In a prior article published in Mortgage Compliance Magazine, I wrote about the opportunities in the reverse mortgage space for forward mortgage companies. In this article, I write about both the similarities, but also the differences lenders should consider when advertising reverse mortgages.
As I previously wrote, “forward” mortgage companies have in place a great deal of infrastructure and operating assets that could easily support expanding into the reverse mortgage market. However, reverse mortgage marketing and originations have differences that should be understood prior to a formerly “forward” mortgage only originator entering the reverse mortgage business.
As we know, mortgage advertising rules exist at both the federal and state level. The definitions under federal law of consumer credit and consumer credit secured by a consumer dwelling, and the definition under state law of a residential mortgage loan generally apply to and cover reverse mortgages. However, under both federal and state law, there can be different applications of these “forward mortgage rules” to reverse mortgages advertising, and there are specific rules under both federal and state law that only apply to reverse mortgages.
Federal Rules on Mortgage Advertising
TILA, ECOA, and the Mortgage Acts and Practices (MAPs) Rule apply to mortgage advertising. TILA’s advertising rules can differ depending upon whether the credit offered is open-end or closed-end credit. Today, while some reverse mortgages are structured as closed-end credit, the majority of reverse mortgages offered are structured as open-end credit. “Forward” mortgage only originators may have a great deal of “muscle memory” in crafting and making closed-end mortgage disclosures. However, if a previously “forward” mortgage only originator enters the reverse mortgage business, it will want to understand and incorporate TILA’s advertising rules for open-end credit into its policies, procedures, and operations.
For instance, the so-called “triggering terms” for mortgage advertising under Regulation Z for closed-end credit include: (i) the amount or percentage of any down payment; (ii) the number of payments or period of repayment; (iii) the amount of any payment; and (iv) the amount of any finance charge.
The “triggering terms” for advertising under Regulation Z for open-end credit include the finance charge or any fee that can be charged, and, if used, the following additional disclosures must be provided in a clear and conspicuous manner: (i) any loan fee that is a percentage of the credit limit under the plan and an estimate of any other fees imposed for opening the plan, stated as a single dollar amount or a reasonable range; (ii) any periodic rate used to compute the finance charge, expressed as an APR; and (iii) the maximum annual percentage rate that may be imposed in a variable-rate plan.
There are additional disclosures for closed-end adjustable rate mortgages under Regulation Z. However, the closed-end reverse mortgages offered on the market today contain only fixed rates of interest. Thus, a “forward” mortgage only originator that enters the reverse mortgage market should not look to those closed-end credit rules in crafting TILA advertising disclosures for variable-rate reverse mortgages.
Under ECOA, a creditor is prohibited from discriminating against an applicant on a prohibited basis, which includes age, regarding any aspect of a credit transaction, including advertising. However, the commentary to Regulation B recognizes that disbursements to a borrower under a reverse mortgage typically are determined by considering the value of the borrower’s home, the current interest rate, and the borrower’s life expectancy. Lenders must nonetheless be careful if and when advertising credit conditions, such as the amount of the credit or monthly payments, that the borrower will receive, or the estimated repayment date.
The MAPs Rule has broad provisions that address mortgage advertising and has specific provisions on reverse mortgage advertising. For instance, it is a violation of the MAPs Rule to make any material misrepresentation in a commercial communication regarding any term of any mortgage loan, including: (i) the existence, number, amount, or timing of any minimum or required payments, including but not limited to misrepresentations about any payments or that no payments are required in a reverse mortgage or other mortgage credit product; or (ii) the right of the consumer to reside in the dwelling that is the subject of the mortgage credit product, or the duration of such right, including but not limited to misrepresentations concerning how long or under what conditions a consumer with a reverse mortgage can stay in the dwelling.
Other more general MAPs Rule requirements that also are important for reverse mortgage advertising include not making a material misrepresentation regarding: (i) the potential for default under the mortgage, including misrepresentations concerning the circumstances under which the consumer could default for nonpayment of taxes, insurance, or maintenance, or for failure to meet other obligations; (ii) the effectiveness of the mortgage in helping the consumer resolve difficulties in paying debts, including misrepresentations that any mortgage can reduce, eliminate, or restructure debt or result in a waiver or forgiveness, in whole or in part, of a consumer’s existing obligations with any person, or (iii) that the mortgage is or relates to a government benefit, or is endorsed, sponsored by, or affiliated with any government or other program, including through the use of formats, symbols, or logos that resemble those of such entity, organization, or program.
The CFPB has been persnickety, to say the least, regarding these requirements as it entered into three reverse mortgage advertising related enforcement actions a year ago over allegations on these very issues.
On our list of potential issues here on the federal level, last, but certainly not least, are Fair Housing Act (FHA) rules. FHA insures Home Equity Conversion Mortgage (HECM) loans, which make up 99% of the reverse mortgage market today. FHA has its own rules on FHA-insured loan advertising, including specific rules for HECMs. One important FHA specific rule to HECMs is that mortgagees are required to explain in clear, consistent language all requirements and features of the HECM program. Mortgagees must ensure that mortgagors are properly informed of all features available to HECM mortgagors and may not mislead or otherwise cause a mortgagor to believe that the HECM product contains any features or limitations that are inconsistent with FHA’s requirements. For example, an FHA mortgagee must explain that:
- FHA insures fixed interest rate mortgages, as well as annual and monthly adjustable interest rate mortgages;
- The mortgagor has the ability to change the method of payment under the HECM at any time provided funds are available;
- Fixed interest rate mortgages are limited to the Single Disbursement Lump Sum payment option where there is a single, full draw at loan closing and the mortgage does not provide for future draws by the mortgagor under any circumstances;
- Adjustable interest rate mortgages provide for five, flexible payment options, and allows for future draws;
- The amount of funds available to the mortgagor is currently determined by the age of the youngest mortgagor; and
- The disbursement of mortgage proceeds during the first twelve-month disbursement period is subject to an initial disbursement limit as determined by requirements set by the Secretary.
A more general FHA advertising rule is that, other than permissible use of the official FHA-Approved Lending Institution logo, a mortgagee must not use FHA or HUD logos or seals, any other official seal or logo of HUD, or any other insignia that imitates an official federal seal in its advertising.
State Rules on Mortgage Advertising
In addition to state required disclosures of licensing information and NMLS numbers, which generally apply to both forward and reverse mortgages, some states have requirements on mortgage marketing that are unique and specific to reverse mortgages.
Nine states prohibit or limit the offering of other financial products, such as annuities, with reverse mortgages. Two states, North Carolina and Tennessee, have broad prohibitions on misrepresenting material facts or making false promises in connection with reverse mortgages.
In Oregon, a lender must disclose to a borrower that if he or she obtains a reverse mortgage, the borrower will not be eligible afterwards for the state real property tax deferral program. Effective January 1, 2018 in Oregon, in any reverse mortgage advertisement, solicitation or communication, the lender must include a clear and conspicuous summary of the terms of the reverse mortgage. The summary must, at a minimum, disclose these provisions of the reverse mortgage loan contract to the extent that the contract includes the following provisions:
- At the conclusion of the term of the reverse mortgage loan, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to the person and the person may need to sell or transfer the property to repay the proceeds of the reverse mortgage from the proceeds of the sale or transfer or the person must otherwise repay the reverse mortgage with interest from the person’s other assets;
- The lender will charge an origination fee, a mortgage insurance premium, closing costs or servicing fees for the reverse mortgage, all or any of which the lender will add to the balance of the reverse mortgage loan;
- The balance of the reverse mortgage loan grows over time and the lender charges interest on the outstanding loan balance;
- The borrower retains title to the property securing the reverse mortgage until the person sells or transfers the property and is therefore responsible for paying property taxes, insurance maintenance, and related taxes. Failing to pay these amounts may cause the reverse mortgage loan to become due immediately; and
- Interest on a reverse mortgage is not deductible from the person’s income tax return until the person repays all or part of the reverse mortgage loan.
Absent further clarification from the Division of Financial Regulation, one of the challenges in dealing with this new Oregon law will be for companies that advertise reverse mortgages across state lines, especially on TV and/or radio.
Also, in Texas, use of pre-printed checks in connection with reverse mortgages is prohibited.
As mentioned before, there are significant opportunities for a formerly “forward” mortgage only originator to enter the reverse mortgage business, in part because “forward” mortgage companies have in place a great deal of infrastructure and operating assets that could easily support expanding into reverse mortgages. However, reverse mortgage marketing and originations have differences that should be understood by a soon to be “forward” mortgage only originator as it enters the reverse mortgage business. Knowing the “rules of the road,” as well as the nuanced “potholes” in the road, is important.
Jim Milano is a member at Weiner Brodsky Kider PC. He can be reached at Milano@TheWBKFirm.com