The Next Wave

Tuesday, 30 June 2009 16:00

Articles - Legal Updates

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Washington and Vermont Lead a Surge of State Legislation


With all the activity we’ve seen at the federal level this year as an outgrowth of the Housing and Economic Recovery Act of 2008, it is easy to neglect the changes state legislatures around the country are currently sowing that may significantly impact the reverse mortgage industry. Rightly or wrongly, in the aftermath of the subprime mortgage meltdown, many state regulatory agencies view reverse mortgages as posing material risks to consumers and are taking steps to get “in front” of a potential problem, rather than being criticized, as was the case in the subprime arena, for not acting quickly enough.


That siren call is no better exemplified than by the comments of the Comptroller of the Currency, John Dugan, who, while speaking at the American Bankers Association Regulatory Compliance Conference on June 8, 2009, compared reverse mortgages to subprime loans and warned regulators that they need to address this issue before real problems develop.
Comptroller Dugan’s comments may seem to be hyperbole, but they are reflective of a trend that is already well underway. As this article goes to press, there are fifteen states considering reverse mortgage legislation, two states (Vermont and Washington) have enacted legislation and one state (Minnesota) passed legislation (containing an onerous suitability provision and a 10-day rescission period) that was vetoed by the governor. Less we neglect these developments while pre-occupied with HUD’s latest mortgagee letter, we focus in this article on the two pieces of state legislation passed this year and enacted into law, namely Vermont House Bill 222 and State of Washington House Bill 1311.


Vermont
The Vermont legislature enacted Vermont House Bill 222 (“SB 222”), which includes provisions that govern and limit the origination of reverse mortgages as well as providing protections to Vermont seniors who participate in certain types of financial products, such as life settlements. The Vermont Governor signed this measure on June 1, 2009. The provisions of SB 222 that relate to reverse mortgages become effective on July 1, 2009.


Definitions
SB 222 defines a “reverse mortgage loan” as a loan wherein the committed principal amount is secured by a mortgage on residential property owned by the borrower, that provides cash advances to the borrower based upon the equity or the value in the borrower’s owner-occupied principal residence, and that requires no payment of principal or interest until the entire loan becomes due and payable. The definition of a reverse mortgage under SB 222 also identifies the events that lead to the termination of a reverse mortgage. Under SB 222, a reverse mortgage becomes due upon sale of the property securing the loan, upon the death of the last surviving borrower, upon the borrower terminating the use of the real property as a principal residence, or upon the borrower’s default.
A “financial institution” that may offer reverse mortgages in Vermont includes a bank or credit union organized or regulated under the laws of Vermont, the U.S. or any other state or territory, or a bank subsidiary, a licensed lender, or a mortgage broker.


Limitation on Reverse Mortgage Programs
The new Vermont reverse mortgage legislation limits the types of reverse mortgage programs that lenders can offer to senior borrowers in such state. SB 222 provides that a financial institution may not issue a reverse mortgage loan in Vermont unless it is a lender approved by HUD to enter into a loan insured by the federal government and the reverse mortgage loan complies with all requirements for participation in the HUD HECM or other similar federal reverse mortgage loan program, and the loan is insured by the FHA or other similar federal agency or is a government sponsored enterprise (GSE) reverse mortgage loan.
The only GSE reverse mortgage product that was previously available to senior borrowers was Fannie Mae’s Home Keeper program. We note that Fannie Mae has discontinued the Home Keeper program as of December 31, 2008.


Counseling
Prior to accepting an application for a reverse mortgage loan, financial institutions in Vermont must refer the borrower to a HUD-approved housing counseling agency and must receive a certification from the counselor indicating that the borrower has received in person face-to-face counseling. However, if the borrower cannot or chooses not to travel to a counselor and cannot be visited by a counselor in their home, telephone counseling may be provided by counseling agencies that are authorized by the Vermont Department of Banking, Insurance, Securities and Health Care Administration. The counseling certificate must be signed by the borrower and the counselor and include the date of counseling, the name, address, and telephone number of both the borrower and the organization providing counseling, and shall be maintained by the holder of the reverse mortgage throughout the term of the reverse mortgage loan.  Lenders should pay particular note of the face-to-face counseling requirement under SB 222. The new Vermont legislation requires in person face-to-face counseling, except under certain specific circumstances. If counseling is provided over the telephone, the counseling agency must be authorized by the appropriate state agency. Of course, in addition to these new Vermont requirements, HECM lenders must comply with the applicable HUD HECM counseling requirements.


Cross-Selling Prohibition
Under SB 222, a financial institution may not require a reverse mortgage applicant to purchase an annuity as a condition of obtaining a reverse mortgage loan. A financial institution or a broker arranging a reverse mortgage loan may not: (i) offer an annuity to the borrower prior to the closing of the reverse mortgage or before the expiration of the right of the borrower to rescind the reverse mortgage agreement, or (ii) refer the borrower to anyone for the purchase of an annuity prior to the closing of the reverse mortgage or before the expiration of the right of the borrower to rescind the reverse mortgage agreement.


Washington
The Washington State Legislature enacted Washington State House Bill 1311 (HB 1311) that regulates reverse mortgage lending practices in Washington. The Washington Governor signed HB 1311 on April 21, 2009, and the new law becomes effective on July 26, 2009. HB 1311 creates the Washington State Reverse Mortgage Act (or “RMA”). In general, most of the provisions in the Washington RMA, including the reverse mortgage program approval requirement, apply to only proprietary reverse mortgages (defined below). However, some of the provisions of the RMA are of general application and impact lenders that originate FHA-insured HECM loans as well.


Definitions
The Washington RMA defines a “reverse mortgage loan” as a nonrecourse consumer credit obligation in which: (a) a mortgage, deed of trust, or equivalent consensual security interest securing one or more advances is created in the borrower’s dwelling; (b) any principal, interest, or shared appreciation or equity is due and payable, other than in the case of default, only after: (i) the consumer dies; (ii) the dwelling is transferred; or (iii) the consumer ceases to occupy the dwelling as a dwelling; and (c) the broker or lender is licensed under Washington state law or exempt from licensing under federal law.
In addition to this general definition, the new law created two separate categories of reverse mortgages. First, the RMA defines an “FHA-approved reverse mortgage” as a “home equity conversion mortgage” or any other reverse mortgage product that is guaranteed or insured by the federal Department of Housing and Urban Development (“HUD”). Second, the RMA defines a “proprietary reverse mortgage loan” as any reverse mortgage loan product that is not a “home equity conversion mortgage loan” or other federally guaranteed or insured loan. A proprietary reverse mortgage loan in Washington may only be made to borrowers 60 years of age or above.
Licensing and Approval
“Forward” Mortgage Licensing
Reverse mortgages offered on the market today are, by definition, first lien residential mortgage loans. Therefore, state mortgage lender and broke licensing requirements applicable to first lien residential mortgage loans generally apply to reverse mortgages. The RMA states that mortgage lenders and brokers who participate in reverse mortgages in Washington must be licensed under Washington state law or enjoy an exemption pursuant to federal law. This licensing requirement is incorporated into the definition of a “reverse mortgage” under HB 1311 and appears to apply to proprietary reverse mortgages and FHA-insured HECM loans. Further, HB 1311 defines a “reverse mortgage broker or lender” as a licensee under the Washington Consumer Loan Act (“CLA”), or a person exempt from licensing pursuant to federal law.


Reverse Mortgage Program Approval
In addition to the above “forward” mortgage licensing requirement, a lender may not offer a proprietary reverse mortgage loan program to Washington consumers unless the program has been preapproved by the Washington Department of Financial Institutions (DFI). The preapproval requirement does not apply to FHA-insured HECM loans. The DFI has authority to issue regulations regarding preapproval process and document requirements, however, as this article went to press, the Washington DFI has not yet issued such regulations.


Financial Requirements
A licensee offering proprietary reverse mortgage loans in Washington must maintain a letter of credit in an amount necessary to fund all of its reverse mortgage loan requirements over the next 12 months or $3 million, whichever is greater. Licensees with a rating of either 4A1 or 5A1 from Dun & Bradstreet credit services for three consecutive years are exempt from this requirement. The licensee must also maintain a minimum capital of $10 million. A licensee may rely on the capital of its parent company if the parent: (1) has a net worth of at least $100 million, and (2) provides a binding written commitment to the licensee to make a minimum of $10 million available to the licensee. These capital requirements do not apply if (A) the licensee only originates proprietary reverse mortgages which are fully disbursed at closing, or (B) only originates proprietary reverse mortgages that are sold to an investor with either a 4A1 or 5A1 rating from Dun & Bradstreet credit services pursuant to a written commitment obtained prior to closing. Delivery to the investor must occur within 10 days of loan closing.


Interest Compounding
HB 1311 addresses the unintended consequences resulting from the 2008 enactment of Washington Senate Bill 6471 (SB 6471), which inadvertently called into question the use of compound interest with reverse mortgage loans offered by Washington Consumer Loan Act Licensees. Under the Washington Consumer Loan Act, all loans must be calculated using a simple interest method which prohibits compound interest. SB 6471 unintentionally made the prohibition on compound interest applicable to reverse mortgages. However, HB 1311 now expressly exempts reverse mortgage loans from the compounding of interest prohibition, as well as from billing cycle and interest rate calculation requirements under the Washington Consumer Loan Act. As such, reverse mortgage loans originated in Washington may provide for a fixed or adjustable interest rate, including negative amortization and compound interest.


Prepayment Penalty
Under the Washington RMA, the borrower may prepay a proprietary reverse mortgage, in whole or in part, at any time without penalty. There is an exception that allows lenders to recapture the fees and closing costs that the lender waived at loan origination if the borrower subsequently prepays the loan. However, such prepayment penalty (or recapture) may not exceed the total amount of the fees or costs waived by the lender at loan origination, and may not be imposed if prepayment occurs as a result of the borrower’s death. The lender must provide the borrower with prior written notice of any such permissible prepayment penalty.


Maturity Events; Temporary Absences
A proprietary reverse mortgage originated in Washington may become due and payable upon the occurrence of any “maturity event” (all borrowers cease occupying the home as a principal residence or the home securing the loan is sold or title to the home is otherwise transferred) or if a default by the borrower occurs as specified in the loan documents. However, a lender may not accelerate a proprietary reverse mortgage in Washington if the borrower is temporarily absent from the home not exceeding 180 consecutive days. Extended absences from the home exceeding 180 consecutive days, but less than one year, may not cause the mortgage to become due and payable if the borrower has taken prior action that secures and protects the home in a manner satisfactory to the lender.


Late Charges
The Washington RMA requires the lender to pay a late charge to the borrower if the lender fails to timely make a required loan advance under a proprietary reverse mortgage. The late charge is ten percent (10%) of the entire amount that should have been paid to the borrower. The lender is also liable for per diem interest on the late advance. In addition, the lender forfeits the right to collect interest and a monthly servicing fee for any month(s) in which the loan advance has not been timely made to the borrower.


Treble Damages
The Washington RMA also provides for civil penalties for lenders that fail to comply with their obligations under a reverse mortgage, including an FHA-insured HECM loan. If a lender defaults on any of the reverse mortgage loan terms and fails to cure such default after notice as provided in the loan documents, the borrower, or the borrower’s estate, is entitled to treble damages. A borrower may also seek other remedies that may apply.
Importantly, the above treble damages remedy appears to apply to FHA-insured HECM loans as well as to proprietary reverse mortgages. In addition, lenders originating FHA-insured HECM loans in Washington should note that a violation of the requirements of the HECM program is deemed to be a violation of the Washington state law.


Counseling
Lenders originating proprietary reverse mortgage loans in Washington are required to refer prospective borrowers to an independent housing counseling agency approved by the HUD for counseling. The lender must refer the borrower to counseling prior to accepting a final and complete application for a reverse mortgage loan or assessing any fees. The lender must provide the borrower with a list of at least five independent housing counseling agencies approved by HUD, including at least two agencies that can provide counseling by telephone. Telephone counseling is only available at the borrower’s request.
Lenders may not accept a final and complete application for a proprietary reverse mortgage loan in Washington or assess any fees without first receiving the borrower’s counseling certificate confirming that the borrower has received counseling. The counseling certificate must be signed by both the borrower and the counselor, and must include the date of the counseling and the names, addresses, and telephone numbers of both the counselor and the borrower. An electronic facsimile copy of the counseling certificate satisfies this requirement.


Cross-Selling Restrictions
The Washington RMA contains several cross-selling restrictions that apply to proprietary reverse mortgage loans originated in Washington. A lender or any other party to the transaction may not require the borrower obtaining a reverse mortgage loan. Lenders and brokers may not offer an annuity to the borrower or refer the borrower to anyone for the purchase of an annuity prior to closing or before the expiration of the rescission period. Lenders and borrowers also are prohibited from providing marketing information or sales leads to anyone regarding the borrower, or receiving any compensation for such an annuity sale or referral. In addition, a lender or any other party to the transaction must maintain safeguards to ensure that individuals who offer reverse mortgages do not provide borrowers with any other financial or insurance products, and that such individuals have no ability or incentive to provide the borrower with any other financial or insurance product.


Disclosures
Lenders must include certain special language in their proprietary reverse mortgage loan documents for use in Washington and must also comply with several disclosure requirements. With regard to loan documents, the deed of trust securing a proprietary reverse mortgage loan in Washington must contain on the first page a special legend in sixteen-point boldface type stat states: “This deed of trust secures a reverse mortgage loan.” Lenders must also disclose in the loan agreement any interest rate or other fees to be charged between the date that the proprietary reverse mortgage loan is due and payable and when it is paid in full.
A lender may not take an application for a proprietary reverse mortgage loan unless the lender has provided the prospective borrower with a statement advising the prospective borrower about counseling prior to obtaining the reverse mortgage loan within three business days of receipt of the completed loan application. The statutory text and formatting requirements for this disclosure are provided in the Washington RMA. In addition, reverse mortgage lenders in Washington must provide annual disclosure statements to borrowers, including details of the loan advances, balance, and other terms. The annual disclosure may be provided by the loan servicer.


The legislation from Washington and Vermont are the first of what may indeed be a banner year for the enactment of state laws regulating reverse mortgages. The National Reverse Mortgage Lenders Association (NRMLA) is working with state regulators, legislators and other interested stakeholders in those jurisdictions with legislation pending. Its goal is to educate the parties about the product and preserve broad access to reverse mortgage credit. While the rhetoric heard in the state houses, like Comptroller Dugan’s remarks, can sometimes seem extreme, NRMLA’s involvement has ensured that there is nonetheless a fundamental appreciation among regulators and legislators for the real benefits reverse mortgages provide to seniors. The results, thus far, suggest that the state legislatures are able to appreciate where the bath water ends and the baby begins. We hope that continues to be the case.


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 .


This article provides only an overview of some of the federal and state laws and regulations that may affect reverse mortgage lending 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.