Banking regulators in Pennsylvania have issued a policy governing the conduct of reverse mortgage lenders in the state. Although the policy appears to cover all reverse mortgage originators, a lot of what it addresses involves issues with proprietary products.
Steve Kaplan, the secretary of banking, said in a statement, "Our policy is designed to make these products, which can be useful to some, available under the right circumstances."
The policy statement was added as Chapter 49 to Title 10 of the state code. It states lenders of proprietary reverse mortgage loans are not required to follow the standards and practices set up by the Federal Housing Administration for the Home Equity Conversion Mortgage.
Thus they present certain financial risks not present with the HECM loans. This includes if the proprietary reverse mortgage servicer were to fail or otherwise unable to service the loan. It could result in borrowers having their income streams disrupted or eliminated.
"Additionally, a risk facing proprietary reverse mortgage lenders is a decline in the market value of a property serving as collateral to a level that is less than the value of the proprietary reverse mortgage loan.
"While FHA insurance provides lenders of insured reverse mortgage loans with protection against this risk, proprietary reverse mortgage lenders would have no similar protection," according to the Chapter 49 section on the purpose of this new policy.
The new policy includes a financial strength requirement for the lender, stating they should not offer reverse mortgage loans unless they have the financial ability to make disbursements and service the loan.
If the lender is having financial troubles that affect its ability to service the loans, it is required to notify the Pennsylvania Department of Banking.
Even though the state requires its mortgage lenders to have a minimum net worth of $250,000, it might require reverse mortgage lenders to have additional capital and funding sources.
The policy statement also declares lenders should ensure that their loan officers selling reverse mortgages are knowledgeable about the product in general and the reverse mortgage loan products they are selling in particular. The LOs are also encouraged to discuss with applicants alternatives to a reverse mortgage that could also serve their needs and goals.
If the applicant is being offered a proprietary reverse mortgage product, the policy calls for the loan officer to confirm that the applicant understands they are not getting a government-sponsored or insured product, and what the differences are between a proprietary loan and a government-sponsored or insured loan.
There are also sections on conflicts of interest and borrower suitability, as well as mental capacity.
As part of this new policy statement, the Pennsylvania Department of Banking has created a new pamphlet for consumers covering reverse mortgage basics, pros and cons, choosing a counselor and other issues to consider in deciding to apply for a reverse mortgage.
