Maryland Lawmakers Punt on Reverse Mortgage Escrow Bill

The Maryland General Assembly recently adjourned, leaving in limbo a bill that would require escrow accounts be established for all reverse mortgage borrowers for the payment of property taxes and insurance.

Sponsored by Senator Delores G. Kelley (D-District 10, Baltimore County), the legislation (S.B. 855) was first introduced to the Maryland state Legislature on February 5, 2016.

Since then, the bill has undergone one hearing in March, and then no other actions prior to the Assembly’s adjournment April 11. Now, it will be the better part of one year before lawmakers revisit the legislation, when the General Assembly reconvenes January 11, 2017.

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If passed, S.B. 855 would have immediately ceased reverse mortgage lending in the state of Maryland altogether, said J. Burgess Kegan, a Maryland-based Certified Reverse Mortgage Professional and Director of Government Affairs with Retirement Funding Solutions.

The proposed legislation conflicts with regulations mandated by the Department of Housing and Urban Development, which prohibit lenders participating in the Home Equity Conversion Mortgage program from allowing escrow for the payment of taxes and insurance.

Kegan, who also serves as president of the Maryland Mortgage Bankers Association (MMBA), testified on behalf of the MMBA during the March hearing on S.B. 855.

During his testimony, Kegan pointed to recent HUD regulations in the past year, namely the Financial Assessment, which requires reverse mortgage lenders to establish set-asides for the payment of borrowers’ taxes and insurance.

“Set-asides are not escrowing,” Kegan told RMD. Rather, he added, set-asides signify the reverse mortgage lender is taking responsibility to make sure payment is made for taxes and insurance (T&I).

The money used to make these T&I payments are set-aside proceeds from the reverse mortgage loan itself, whereas escrow accounts—such as with forward mortgages—must be funded by the borrower with separate funds at loan closing. Also, as with a forward mortgage, escrow amounts are included as part of the monthly payment of principal and interest that the borrower makes to the lender during the life of the loan.

Via Mortgagee Letter 2014-21, HUD explicitly states that set-aside funds are not to be held in an escrow account.

Emphasizing this distinction between escrow payments and set-asides, as promulgated by the Financial Assessment, the National Reverse Mortgage Lenders Association (NRMLA) also provided written testimony in opposition of S.B. 855.

In its testimony dated February 24, NRMLA stated that while it agrees with the intent of S.B. 855 to “further protect and serve seniors receiving reverse mortgages in Maryland,” the legislation, if enacted, will have a “very disruptive effect” on offering these loan products to seniors living in the state.

“If an escrow account is required on all reverse mortgages in Maryland, lenders will not be able to legally offer such loans under the FHA HECM program, and reverse mortgage lending in Maryland will cease,” NRMLA stated.

With limited exceptions, Maryland law currently requires any non-Federal Housing Administration-insured reverse mortgage to comply with the HECM program. Therefore, NRMLA argues that the requirements of meeting Financial Assessment guidelines under the FHA program apply to any non-FHA insured loan made in Maryland.

“By extension, the requirement to establish a property charge set aside account also would apply to any borrower under a non-FHA-insured reverse mortgage that does not satisfy these Financial Assessment requirements,” NRMLA stated in its written testimony.

While Maryland’s General Assembly may choose to revisit S.B. 855 when it reconvenes next January, some in the reverse mortgage industry are optimistic that they will continue to conduct business in the state.

“The majority Senate Finance Committee members understand the reverse mortgage regulations relative to S.B. 855,” Kegan said. “They understand the Financial Assessment and they understand the Reverse Mortgage Stabilization Act of 2013 and what it has brought to the reverse mortgage products; making them more consumer-friendly and having more consumer protection aspects today than they had prior to the enactment of these regulations.”

Written by Jason Oliva

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  • “’Set-asides are not escrowing,’ Kegan told RMD. Rather, he added, set-asides signify the reverse mortgage lender is taking responsibility to make sure payment is made for taxes and insurance (T&I).”

    Does a partially funded LESA says nothing about the lender taking responsibility for any property charge. Unlike a fully funded LESA, with a partially funded LESA all payments are made to the borrower not the the property tax collector or insurance company. It is up to the borrower with a partially funded LESA to make all property charge related payments.

    The purpose of the partially funded LESA is to sufficiently fund the borrower based on the financial assessment so that the borrower can pay all property charges. With a fully funded LESA, the lender is saying that the borrower is not being trusted to make property tax and insurance payments, so the lender will be making those payments directly to the related payees until the LESA runs out.

  • I doubt very much that “S.B.855” would ever pass the Maryland senate. If this bill passed, it would be in direct conflict and violation with HUD’s mandate on escrow accounts.

    A legislator would have to be pretty ignorant to pass this bill, knowing they were defying a HUD regulation. This would also mean that no senior in the state of Maryland would be able to obtain a HECM!

    However, in this day of age, who knows what could happen when it comes to politicians and their legislative actions?

    John A. Smaldone
    http://www.hanover-financial.com

  • There are members of our industry who work on their own time and largely at their own expense for our industry. Mr. Burgess Keegan is one of those individuals.

    This legislation must be stopped or other states are likely to follow.

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