CFPB Exam Points to Inaccurate Reverse Mortgage APRs

The Consumer Financial Protection Bureau (CFPB) released the 19th edition of its Supervisory Highlights last week, which includes examinations of reverse mortgage loan and manufactured home loan servicers. CFPB examinations yielded information concerning activities which appeared to result in the conveyance of inaccurate information concerning reverse mortgage annual percentage rates (APRs).

The document also includes findings related to auto loan servicing, deposits and remittances, and covers the agency’s larger supervision activities completed primarily between December 2018 and March 2019.

Relating inaccurate reverse mortgage APR information

One of the purposes of the Supervisory Highlights report is to examine compliance with various Federal consumer financial laws on the part of forward and reverse mortgage origination activities, including the Truth in Lending Act and its implementing regulation, Regulation Z. Regulation Z requires creditors to, “disclose the annual percentage rate (APR) in accordance with either the actuarial method or the U.S. Rule method,” the Supervisory Highlights document says.

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In at least one examination, CFPB examiners documented observing that creditors were disclosing inaccurate APRs for closed-end reverse mortgages, the document reads.

“Specifically, while conducting loan file reviews, examiners observed creditors using a unit-period of one month instead of one year to calculate the APR, leading to inaccurate calculations outside of Regulation Z’s permissible tolerances,” it says.

In response to this documented finding, CFPB says that the relevant creditors have revised the ways in which they make their calculations to reflect the correct unit-period, and have provided affected consumers with reimbursements. Examiners also reportedly found creditors disclosing inaccurate APRs for closed-end reverse mortgages equipped with a Life Expectancy Set Aside (LESA).

“While conducting loan file reviews, examiners observed creditors using a unit period of one month instead of six months to calculate the APR, leading to inaccurate calculations outside of Regulation Z’s permissible tolerances,” the document says. “In response to this finding, the creditors have revised their calculation methodologies to reflect the correct unit-period.”

Inaccurate TALC disclosures, new rules and guidance

CFPB also noted similar issues for reverse mortgage lenders in the calculation of total annual loan cost (TALC). Lenders are required as a creditor to provide good-faith projections of the total cost of credit in a given loan, and are also required to observe that the appropriate unit-period for such transactions when determining the TALC rate is one year.

“While conducting loan file reviews, examiners observed creditors using a unit-period of one month instead of one year to calculate the TALC rate and the future value of all advances, leading to inaccurate TALC disclosures,” the document says. “In response to these findings, the creditors have revised their calculation methodologies to reflect the correct unit-period.”

The document also includes a rundown of new rules and guidance issued by the CFPB. This includes an update to the small entity compliance guide summarizing the Payday Lending Rule’s payment-related requirements, which has been updated to incorporate the changes by a delay of the final rule instituted earlier this year.

Also included is a description of an amendment made in August to the annual privacy notice requirement under the Financial Services Modernization Act of 1999, which provides an exception allowing some financial institutions that meet a set of specific conditions not to be required to provide annual privacy notices to customers.

Read the full Supervisory Highlights document.

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  • Chris, thank you for the link to the document. It was then easy to reach the applicable regulation.

    The calculation is so simple that anyone with basic high school and a handheld financial calculator can easily compute the APR for a closed end reverse mortgage when there are no set asides. Even the TALC percentage rate for adjustable rate HECMs are easy to compute when there are no set asides. LESAs create a more difficult computation but certainly not impossible. So for a little savings in internal controls and the cost of a handheld calculator, we see yet more bad press for the industry.

    There is no excuse for this type of miscalculation. Does NRMLA censure lenders for these ridiculous and needless types of errors? It certainly paints a poor imagine of our care for borrowers.

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