Earlier this week at the American Bankers Association’s Regulatory Compliance Conference in Orlando, Fl, Comptroller of the Currency’s, John Dugan gave a speech about the need for “Consumer Protections for Reverse Mortgages”.
When the press got wind of a few parts of the speech, the headlines started hitting national papers like the Wall Street Journal, Washington Post, Reuters, and more. However, if you read a copy of his actual speech, he brings up a lot of good points.
During the speech, he points to how the record levels of foreclosures and losses on subprime loans resulted from a combination of risk factors which include:
a vulnerable customer segment; complex product features that were ineffectively, and sometimes deceptively, disclosed to customers; nontraditional underwriting that was heavily based on the value of the collateral, rather than the borrower’s ability to repay; skewed incentives of key distributors of the product; and finally, a distribution chain that was heavily populated with nonbanking companies that were not subject to comprehensive supervision.
He stresses that everyone needs to learn the right lessons from this very negative experience, because it clearly demonstrates the link between compliance and safety and soundness.
Later in the speech he said, “consumer compliance risks with reverse mortgages are real, and indeed, I am struck by some of the similarities to the risks of subprime mortgages”. Why are they similar?
a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product.
Now I don’t know about everyone else, but I’ll admit that he has a point. I don’t think he is saying that reverse mortgages are subprime loans, but showing how they share many of the same risks.
He then goes on to say that now is the time to confront these compliance issues before real problems develop so that reverse mortgage providers make these loans in a way that is prudent for both lenders and borrowers. Everyone who is in the business should agree with that statement.
After reading the speech a couple times his issue isn’t with reverse mortgage products in general, but it’s with proprietary reverse mortgages. Even thought the HECM product is the dominant force in the marketplace today, many (including myself) think the industry will see most of its growth from proprietary products.
As more and more states propose reverse mortgage legislation, I’d rather be ready with a set of guidelines ready to go, instead of letting them draft their own protections which end up banning proprietary products like the legislators in Vermont.
While I might not agree with everything he said in his speech, his concerns are legit.