Dennis Norman
Reverse mortgages have become increasingly popular over the past few years with seniors that find themselves with a large amount of equity in their home, but short on cash, or struggling to pay for the upkeep of the home, property taxes, insurance or other living expenses. A reverse mortgage allows people in that situation to pull the equity from their home in a lump sum, monthly payments or just as they need it.
Unfortunately some seniors have gone the route of a reverse mortgage without fully understanding all the terms and costs of the loan as well as many have been preyed upon or taken advantage of to invest the proceeds into a financial or insurance product offered by the company doing the reverse mortgage.
To address this and protect consumers obtaining a reverse mortgage, the Federal Reserve has proposed a change to Regulation Z to help consumers better understand these rather complex loans. Under the new rule lenders would be required to:
- Provide a new, two-page disclosure at time of application which highlights in simple language the basic features and risks of reverse mortgages.
- Provide transaction-specific disclosures to the borrower within 3 days of application reflecting the actual terms of the reverse mortgage being offered.
- Provide final disclosures, similar to the above, to the borrower at least 3 days prior to closing to allow the borrower the opportunity to compare the final disclosure to the initial disclosure.
- Ensure that their advertisements for reverse mortgages are accurate and balanced. For example, if an ad states that a reverse mortgage “requires no payments” it must also clearly disclose the fact that borrowers must pay property taxes and required insurance.
In addition, to protect consumers from unfair practices related to reverse mortgages, the proposal would:
- Prohibit lenders from, as a condition of the reverse mortgage loan, requiring a borrower to purchase another financial or insurance product (such as annuities or long-term care insurance).
- Require that a consumer receive counseling about reverse mortgages before any non-refundable fee can be imposed (except a fee for the counseling itself) or the loan can by close.
- Prohibit creditors from steering customers to specific reverse mortgage counselors or compensating counselors or counseling agencies, to ensure that the counseling is unbiased.
Finally, a consumer generally has three business days after closing to rescind certain home-secured loans, but this right may be extended for up to three years if the lender fails to provide the consumer with certain disclosures or the notice of the right to rescind. The proposed revisions would:
- Simplify and improve the notice of the right to rescind provided to consumers at closing.
- Revise the list of disclosures that, if not properly made, can trigger an extended right to rescind.
- Clarify lender’s obligations when the extended right to rescind is asserted.
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