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 Mortgages – A Policy Definition

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 reverse mortgage transaction is defined[i] as a “nonrecourse” consumer credit obligation in which: 

·       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. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[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

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

Reverse Mortgage Advertising – Compliance Risks

QUESTION
Last year, our company got into reverse mortgages. We hired on a few loan officers who knew a lot about reverse mortgages, and we set up a reverse mortgages division. 

At first, we did well until the banking department notified our CEO about advertising violations involving our reverse mortgages. Our compliance manager had approved the advertisements, but what’s done is done. 

We had to go through an examination of all our reverse mortgage advertising, and we were stuck with a list of violations and penalties. We scaled down the reverse mortgages division. I’m sure this could have all been avoided. 

Now, there’s talk of expanding it again. This time around, I think we need help. I would appreciate your telling us some mistakes we could watch out for in the future. 

What are some advertising mistakes in reverse mortgages?

ANSWER
There are many advertising pitfalls associated with reverse mortgages. Over the years, these violations have become the basis for lawsuits, administrative actions (state and federal), agency concerns, and adverse reputation risks. I’ll mention a few for you to consider. If you are not really familiar with this area of advertising compliance, please contact us for support. 

Most importantly, always make it a point to take the consumers’ point of view as it relates to reverse mortgage advertisements. Too often, they misunderstand one or more important features of the loans and the loans’ potential risks. Ads that downplay the terms and risks of reverse mortgages or confuse prospective borrowers lead to trouble. 

Here are a few pointers to consider. Revise your advertising accordingly. 

- It may seem odd, but many consumers do not understand that reverse mortgages are loans. For instance, some consumers falsely believe that the government provides reverse mortgages and that, therefore, repayment would not be required. 

- Indeed, many consumers find it difficult to understand that reverse mortgages are loans with fees and compounding interest like other loans since ads may not include interest rates or include them in the fine print. 

- Some consumers mistakenly believe that money received through a reverse mortgage represents home equity they had accrued over time and that there is no reason they would have to pay it back. 

- Consumers are confused by incomplete and inaccurate information. For instance, reverse mortgage advertisements often erroneously imply or state that borrowers cannot lose their homes or that borrowers make no monthly payments. 

Sometimes, ads misleadingly claim that reverse mortgage proceeds are “tax free,” thus leading consumers to believe they would not have to pay property taxes. 

- One of my pet peeves is that some advertisements leave the impression that the main benefit of a reverse mortgage is that consumers can remain in their homes “as long as they want” based on ads that state that “the title and deed remain in their name.” Consumers then assume that having a reverse mortgage means they can never lose their homes. This is a disingenuously created perception 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.

Furthermore, 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 that create the impression that there is no risk are thus misleading. 

- Consumers often do not read the “fine print.” We all know that! Inevitably, most consumers do not read the fine print in printed ads; indeed, virtually no consumers read the fine print used in television ads. 

Ads may include information about borrower requirements in fine print, but regulators do not tolerate the “fine print” disclosure gambit, especially and egregiously where the fine print generally addresses tax and insurance requirements, property maintenance, and residency requirements, repayment terms, and other essential details about the loans. 

- Consumers misunderstand the role of government due to defective reverse mortgage ads. This is caused by ads that state that the loans are “government insured” or a “government-backed program.” Some misleading advertisements use text and graphics, such as eagles, government seals, and so forth, to imply that reverse mortgages are affiliated with or offered by the federal government. 

- Some consumers complain that language or images in the ads reference the Department of Housing and Urban Development (HUD) or the Federal Housing Authority (FHA). Regulators take the position that federal agencies’ names in the ads deceptively signal that the government is funding and operating a reverse mortgage program for senior citizens. 

- Regulators issue administrative actions where ads claim “tax free” money because it is a sign that the company is trying a subterfuge to suggest that the reverse mortgage is a government-run program or benefit.

One final note. Be sure that the reverse mortgage ad is complete with respect to advertising compliance – and I do mean totally complete! Incompleteness in ads can lead to a determination that they are unfair or deceptive if coupled with claims of guarantees or strong statements about the absence of risk.

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

Calculating APR in Reverse Mortgages

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

Reverse Mortgage Disclosures

QUESTION:

What are the additional disclosure requirements for originating a reverse mortgage loan? 

ANSWER:
Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), sets forth the disclosures that are required for reverse mortgage loan transactions. Indeed, Regulation Z requires additional disclosures reflective of the model form provided in its Appendix K, paragraph (d). 

These additional disclosure requirements are:

1. A disclosure that the applicant is not obligated to complete the reverse mortgage transaction, even if the applicant received specific reverse mortgage disclosures, and even if the applicant has signed an application for a reverse mortgage loan.

2. A Good Faith Estimate that provides the total cost of the credit extended, and expressed as a table of “total annual loan cost rates.” [see Regulation Z, Appendix K]

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

4. An explanation of the table of the “total annual loan cost rates” that are provided in the model form found in Regulation Z. [see Regulation Z, Appendix K, paragraph (d)]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group