Proprietary Reverse MortgageReverse Proprietary Mortgage
Member firms of the Federal Financial Institutions Examination Council (FFIEC) have issued the definitive guide "Reverse Mortgage Products": The " Guidelines for Managed Compliance and Reputation Risk ", which address consumers' concern about reverse mortgage lending and the importance of reducing the risk of regulatory and reputational risk associated with these assets. Launched on 17 August, the Directive also deals with the general characteristics of reverse mortgage credit and with the regulatory framework and consumers' concern about reverse mortgage credit.
This guide concentrates on the need for depositaries to give clear and equitable information to the consumer on the risk and rewards of reverse mortgage credit while the consumer makes choices about these credit instruments, thereby providing information to the consumer on available alternative mortgage options. These guidelines also state that banks should take measures to prevent the emergence of a risk of conflicts of interest and that customers should be provided with professional advice independently.
These guidelines cover related guidelines, processes, internal control and third-party risksanagement. It will come into force on 18 October 2010. Under the Guidelines, depositaries under the control of FFIEC agents generally appear to offer two fundamental kinds of reverse mortgage products: the lenders' own proprietary reverse mortgage product and reverse mortgage product under the Home Equity Conversion Mortgage (HECM) programme.
An HECM is a reverse mortgage covered by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). HECM debt and proprietary debt are governed by the Truth in Leasing Act, the Real Estate Settlement Procedures Act, the Federal Trade Commission Act and various other mortgage credit Acts.
The HECM loan is also governed by a comprehensive system of regulation defined by HUD, which includes rules for the FHA protection of HECM loan, protecting both the lender and the reverse mortgage borrower. According to the guideline, the use of reverse mortgage could increase significantly in the years to come as more home owners are considering reverse mortgage offerings as the older US populace grows.
These guidelines address aspects of customer safety that involve regulatory and reputational risk, but recognise that reverse mortgage product may also present other risk to creditors, such as loan, interest rates and cash flow risk, particularly for proprietary reverse mortgage product that lacks the coverage provided under the German government's HECM programme.