirements,
such as the various mandates involving the Total Annual Loan Cost Rates (TALC)
disclosure. However, I will limit my response to offering a definition of a
reverse mortgage for your policy statement.
· A mortgage, deed of trust, or equivalent consensual security interest securing one or more advances is created in the consumer’s principal dwelling; and
· Any principal, interest, or shared appreciation or equity is due or payable (other than in the case of default) only after:
o The consumer dies;
o The dwelling is transferred; or
o The consumer ceases to occupy the dwelling as a principal dwelling.
The term “nonrecourse” requires an explanation. A nonrecourse transaction limits the homeowner’s liability to no more than the proceeds of the sale of the home unless a lesser amount is called for in the credit obligation. For example, there might be an equity reservation or conservation provision in the agreement between the consumer and the creditor.
Stay with me for a moment. A “nonrecourse” transaction requires a slightly attenuated outline.[ii] A transaction must be nonrecourse to meet the definition of a reverse mortgage.[iii] That is, the consumer’s liability must be limited to the proceeds from the sale of the home. If a closed-end reverse mortgage does not limit the consumer’s liability to the proceeds of the sale of the home, and the transaction meets the definition of a high-cost mortgage loan,[iv] the transaction[v] is subject to all the requirements of high-cost mortgages[vi] and prohibited acts or practices in connection with high-cost mortgages.[vii]
Furthermore, the term “default” is not defined by the statute or regulation,[viii] but rather by the legal obligation and state or other applicable law. This means that the definition of that term is left to the agreement between the parties or state law.
To meet the definition of a reverse mortgage transaction, a creditor cannot require principal, interest, or shared appreciation or equity to be due and payable (other than in the case of a default) until after the consumer’s death, transfer of the dwelling, or the consumer ceases to occupy the dwelling as a principal dwelling.[ix]
The reverse mortgage obligation may state a specific maturity date or term of repayment and still meet the definition of a reverse mortgage as long as the maturity date or term will not cause maturity prior to the occurrence of any of the maturity events recognized in the regulation. For example, the obligation could state a term but automatically extend the term for consecutive periods if no recognized maturity event has occurred. All costs and charges the consumer incurs in a reverse mortgage are included in the projected total cost,[x] whether or not the cost or charge is a finance charge.[xi]
· So, let’s stop here and clarify. By definition, in a reverse mortgage transaction, a creditor may not require any principal, interest, or shared appreciation or equity to be due or payable (absent default) until after the consumer’s death, transfer of the dwelling, or cessation of occupancy by the consumer.
· And, how is this affected by state laws that require legal obligations secured by a mortgage to specify a definite maturity date or term of repayment? Stating a definite maturity date or term of repayment in an obligation would not conflict with the definition of a reverse mortgage if the maturity date or term of repayment would in no case operate to cause maturity prior to the occurrence of any of the events recognized in the regulation.
With respect to a definition of a definite maturity date or term of repayment, a creditor cannot require any principal, interest, or shared appreciation or equity to be due and payable (other than in the case of default) until after the consumer’s death, transfer of the dwelling, or the consumer ceases to occupy the dwelling as a principal dwelling. Some state laws require legal obligations secured by a mortgage to specify a definite maturity date or term of repayment in the instrument.
An obligation may state a definite maturity date or term of repayment and still meet the definition of a reverse mortgage transaction if the maturity date or term of repayment used would not operate to cause maturity prior to the occurrence of any of the maturity events recognized in the regulation. For example, some reverse mortgage programs specify that the final maturity date is the borrower’s 150th birthday; other programs include a shorter term but provide that the term is automatically extended for consecutive periods if none of the other maturity events has yet occurred. These programs would be permissible.
Chairman & Managing Director
[i] Truth-in-Lending Act § 103(cc), Regulation
Z § 1026.33
[ii]
§ 1026.33, Comment 33(a)-1
[iii]
§ 1026.33(a)
[iv]
§ 1026.32
[v]
Op. cit. ii
[vi]
Idem
[vii]
§ 1026.34.
[viii]
§ 1026.33, Comment 33(a)(2)-1
[ix]
§ 1026.33, Comment 33(a)(2)-2
[x]
§ 1026.33, Comment 33(c)(1)-1
[xi]
Under §1026.4
