Top-10 Reverse Mortgage Consumer Protections
The federally insured reverse mortgage product known as a Home Equity Conversion Mortgage or HECM has been around for more than 30 years. During that time, the U.S. Department of Housing and Urban Development (HUD) and other governmental agencies have added layers of protection for older Americans. Let us begin at #10 and count our way down to #1.
10. Counseling protocol
HUD regulations require each borrower to receive HECM counseling from a HUD-approved agency. This is done to ensure that the consumer has been advised on the product by someone other than the loan originator. One role of the counselor that is critical and often overlooked – a required assessment to determine if the borrower understands the basics of the HECM product.
9. HECM-to-HECM refinancing tests
To prevent loan flipping, equity stripping, or churning, there are restrictions when originating HECM-to-HECM refinances. HUD has their requirements, but industry trade associations and lenders have ethical overlays to consider. In essence, we need to show that the refinance offers a bona-fide advantage to the client before refinancing.
8. The HECM maturity date
So long as the loan remains in good standing, the default HECM maturity date is 50 years beyond the youngest borrower’s 100th birthday. This date is listed in the Security Instrument and is set with the expectation that the borrower will not outlive the HECM loan. For a consumer concerned about the loan maturing, outliving a HECM should be the least of their concerns.
7. Cross-selling restrictions
Cross-selling is the practice of offering a client an additional product that might interest them. This might be an insurance policy, an annuity, or an investment. To some, that sounds harmless. But this practice opens the door for exploitation. While a reverse mortgage is designed to increase cash flow, decisions on the use of funds should be left to the borrower and their trusted advisors.
6. Initial disbursement limits
In 2013, HUD began restricting initial disbursements with the HECM product. As a result, homeowners may not be able to access all their principal limit upfront unless those funds are paying off large mortgage balances. This regulation worked. It protected consumers from over-consuming their line of credit, and we find that borrowers are now using the product more prudently.
5. Principal limit protection (PLP) lock
Long-term interest rates (expected rates) determine a HECM applicant’s borrowing power. When expected rates rise, the borrower will qualify for less principal. Fortunately, HUD allows us to “lock-in” an expected rate to protect the applicant. So long as closing takes place within 120 days of FHA case number assignment, the borrower has principal limit protection.
4. Financial Assessment
Since 2015, every lender must evaluate each borrower’s ability meet their financial obligations and to comply with the mortgage requirements. Those requirements are to 1) Occupy and maintain the home, and 2) Pay all property charges. HUD-required Financial Assessment is all about consumer protection. We must make sure this is a sustainable solution for all HECM borrowers and their households.
3. Non-borrowing spouse
HUD defines a non-borrowing spouse (NBS) as “the spouse of the HECM borrower, at the time of closing, who is also not a borrower.” With this consumer protection in 2014, the due & payable status of a HECM loan may be deferred for an eligible NBS after the death or incapacity of the borrowing spouse. While the NBS cannot borrow, they may be able to remain in the home for life.
2. HECM line-of-credit
The HECM line-of-credit (LOC) is a consumer protection because the borrower can draw funds as they need them, irrespective of home value. The LOC is not only secure, but also the available LOC grows at the same rate the loan balance grows (monthly at 1/12th the interest rate plus 0.5%). This gives the borrower a greater capacity to draw more of their equity in the future.
1. The non-recourse feature
My top consumer protection is the Non-Recourse Feature because it benefits both the homeowners and their heirs. When the homeowner chooses to sell the home, or passes away, FHA guarantees that neither the borrower nor their heirs will owe more than the home is worth at the time the home is sold. The homeowner does not carry any of the risk of the home becoming upside down.
There are two results of these regulatory reforms, 1) HECM lenders receive few CFPB complaints about the product, and 2) Client satisfaction is high.
So, there you have it – my Top 10 list of Reverse Mortgage Consumer Protections. Tell me if you think the order is accurate and if I have missed any critical advantages.
For more information on reverse mortgage guidelines, please purchase the book Understanding Reverse, and subscribe to my blog in the upper right corner of this page.
Dan Hultquist