Reverse Mortgage Disclosures: Timing Requirements

QUESTION

I have a question about the timing of disclosures on reverse mortgages.

We have just gotten into reverse mortgages and are setting up our rules in the loan origination software.

TILA says we are supposed to disclose three business days before consummation. But we are confused about what special disclosures are subject to that rule. 

Also, if we disclose on Friday, what is the consummation day?

And which particular forms are subject to the three-day rule?

What are the timing requirements for disclosures on reverse mortgage loans?

ANSWER

The Truth in Lending Act (TILA)[i] and its implementing Regulation Z[ii] indicate what disclosures are required. My response will pertain to closed-end, reverse mortgages.

In addition to any other disclosures required by TILA and Regulation Z, creditors must provide the following disclosures in a manner substantially similar to the model form provided in Regulation Z’s Appendix K.[iii] 

I will outline them here, along with brief descriptions.

Disclosure Requirements 

Notice 

A statement that the consumer is not obligated to complete the reverse mortgage transaction merely because the consumer has received the required disclosures[iv] or has signed an application for a reverse mortgage loan. 

Total Annual Loan Cost Rates 

A good-faith projection of the total cost of the credit, determined by Regulation Z[v] and expressed as a table of “total annual loan cost rates.” Regulation Z’s Appendix K gives comprehensive instructions on format and mathematical computation. 

Creditors must use the term “total annual loan cost rate”[vi] rather than “annual interest rate,” as used in TILA.[vii] This rule is based on the belief that the term “total annual loan cost rate” is less likely to be confused with the annual percentage rate (APR) and is a more accurate description of the percentage cost of reverse mortgages.  

The table of “total annual cost rates” requires creditors to disclose total annual loan cost rates for not less than three projected appreciation rates (0 percent, 4 percent, and 8 percent) and not less than three credit transaction periods (two years, a period equal to the consumer’s life expectancy, 1.4 times the consumer’s life expectancy), and an optional fourth period equal to half the consumer’s life expectancy.  

This disclosure is, in fact, modeled on the Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage program. 

Itemization of Pertinent Information 

An itemization of loan terms, charges, the age of the youngest borrower, and the appraised property value. 

Explanation of Table

An explanation of the table of total annual loan cost rates as provided in the model form.[viii]

Timing of Disclosures 

Regulation Z[ix] requires a creditor to give the reverse mortgage disclosures at least three business days prior to 

(1) consummation of a closed-end credit transaction or 

(2) the first transaction under an open-end credit plan. 

This is a situation in which Regulation Z is more specific than TILA,[x] which does not distinguish between a closed-end and open-end plan. 

Regulation Z[xi] requires the creditor to make the disclosures “clearly and conspicuously” in writing, in a form the consumer may keep. The disclosures may be provided to the consumer in electronic form,[xii] subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act).[xiii] 

The Official Staff Commentary offers additional guidance on the timing of disclosures for reverse mortgages.[xiv] Under Regulation Z, the required disclosures must be given within three “business days” of consummation. The applicable Comment[xv] defines “business day” as “all calendar days except Sundays and the federal legal holidays.[xvi] 

The following are legal public holidays: 

New Year’s Day, January 1; 

Birthday of Martin Luther King, Jr., the third Monday in January; 

Washington’s Birthday, the third Monday in February; 

Memorial Day, the last Monday in May; 

Juneteenth National Independence Day, June 19; 

Independence Day, July 4; 

Labor Day, the first Monday in September; 

Columbus Day, the second Monday in October; 

Veterans Day, November 11; 

Thanksgiving Day, the fourth Thursday in November; and 

Christmas Day, December 25. 

With respect to your question about issuing disclosures on Friday, if disclosures are provided on a Friday, consummation may occur any time on Tuesday, the third business day following receipt of the disclosures.[xvii] 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

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[i] TILA § 138(a)

[ii] Regulation Z § 1026.33(b)

[iii] Appendix K, Paragraph (d)(1), Regulation Z

[iv] See§ 1026.33

[v] In accordance with Reg. Z § 1026.33(c)

[vi] § 1026.33(b)(2)

[vii] TILA § 138.

[viii] Appendix K, Paragraph (d), Regulation Z

[ix] § 1026.31(c)(2)

[x] TILA § 138(a)

[xi] § 1026.31(b)

[xii] Idem

[xiii] 15 USC § 7001 et seq. See § 2.08.

[xiv] § 1026.31(c)(2)

[xv] 31(c)(2)-1

[xvi]  5 USC § 6103(a)

[xvii] Op. cit. xv

Reverse Mortgage Discrimination

QUESTION

Earlier this year, our federal regulator alleged that we were discriminating on reverse mortgages based on age. At this point, we are still trying to satisfy their requirements to remedy this issue.

Frankly, I don’t see how a HECM can be a focus of age discrimination since we originate them only for homeowners who are 62 or older. Senior citizens are usually people who are 62 or older.

Also, the regulator told us that our reverse mortgage advertisements had fair lending issues. Those concerns are all resolved now. But I need some clarification about the fair lending implications.

How does fair lending impact reverse mortgages?

And what types of advertisements can cause fair lending violations?

ANSWER

Fair lending compliance certainly applies to reverse mortgages. Just like traditional mortgages, reverse mortgages are subject to federal laws governing mortgage lending, including TILA, RESPA, and fair lending laws such as the Equal Credit Opportunity Act (ECOA). These laws and their respective implementing regulations set forth important protections for all mortgage borrowers, including reverse mortgage borrowers.

But, many protections are not tailored to the unique needs of reverse mortgage consumers. ECOA and its implementing regulation, Regulation B, set forth rules prohibiting discrimination by a creditor based on age (or race, color, religion, national origin, sex, or marital status) with respect to any aspect of a credit transaction. ECOA covers both intentional discrimination (i.e., disparate treatment) and also facially neutral practices that have a disparate impact on a prohibited basis, including age.

Regulation B also prohibits creditors from making statements to applicants or prospective applicants discouraging – on a prohibited basis – a reasonable person from making or pursuing an application.

Reverse mortgages are available only to consumers 62 years of age and older. Generally, the amount a consumer can borrow is partly a function of the consumer’s age. This is permissible under Regulation B. However, fair lending concerns can still arise in the reverse mortgage context. For example, if a lender that offers a range of lending products, including reverse mortgages, were to discourage creditworthy applicants over age 62 from applying for alternatives to a reverse mortgage, the lender could risk violating Regulation B.

State regulators have taken enforcement actions to combat unfair and deceptive marketing of reverse mortgages. Many administrative actions have centered not only on individuals and entities that make unfair or deceptive statements about reverse mortgages but also on those that misrepresent their ability and qualifications to offer reverse mortgages to consumers.

Many reverse mortgage lenders are also subject to UDAAP enforcement actions by the CFPB.[i] Some reverse mortgage lenders may also be subject to enforcement actions by the FTC.[ii]

Reverse mortgage advertisements are often a minefield of fair lending violations. Often, the violative ads confuse the consumer. Other ads tend to cause consumers to misunderstand one or more important features of the loans and the loans’ potential risks.

Here are a few of the fair lending issues we have found in our advertising compliance reviews. Keep in mind that these consumer reactions are in some way caused by the texts, various features, and delivery methods of the advertisements.

·       Advertisements caused consumers to believe that the government provided reverse mortgages and that repayment would not be required, giving the impression that reverse mortgages are not loans. 

·       Some ads caused consumers to mistakenly believed that money received through a reverse mortgage represented home equity they had accrued over time and that there was no reason they would have to pay it back. 

·       Many ads either did not include interest rates or put them in the fine print, leading to consumers finding it difficult to understand that reverse mortgages are loans with fees and compounding interest like other loans. 

·       Certain advertisements were confusing due to being incomplete and inaccurate, such as ads implying or stating that borrowers cannot lose their homes or do not have to make monthly payments. 

·       Many ads claimed that reverse mortgage proceeds were "tax free," thus leading consumers to believe they would not have to pay property taxes. 

·       The bogus claim of "tax free" money was used in ads by giving the impression that reverse mortgages are a government-run program or benefit. 

·       Advertisements using language or images referenced the Department of Housing and Urban Development (HUD) or the Federal Housing Authority (FHA), signaling that the government was funding and operating a reverse mortgage program for senior citizens. 

·       Some advertisements created a false perception by stating or implying that the main benefit of a reverse mortgage was that consumers could remain in their homes "as long as they want" based on ads that said, "the title and deed remain in their name." This implied that having a reverse mortgage meant they could never lose their home. This is false because while reverse mortgage borrowers retain the title and deed, the loans are secured by a lien, and borrowers can, in fact, lose their homes. Reverse mortgage borrowers are responsible for several requirements, including paying property taxes, homeowner's insurance, and property maintenance. Failing to meet these requirements can trigger a loan default that results in foreclosure. 

·       Advertisements hid various terms and conditions in the "fine print." Indeed, in some cases, it is likely that consumers could not even read the ridiculously small fine print in the printed ads, and, for the most part, no consumers could read the fine print used in television ads. Ads that included information about borrower requirements typically did so in the fine print. Fine print generally addressed tax and insurance requirements, property maintenance and residency requirements, repayment terms, and other important loan details. 

·       Advertisements caused consumers to misunderstand the government's role because the ads stated that the loans were "government insured" or a "government-backed program." A few advertisements went so far as to use text and graphics, such as eagles and government seals, to imply that reverse mortgages are affiliated with or offered by the federal government. 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director 

Lenders Compliance Group

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[i] Dodd-Frank Act § 1031

[ii] 15 USC § 45