Just What the Compliance Doctor Ordered

Written by Weiner Brodsky Sidman Kider PC Tuesday, 02 March 2010 17:13

Articles - Legal Updates

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 A Preventative Dose of Reverse Mortgage Examination Guidelines

Almost as a byproduct of the states'  implementation of the Safe and Fair Enforcement for Mortgage Licensing Act of 2008 (the S.A.F.E Act or S.A.F.E), the era of modernization and greater uniformity of the regulatory examination process is now upon us.   Although the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators  (AAMR) launched its initiative to revolutionize the examination process more than a year prior to passage of the S.A.F.E. Act, many of S.A.F.E's objectives align squarely with the goals of AAMR and CSBS and, as a result, has led to greater cooperation between state regulatory agencies.  All of the foregoing is likely to change the landscape of mortgage supervision by supercharging the number of states that adopt uniform examination guidelines and implement multi-state examinations.  Less you be caught flat-footed, reverse mortgage originators and lenders, particularly those with multi-state platforms, best become familiar with the reverse mortgage examination guidelines (RMEGs) published jointly by AAMR and CSBS.  In our continuing efforts to keep you on your toes, take a few stretches, and then allow us to coach you through a "spin" through the RMEGs and why they should be part of any good compliance fitness program.

Although originally published in late 2008 by CSBS and AAMR, , the two national organizations that support state banking and mortgage lending regulators, the RMEGs were amended and republished in 2009.  The RMEGs establish a comprehensive set of examination guidelines covering all aspects of reverse mortgage origination and servicing activities.  The RMEGs generally apply to state-chartered banks and state-licensed mortgage lenders and mortgage brokers, although, as will be noted below, the Federal regulatory agencies are working with CSBS to develop a similar protocol.

According to Chuck Cross, CSBS Vice President for Mortgage Regulatory Policy, there are three main objectives of the RMEG initiative.  First, the RMEGs provide a set of standardized guidelines to assist state banking and mortgage lending regulators in evaluating and examining business practices and operations of institutions that originate, fund and service reverse mortgage loans.  Second, the RMEGs create uniform standards that can be applied in “multistate” examination and enforcement actions.  For instance, if it is impractical for one state’s regulator to conduct its own examination, the agency could use and apply another state regulator’s findings made in an examination report based upon uniform examination criteria found in the RMEGs.  Third, and perhaps most importantly, participants in the reverse mortgage industry, such as state banks and mortgage lenders or brokers, can implement the RMEGs as internal policies and procedures and utilize the RMEGs as part of in-house compliance reviews to prepare for audits and examinations by state regulators.

The instructions to the RMEGs indicate that state regulators may use all or portions of the RMEGs, depending on the size and complexity of the institution examined and the available resources of the agency.  According to CSBS and AARMR, the RMEGs began to actually be used by some state mortgage regulators in early 2009.  According to Chuck Cross, not all states that elect to rely on the RMEGs may formally adopt them, rather, states may simply elect to follow the RMEGs as part of their examination process.

The RMEGs are styled as a worksheet that allows the examiner to take notes using either a hard copy or a computer file that can be downloaded from CSBS’ web site.  The RMEGs are generally divided into nine major modules.  State examiners and other RMEG users can utilize the various modules, as applicable, depending on the purpose of the examination (such as, for instance, as part of an audit or exam by a state regulator or during an in-house quality control review), the type of the entity examined (mortgage lender or broker), the type of activity performed (origination, servicing) and the type of the lending program (FHA-insured HECMs, proprietary reverse mortgages).  Several sections of the RMEGs contemplate that state regulators will supplement state-specific questions in the areas governed by state laws, including state specific counseling and disclosure requirements. 

Module 1 of the RMEGs provides general instructions to the examiner regarding the scope of the review.  A full scope examination under the RMEGs would typically consist of an offsite preparation and review stage, followed by an on-site examination.  The examiner may also elect to complete a limited scope examination conducted entirely offsite, through questionnaire responses.  Although such limited review would depend upon the veracity of the institution’s responses, the RMEGs indicate that it nevertheless can be a valuable tool for monitoring an institution or in situations where the volume of reverse mortgage activity of the institution does not merit a full examination of the institution.

Modules 2 and 3 of the RMEGs include specific questions to be reviewed by the examiner.  Module 2 applies to all reverse mortgage participants, regardless of the type of the reverse mortgage program originated or funded, while Module 3 applies to entities that participate in FHA-insured HECM loans.  Because almost all reverse mortgages originated today are FHA-insured HECMs, it appears state banking and mortgage lending regulators, as well as reverse mortgage industry participates who utilize the RMEGs, would typically utilize Module 2 in conjunction with Module 3.  Most of the questions in Module 2 apply to all reverse mortgage programs, with certain questions specifically targeting proprietary reverse mortgages.  In this regard, the RMEGs contemplate that, in the future, proprietary reverse mortgages will regain a larger share of reverse mortgage originations.  In the meantime, an answer of “N/A” is acceptable whenever a question does not apply, such as if the entity presently does not originate proprietary reverse mortgages.

Modules 2 and 3 of the RMEGs are generally divided into several categories of questions corresponding to the loan production process, including (i) Pre-Examination, (ii) Consumer Contact/Origination, (iii) Underwriting, (iv) Operational Management, (v) Servicing, (vi) Secondary Market, and (vii) Other Issues and Concerns.  For instance, under the Pre-Examination category, the examiner must obtain and thoroughly review all policies and procedures related to reverse mortgages originated or serviced by the entity undergoing the examination.  Among other things, the examiner must determine whether policies and procedures have been implemented to assure the institution is able to continue funding loan commitments.  Given the difficulties some lenders currently experience in securing and maintaining warehouse lines of credit, this particular requirement in the RMEGs could be significant.  In addition, the RMEGs prompt the examiner to determine whether the institution has a disproportionate number of loans originated as an exception to existing policies and procedures.  Entities participating in FHA-insured HECM loans must also provide evidence of their FHA-approved status.

According to the RMEGs, most of the items in Modules 2 and 3 can be completed by the examiner during the offsite portion of the review, based upon the responses to other RMEG sections.  Such other RMEGs sections include questionnaires and worksheets, and include the Information and Data Request (Module 5), the Institution and Management Questionnaire (Module 6), the Reverse Mortgage Activity Summary (Module 7), the Reverse Mortgage Product Worksheet (Module 8) and the Reverse Mortgage Servicing Worksheet (Module 9).  The RMEGs also contemplate that some questions will require file level review and possible interviews of the institution’s personnel, borrowers and third party service providers, such as appraisers and counselors.

The HECM specific questions in Module 3 of the RMEGs are based, in many instances, on guidance in the HUD HECM Handbook 4235.1 REV-1 and various HUD HECM Mortgagee Letters.  Acknowledging the evolving nature of HUD’s guidance in the area of FHA-insured HECM lending, the RMEGs instruct examiners routinely to review HUD’s web site for updates to Mortgagee Letters and other HUD HECM requirements.  Indeed, HUD has issued a record number of Mortgagee Letters last year, in large measure to implement changes to the HECM program resulting from the amendments enacted as part of the Housing and Economic Recovery Act of 2008 (HERA) and the American Recovery and Reinvestment Act of 2009 (ARRA).  In this regard, some of the more recent updates to the HECM program, such as the recently authorized HECM for Home Purchase program, are not covered by the RMEGs.  Given the frequency of updates in Mortgagee Letters and other HUD guidance concerning the HECM program, it would appear incumbent upon state examiners and other users of the RMEGs to utilize HUD’s most recent guidance.

The RMEGs state that they are not a required standard for reverse mortgage originators.  However, reverse mortgage originators and other participants in the reverse mortgage industry should note that a state regulator’s review conducted pursuant to the RMEGs could reveal a violation of a particular state’s law or rule applicable to the institution.  Such violation, of course, could lead to administrative action by the regulator.  In addition, if the RMEGs are more formally adopted by the state regulator, a violation of the RMEGs could possibly amount to a prohibited act under such state’s mortgage licensing and regulatory scheme.  The failure of the originator to address and correct the findings made during an examination conducted with the use of the RMEGs could, in and of itself, amount to a violation of state licensing laws, and may be deemed an improper practice under state unfair and deceptive practices acts.  In this regard, reverse mortgage originators and other participants should consider closely reviewing the latest version of the RMEGs, available on CSBS’ web site.

In addition to the release of the RMEGs, the CSBS is working jointly with the Federal Financial Institutions Examination Council (or FFIEC), a federal interagency organization that supports federal banking regulators, to develop a similar set of industry guidance for reverse mortgage originators that are federally chartered institutions.  The federal banking agency’s reverse mortgage guidelines are expected to be similar to the RMEGs and will apply to financial institutions subject to the examination by the federal regulating agencies, including the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).

The era of greater coordination between regulatory agencies and uniformity in supervision is clearly upon us, and the implementation of the RMEGs is just one aspect of this trend.  While the compliance bar is being raised, the implications for mortgage originators and lenders are not all bad.  Supervision among different regulatory agencies will be better coordinated, more risk-based and less intrusive.   And, the key to success in this new era is pretty much the same as the old era, namely, being prepared. 
On that note, can you imagine how blessed we would have felt during our long-gone academic years to actually have all the specific test questions in advance?  We might even have thought of this advantage as a form of "cheating."  Well, the RMEGs provide precisely that type of advantage.  And for that reason, any good compliance doctor would prescribe RMEGs as an important element that should be incorporated into your compliance and internal audit regiments. 

This article provides only an overview of some of the federal and state laws and regulations that may affect reverse mortgage lending, marketing and finance matters.  Although the practice of Weiner Brodsky Sidman Kider P.C. is national in scope, attorneys within our firm do not actively practice law in all jurisdictions, and these materials are not intended to and do not provide legal advice.  Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

By Joel Schiffman and Fed Kamensky, of the law firm of Weiner Brodsky Sidman Kider, P.C.  The law firm serves as General Counsel to the National Reverse Mortgage Lenders Association and advisor to reverse mortgage lenders and industry participants throughout the nation.  The firm has offices in Washington, D.C., Newport Beach and Dallas.  Additional information can be found at www.wbsk.com or by telephone at 202.628.2000.  Messrs. Schiffman and Kamensky can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and This e-mail address is being protected from spambots. You need JavaScript enabled to view it .