Possible Impacts of New York’s Sweeping New Reverse Mortgage Law

A New York state law that was recently signed by Governor Andrew Cuomo, and which targets deceptive consumer practices while imposing new requirements on borrower representation during loan closings, could have potentially serious implications on the way that reverse mortgage business is conducted in the state.

State Assembly bill A5626 was first passed by the New York State Assembly in May, and takes sweeping aim at what it calls “deceptive practices,” requiring reverse mortgage lenders to provide supplemental consumer protection materials while imposing additional restrictions on lenders related to their payment of insurance premiums and property taxes.

The bill also requires that lenders and borrowers be represented by an attorney at the time of closing, and at least one attorney must be present on the sides of both the lender and the borrower to conduct the closing itself.

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What the new law does

A change in the political structure of the state may have contributed to the ultimate passage of this bill, according to Jim Milano, partner at law firm Weiner Brodsky Kider in Washington, D.C. in a presentation at the National Reverse Mortgage Lenders Association (NRMLA) Annual Meeting in Nashville, Tenn.

“A lot happened last year in New York state,” Milano said. “Democrats took full control of both houses of Congress with substantial majorities, and the state also of course has a Democratic governor. This leads to the passage of state assembly bill 5626 in May 2019.”

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. “If you make a HECM in New York today, you need a mortgage banker or broker license, which is the forward mortgage license that lenders need pretty much anywhere if you originate reverses. In New York when the Governor signs the bill, in addition to that license, you’ll need a separate approval to make HECMs.”

One of the ways that Milano has proposed potentially alleviating this separate approval process for reverse mortgage industry players that are already actively creating new loans in the state is through a “grandfathering” process, in which certain previously-existing lenders and originators can operate under the previous standard as long as they’re fulfilling all of the necessary obligations. This is just a proposal, however.

“We need to get into the regulator and tell them about this,” Milano said. “This is something we plan to raise with the regulator in New York. Everyone doing business in New York is going to have loans in process, and you can’t stop.”

The requirement for an attorney to be present will likely increase the cost of getting a HECM loan for New York seniors, and associated attorney’s fees will likely have to be paid outside of closing, according to an expert with knowledge of the new law. The addition of legal representation for borrowers also has the potential to extend the time it will take to originate a new HECM loan, which could be detrimental particularly for time-sensitive seniors, the expert says.

Marketing restrictions, lender preparations

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 the terms “public service announcement,” and “government-insured,” or similar language.

“Not saying that a HECM is government supported or sponsored is going to be hard to do,” Milano said. “This is another discussion point we need to have with the regulator.”

Direct mail advertisements also need to include supplemental consumer protection materials that will be put out by the regulator, and both lender and borrower will have to be independently represented by an attorney at the time of the loan closing.

Institutions are still developing their own policies in terms of how to implement the law’s requirements into their operations. In one case, New York-based Quontic Bank is still actively formulating its plans to comply with the law according to Patricia Whitlock, reverse mortgage specialist at Quontic Bank in Melville, N.Y.

“Our office has not yet developed a policy for this upcoming change to the law, apart from a general plan to schedule closings at a law office rather than in the borrower’s home, which is what we would usually do,” she tells RMD in an email.

Still, it should be expected that many reverse mortgage loan officers (LOs) will portray the changes that the law will bring in a positive light, she says.

“As with all changes to the HECM program, I think most LOs will put a positive spin on it for their clients. The purpose of many recent changes has been to protect the borrower,” she adds.

Association perspective, co-op reverse mortgage legislation

Shortly after the passage of the bill, the National Reverse Mortgage Lenders Association (NRMLA) expressed concern for some of its provisions according to the association’s then-SVP and current President Steve Irwin.

“While NRMLA continues to support consumer protections relative to reverse mortgage lending, we are concerned about some of the provisions contained in this bill,” Irwin said in a July email to RMD. “NRMLA and its outside counsel communicated our concerns to the bill’s sponsors in the New York Legislature prior to its passage.”

Recently, New York Governor Andrew Cuomo vetoed another piece of legislation which would have permitted reverse mortgages on co-operatives in the state, citing insufficient borrower protections as the primary reason for his veto.

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  • While there is a chance that regulators will listen to providing a grandfathering exception, the argument as for TPOs is much weaker than with FHA approved lenders. FHA directly regulates FHA approved lenders but not TPOs. Their FHA approved lending wholesaler is expected to “supervise” its TPOs. The strength of supervision varies by Mortgagee and does not have the matching teeth of FHA and HUD.

    Then there is the new joke about how many attorneys does it take to originate a reverse mortgage in NY. The right answer is: Is NY still legislating any new consumer protections for its residents looking at obtaining reverse mortgages on their NY residences?

    Who else might need to be represented by attorneys at closing? How about servicers, the CFPB and as to HECMs, FHA?

    As stated in a prior comment, is there a cap on legal representation fees that borrowers can be charged as a direct cost plus as reimbursements when it comes to a reverse mortgage? While an increase to malpractice insurance maybe less for advising and representing clients on a HECM maybe lower than with a proprietary reverse mortgage, how much lower will the representation and consulting fees be for a HECM as a result?

    The increased legal costs means that the barrier to obtaining a reverse mortgages for prospects with lower appraised values has been raised in NY. It would seem that the cost for legal representation and consultation for consumers who are originating a proprietary reverse mortgage will be higher than for those who are originating HECMs. Will lenders be allowed to pay those costs and increase interest rates accordingly? I doubt if the NY state Treasury will pay those costs.

    Finally, it is strange that the new law was not called “The Full Employment Act for NY Attorneys, Willing to Represent Borrowers at Reverse Mortgage Closing.” Yeah, it was probably too long to be its title.

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