New Consumer Protections Urged for Reverse Mortgages

Stricter rules governing reverse mortgages are needed to guard against repeat of the kind of problems that led to the subprime mortgage crisis, the U.S. Comptroller of Currency has said.

Reverse mortgages share many of the same characteristics that created problems with subprime mortgages, Comptroller John Dugan told a meeting of the American Bankers Association today. And they're likely to grow rapidly in popularity as the baby boomer population heads into retirement and starts drawing on their home equity as a source of income.

"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," Dugan said. " I believe that now is the time to get out in front of this issue - before real problems develop - so that reverse mortgage providers make these loans in a way that is prudent for both lenders and borrowers."

Parallels to subprime mortgages cited

He cited a number of factors that contributed to the subprime mortgage crisis, many of which also apply to reverse mortgages or could easily apply to them in the future. They include a vulnerable customer base, complex financial products that are often poorly explained to customers, financial incentives for distributors that work against the customer's best interests and lax supervision of companies promoting the products.

"We need to learn the right lessons from this very negative experience, because it clearly demonstrates the link between compliance and safety and soundness," he said.

Potential problems seen

Among the potential problems with reverse mortgages, he said, are that lenders may seek to aggressively market additional services and products as part of the package, including investments, insurance and annuities, perhaps even requiring the purchase of such products as a condition of approving the reverse mortgage. He noted that elderly consumers with a large pot of cash available from their home equity may be particularly vulnerable to purchase expensive financial products that are not suited to their needs.

Another problem, he said, is that borrowers may fail to account for the often-substantial fees that are charged for setting up a reverse mortgage. Others, in taking out a large lump sum up front, may exhaust their funds too rapidly and not have enough left for home maintenance and property taxes, which could lead to foreclosure.

Misleading marketing claims are another issue, Conway said, particularly when providers have loan origination incentives and fees that put more of a premium on making the sale than on providing a product that is appropriate for the consumer.

Seeks regulation of proprietary lenders

About 90 percent of reverse mortgages at present are backed by the Federal Housing Administration and are subject to federal guidelines. However, Conway said growing demand for the product could see an increase in reverse mortgages offered by proprietary lenders who are not subject to the same rules.

Conway said the OCC will use its existing authority to regulate national banks to limit certain abuses, including regulations banning unfair and deceptive practices in making home loans, and a prohibition on tying a loan approval to the purchase of various nonloan products. He said the OCC would also seek to get similar regulations to apply to proprietary lenders as well.