It now seems that the Guidance issued recently by the Federal Financial Institutions Examination Council (FFIEC) was a mere prelude to actual regulatory changes. In August 2010, the Federal Reserve Bank proposed “enhanced consumer protections and disclosures” for reverse mortgages. Now, the 90-day comment period that followed its publication is about to expire, and following some additional revisions, the Fed’s proposals could become tantamount to law.

The Fed’s overarching goal is to improve the disclosures that borrowers receive at various stages throughout the reverse mortgage. (The Fed will also push to strengthen regulations governing the marketing of reverse mortgages, to further limit lenders from cross-selling other financial products in conjunction with reverse mortgages, and to clarify the borrower’s Right to Rescind, but these are all subsumed under the umbrella of disclosure).

Under the proposed changes, prospective borrowers “would receive disclosure on or with the application form, using simple language to highlight the basic features and risks of reverse mortgages.” The purpose of this initial disclosure would be to clarify how reverse mortgages are different from conventional mortgages. After receiving the application, lenders would be required to furnish “transaction-specific disclosures that reflect the actual terms of the reverse mortgage being offered.”

The sample disclosure form prepared by the Fed is both comprehensive and specific. It first lists information about the borrower and property, followed by a basic description of the reverse mortgage, including the borrower’s rights and responsibilities. The next section details the disbursement of funds and informs the borrower that he may change the form of disbursement (from line of credit to monthly advance, for example). This is followed by an explanation of APR, including how it is determined and whether it can change.

Next is a discussion of fees, beginning with origination fees (“Account Opening Fees”), and followed by monthly service fees and any early termination fees. After a brief summary of borrowing guidelines and limits, there is a table that shows how the loan balance will (hypothetically) grow over time. Repayment options are covered, as are the risks. Here, lenders explicate the conditions under which they would cease disbursement of funds, terminate the loan, and/or foreclose on the property. Finally, there is some boiler-plate language stating that the prospective borrower is under no obligation to accept the terms of the reverse mortgage, that he has the right to rescind the loan, and that he should seek counseling before taking further action.

While the fed acknowledges that “disclosures alone may not always be sufficient to protect consumers from unfair practices related to reverse mortgages,” it is nonetheless agreed that better disclosure will at least serve to stop borrowers from obtaining them without fully understanding what they are getting themselves into.

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