The U.S. population is aging, and one of the well-established components of the American dream — buying and owning a home — appears poised to aid in the baby boomers' next phase of life. In fact, an increasing number of older Americans are expected to tap into their home equity to fund their living expenses through the use of reverse mortgages.
With this expansion, reverse lenders and servicers can expect regulator attention, as their operations are clearly on the radar. Although, at the federal level, the Department of Housing and Urban Development, Consumer Financial Protection Bureau and Federal Trade Commission continue to regulate reverse mortgage lenders' activities, the states are increasingly getting into the game. The result is a complex, and sometimes conflicting, sea of rules through which reverse mortgage brokers, lenders, servicers and investors must navigate.
As one may expect, the states take varying approaches to the licensing and registration of reverse mortgage companies. Some state codes include explicit references to reverse mortgages. Others merely include language that is generally associated with forward mortgages but which has sufficient breadth to cover reverse loans as well.
Understanding the complexities of the licensing and registration requirements is really just the beginning when it comes to understanding the states’ ability to oversee and regulate reverse mortgage companies. In fact, it may be the most straightforward part of the process. This is because there is no one-size-fits-all approach to the state-specific substantive legal requirements governing reverse mortgage lending and servicing.
States that have licensing requirements that specifically apply to reverse mortgage lending, servicing, and/or holding activity also have substantive requirements or limitations applicable to such activity. For example, North Carolina imposes reverse mortgage-specific disclosure requirements.
In those states, the requirements or limitations related to reverse mortgages take many forms. These can range from state-specific disclosure forms to mandatory “cooling off” periods (i.e., imposing a time period between counseling and acceptance of a final and complete application). In fact, Oregon just enacted new state-specific disclosure requirements applicable to reverse mortgages.
As a result, any company participating in reverse mortgages must familiarize itself not only with any potentially applicable state licensing and registration requirements, but also with those laws and rules governing reverse mortgage originations and servicing.
While some states have a history of taking enforcement actions against reverse mortgage lenders, those typically have involved general lending and servicing activities. States have gone after unlicensed activity and misleading solicitation and advertising practices by reverse mortgage lenders.
The increase in state participation in multistate examinations, in conjunction with the CFPB, appears primed for heightened enforcement risk for reverse mortgage lenders and servicers. We are aware that Florida, Kentucky, and Illinois recently challenged practices at reverse mortgage lenders. State attorneys general have also demonstrated an increased interest in reverse mortgage activities, especially given the age cohort of the borrowers at issue.
By way of example, the Massachusetts attorney general recently settled with two reverse mortgage brokers for allegedly colluding with insurance agents to transfer reverse mortgage proceeds into other investments. As the reverse mortgage market expands, we expect to see a concomitant expansion in state interest and enforcement.
The future of compliance
As the states increasingly join the federal government in scrutinizing reverse mortgages lenders’ and servicers’ compliance, we anticipate an increase in reverse mortgage specific laws, as well as application of laws that we generally regard as applying to forward mortgages to the reverse space.
In order to navigate the current and expected-future examination and enforcement environment, those involved in the reverse mortgage business should assess whether they have adequately accounted for state-based risks in their compliance programs. This involves not only understanding the rules that currently apply and how the states and courts interpret them, but also monitoring for changes and implementing updated processes as needed.
Any failure to adequately implement state law compliance can trigger scrutiny across jurisdictions — attention no reverse lender or servicer wants.
Kathryn Ryan, a partner, and Kathryn Contario, an associate, in the Washington, D.C., office of Buckley Sandler LLP contributed to this article.