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Guidance on Compliance and Reputation Risks from Reverse Mortgages Issued for Federal Regulators

image The Federal Financial Institutions Examination Council (FFIEC) proposed to the Federal financial institution regulatory agencies guidance on managing compliance and reputation risks presented by reverse mortgage products.

According to the statement from the agency, reverse mortgages present safety and soundness challenges since they rely primarily on the sale of the collateral property for repayment, and they have not been tested through the credit life cycle.

It adds that although reverse mortgages are growing in popularity, they are complicated products for consumers. This, combined with the fact that they are offered to seniors who may be vulnerable to misleading marketing techniques, prompted the FFIEC to propose guidance for lenders.

The guidance focuses on the following compliance and reputation risks:

  1. consumers may enter into reverse mortgage loans without understanding the costs, terms, risks, and other consequences of these products, or may be misled by marketing and advertisements promoting reverse mortgage products;
  2. counseling may not be provided to borrowers or may not be adequate to remedy misunderstandings;
  3. appropriate steps may not be taken to determine and assure that consumers will be able to pay required taxes and insurance; and
  4. potential conflicts of interest and abusive practices may arise in connection with reverse mortgage transactions, including with the use of loan proceeds and the sale of ancillary investment and insurance products.

To address these issues, the guidance provides advice on communicating with consumers;obtaining qualified independent counseling; avoiding conflicts of interest; making use of appropriate internal controls, and managing third parties.

The six members of the FFIEC are the Federal financial institution regulatory agencies (the Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System (Board); the Federal Deposit Insurance Corporation (FDIC); the Office of Thrift Supervision (OTS); the National Credit Union Administration (NCUA)), and the State Liaison Committee (SLC) of the FFIEC.

Comments should be submitted by February 16, 2010.

Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks