Comptroller Dugan Calls For More Stringent Regulation Of Reverse Mortgages

e mortgages pose significant compliance risks, and regulators should get out in front of this issue, before real problems develop, says Comptroller of the Currency John C. Dugan. ‘While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages – and that should set off alarm bells,’ [link=http://www.occ.gov/ftp/release/2009-61a.pdf][u]Dugan said[/u][/link] at an American Bankers Association conference in Orland, Fla. The experience with subprime mortgages "clearly demonstrates the link between compliance and safety and soundness,’ he added. Dugan said the regulatory agencies should ensure that interagency guidance being worked on is sufficiently robust to ensure that consumers are adequately protected. Definitive regulatory standards are needed, he said. "[T]he [Office of the Comptroller of the Currency (OCC)] is prepared to do that – even if the standards we advocate initially apply only to reverse mortgage lending by national banks," he said in a speech. While some lenders offer their own proprietary products, 90% of all reverse mortgages are home equity conversion mortgages (HECMs) insured by the Federal Housing Administration. The ability of consumers to access their home equity through immediate and large lump-sum payments can pose substantial risks, according to Dugan. The comptroller also expressed concern about misleading marketing claims, especially if the product's incentives and fees put more of a premium on making the loan than on ensuring it is appropriate for the borrower. "Even when consumers are not subject to misleading or deceptive marketing, they still may have a hard time understanding the complex nature and costs associated with reverse mortgages," he said. "If a consumer doesn't fully understand how much the loan will cost, how much can be borrowed, or all the circumstances under which the loan can become due, then the risk increases for a transaction that is not appropriate to the consumer's needs." The OCC already has regulations in place to deal with deceptive marketing, and Dugan stated that the OCC "will use this authority to require immediate correction of any potentially misleading marketing claims by a bank in connection with reverse mortgage products." The OCC will also use existing authority to ensure that national banks do not condition the availability of a reverse mortgage on the borrower's purchase of certain nonbanking products, such as an annuity or life insurance. Dugan said one area that deserves particular attention is whether to impose additional requirements with respect to escrows of taxes and insurance. Nonpayment of taxes or insurance can trigger foreclosure. However, the new Federal Reserve Board escrow requirements for higher-priced mortgages do not apply to reverse mortgages, and HUD does not require escrows to be established in connection with HECMs. "Given the predominance of the HECM product in reverse mortgage lending, I think it would be a major step forward for HUD to issue guidelines or requirements addressing the escrow issue for HECMs, and I would like to begin a dialogue with them on the issue," he said. "Once they set the standards for escrows, we would ensure that they are followed by national banks for HECM products, and would ensure – by regulation, if necessary – that comparable standards apply in connection with proprietary reverse mortgages offered by national banks," he added. SOUR