Rhode Island recently passed a new state law  for reverse mortgages to help protect consumers and permits lenders to charge prepayment penalties to borrowers who pay off their loans early.

The prepayment penalties permitted in the new law are designed to enable lenders to recoup the cost of closing the loan “because they are very expensive loans to close,” said A. Michael Marques, the state regulator. “From a business standpoint … I think that’s just fair.”  Lenders will not be able to charge prepayment penalties for any HECMs, only proprietary loans.

Peter Bell, president of the National Reverse Mortgage Lenders Association, said the new law satisfied the concerns of his membership that lenders would still be able to offer reverse mortgages with reduced or no up-front fees in exchange for a requirement that the borrower agree to immediately draw down 75 or 100 percent of the loan.  

According to the Providence Journal, the new reverse-mortgage law, effective Jan. 1, mandates greater disclosure of fees charged by lenders, and requires that borrowers receive financial counseling from a government-approved agency prior to entering the loan agreement.  The measure also creates a three-day waiting period before the closing is finalized, and prohibits lenders from requiring that borrowers also purchase an annuity as a condition of closing the mortgage.  Call me crazy but isn’t all of this already in practice?

Below is clarification of the prepayment penalty that NRMLA issued:

Prepayment Penalty– Section 34-25.1-7(2)

• RM may be prepaid without penalty in the event of sale, death, etc.
• If the mortgagee waived all the usual fees, a Prepayment Penalty may be imposed; penalty must be calculated as a percentage of the available credit commitment stated in the loan documents and cannot exceed the total usual fees initially absorbed, and must be on a prorated basis by the percentage of months remaining in the full prepayment penalty term.

Right now Rhode Island is the only state that is allowing a prepayment penalty on proprietary products, will we start to see other states do the same?  To read a copy of the bill click here.

Carcieri signs reverse mortgage law (Providence Journal)

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