Clearing Up Compensation Rules for Reverse Mortgages
Understandably lenders remain confused about the compensation rules applicable to reverse mortgages. The main misconception is that Dodd Frank and the LO comp rules distinguish reverse and forward loans. In fact, no such distinction exists. Despite the fact that most lenders have no choice between reverse and forward loans due to age ineligibility, the rules consider forward or reverse a “term” for which compensation must remain fixed.
That is not to say that all reverse loans are covered by these rules. Rather, an open-ended loan (whether forward or reverse) is excluded from coverage under the compensation rules. Open-ended loans (which usually involve variable interest and are essentially akin to lines of credit) are not covered by either Dodd Frank or Reg Z. Closed end loans are covered by both rules. In practice this means that reverse loans are covered by the LO compensation rules (and Dodd Frank) unless they are open ended. While most HECM loans are open ended, that is not necessarily the case.
Still, this does not necessarily end the inquiry. Indeed, lenders that might be inclined to set different compensation rates for open ended loans must take care to ensure that differences in compensation do not create judgment errors where borrowers are advised to opt for one particular loan that may result in maximizing the LO's compensation. Such situations could lead to liability for originators and creditors. This is especially true now, as the CFPB has made clear its intention to closely examine and monitor the reverse mortgage market to ensure that the bests interests of the borrower are being served. Specifically, the CFPB has already issued a 250 page report on the reverse mortgage market and suggested that it plans to improve TILA and RESPA disclosure requirements for reverse mortgages; place limits on misleading advertising, improve disclosures, and close regulatory gaps; improve education to empower consumers to make better informed decisions; and improve consumers’ ability to compare products, understand costs and risks, and evaluate tradeoffs. As such, lenders must consider not only the strict requirements of the LO compensation laws, but the effect that distinctions in compensation could have in regard to overall compliance.