In terms of regulations that govern the reverse mortgage industry and possible outcomes for such matters in 2020, distractions being experienced by Congress, White House proposals for federal regulations and the continuing presence of possible Consumer Financial Protection Bureau (CFPB) enforcement actions could make for an eventful year in terms of actions related to regulatory compliance.
This is according to Jim Brodsky and Jim Milano of law firm Weiner Brodsky Kider in a presentation at November’s National Reverse Mortgage Lenders Association (NRMLA) Annual Meeting in Nashville, Tenn.
Their presentation was divided into three categories: “distractions” on the part of the United States Congress drawing attention away from issues specifically related to the reverse mortgage industry; “contractions” in which developments in regulatory compliance areas for the industry are stepped away from; and “reactions” specifically in terms of possible actions that the U.S. Department of Housing and Urban Development (HUD) can take in 2020, in addition to regulatory developments in specific states.
Distractions in Congress
Heading into 2020, both chambers of the United States Congress find themselves embroiled in larger issues making them more distracted than usual due to a looming presidential impeachment.
“Congress is distracted right now,” Milano said. “We don’t need to tell you why, you all see what’s happening in Washington.”
Congress is particularly entrenched since the impeachment exercise currently taking place on Capitol Hill is unfolding during the run-up to a general election in November of 2020, distracting the legislature even more than usual, Milano says.
Government-sponsored enterprise (GSE) reform is something currently on the plate of Congress, regarding the end of federal conservatorship for both the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Ending the conservatorship of both entities has been on the “to-do” list of the Trump Administration for quite a while, but given everything happening in Washington at the moment, that’s where it may have to remain, Milano says.
“I’m making a prediction here that GSE reform, and things with our industry won’t settle until the end of the 2020 presidential election,” he said. “What happens after that heavily depends on the outcome of that election. There’s a lot of effort going into [impeachment proceedings] in Washington right now that’s sucking up a lot of time and bandwidth.”
Contractions in current regulatory posture
One of the bigger changes observed in the regulatory posture of the federal government centered around the change in leadership at the CFPB, beginning in 2017. After inaugural director Richard Cordray stepped down that November to mount his own political campaign, White House Office of Management and Budget (OMB) head Mick Mulvaney was tapped to serve as acting director until a permanent replacement could be found.
In June of 2018, Kathleen Kraninger was first tapped as the nominee to become the new CFPB director, but she wasn’t actually confirmed and sworn in until December of that year. While CFPB enforcement actions decreased significantly during Mulvaney’s tenure as acting director, Kraninger’s rise in the top leadership position has seen enforcement actions increase slightly. They are still nowhere near the amount of actions instituted under Director Cordray, but the contraction of enforcement actions does not take them off of the proverbial table, Milano said.
“Over the course of Director Cordray’s administration, over 160 enforcement actions were issued by CFPB with big fines,” he said. “Many of them were mortgage-related, and included reverse mortgage advertising issues. Since November 2017 when Mulvaney went in, there have been 33 enforcement actions, an average of 1.4 a month. This is a reduction, but not an outright dissipation.”
Another issue that could have an effect on the reverse mortgage market revolves around the “qualified mortgage (QM) patch,” a rule that allows Fannie Mae and Freddie Mac to breach CFPB regulations by underwriting mortgages to borrowers with a higher debt-to-income (DTI) ratio than the 43% that is typically required. The CFPB previously indicated that they will allow this rule to expire in 2021.
“This could have potential impacts on reverse mortgages,” Milano said. “People may realize that making a 30-year loan to a 60-year old borrower is not a good idea, but there will remain an appetite for some kind of loan. It may be non-QM, and Fannie and Freddie can’t buy non-QM.”
With an appetite for some kind of loan without the ability to turn to a non-QM arrangement, there’s potential for that need to translate into proprietary/portfolio reverse mortgages, he said.
“They’ll go into private securitizations. It will create a lot of appetite for non-traditional investments, which [the reverse mortgage industry] may fit into,” he said. “Having that infrastructure continue to build up will be a direct benefit to this industry.”
Reactions by states to the reverse mortgage industry
In the “reactions” category, changes to the way individual states deal with the reverse mortgage industry were highlighted, with the first example being a bill concerning new regulations governing reverse mortgage activity in the state of New York, specifically in Assembly Bill A5626 passed in the state legislature in May.
The bill can be broken down into four primary categories: regulatory approval, marketing and origination practices and disclosures, servicing practices and disclosures and penalties for violations.
“What this bill does is creates a new section in the real property law that basically defines a reverse mortgage, and it says if you make a HECM in New York then you’ll need a separate approval by the New York Department of Financial Services,” Milano said. “[This means that] in New York, [after] the Governor signs the bill in addition to [your mortgage] license, you’ll need a separate approval to make HECMs.”
On the marketing side, the law also contains a general prohibition on what it calls “deceptive practices,” including in marketing communications. Three specific elements are called out in the rules: reverse mortgage advertising cannot use either the terms “public service announcement,” or “government-insured,” or similar language.
Additional conversations about the impact of implementation of the new law is currently being sought, Milano said. The law was signed by Governor Andrew Cuomo in December. Bills in two other states including Maine and New Jersey are also currently being deliberated, Milano said. In Maine, its bill would institute a “duty of good faith” provision into regulations for mortgage servicing, while New Jersey’s bill aims to establish pre-loan counseling requirements and borrower right of rescission for reverse mortgage loans.
In terms of HUD, there is encouragement personified by the creation of a HECM working group within the Department that will aim to address issues in the program, as publicly announced by FHA Commissioner Montgomery at the NRMLA event.
“This is a very welcome reaction, I think,” Brodsky said. “I cite as an example of it the Housing Finance Reform plan introduced in September, which included a HECM provision that said HECM-to-HECM refinances should be eliminated, which we think is a step backward if it results in them being taken away.”
Commissioner Montgomery has communicated that he has heard the requests from the industry regarding the HECM-to-HECM refinancing proposal, Brodsky said, and that he will contemplate those concerns further.
“In the reaction area and in HUD, there are good signs of progress,” Brodsky said. “But, like Yogi Berra said, ‘It’s tough to make predictions, especially about the future.’”