BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.  20551

DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS

CA 10-11

September 21, 2010

TO THE OFFICERS AND MANAGERS IN CHARGE OF CONSUMER AFFAIRS SECTIONS

SUBJECT: Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks

The Federal Reserve, along with other financial regulators of the Federal Financial Institutions Examination Council ¹, adopted the attached guidance on Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risk ². The guidance was developed to address the compliance and reputation risks associated with reverse mortgages in light of the anticipated growth in the market, as the U.S. population ages. While reverse mortgages allow senior citizens to access the equity in their homes, the loans are highly complex. Accordingly, lenders must manage the compliance and reputation risks associated with reverse mortgages, and should disclose adequate information and provide other appropriate protections to consumers as discussed in the guidance.

Key Provisions of the Reverse Mortgage Guidance

The guidance focuses on ways to mitigate several areas of concern, including inappropriate or misleading communication with consumers through marketing and advertisements, and potential conflicts of interest and abusive practices in connection with reverse mortgage transactions.

Communication with and Counseling of Consumers. The reverse mortgage guidance emphasizes the responsibility of institutions to ensure that marketing materials and communications with consumers are balanced and refrain from providing misleading information about product features, loan terms, or product risks, or about a borrower's obligations. The reverse mortgage guidance also emphasizes the need for institutions to provide independent consumer counseling, similar to that which is currently required for federally-insured reverse mortgages ³.

Conflicts of Interest, Abusive Practices, and Third Party Relationships. The reverse mortgage guidance recommends that institutions adopt policies designed to ensure that loan originators and brokers do not have an inappropriate incentive to sell other products that appear to be linked to the granting of a reverse mortgage. Similarly, the guidance recommends that the institutions develop policies to guard against tying the purchase of certain nonbanking products from an affiliate to the granting or pricing of credit in violation of any applicable anti-tying restrictions. In addition, the guidance recommends that institutions should monitor ongoing compliance by third parties with applicable agreements, institution policies, and laws and regulations; institutions are also advised to implement appropriate corrective actions in the event that the third party fails to comply with them.

Consumer Compliance Examination Considerations

In addition to assessing compliance with relevant consumer protection laws as they apply to reverse mortgages, including the Truth in Lending Act (and its implementing Regulation Z) and Section 5 of the Federal Trade Commission Act that prohibits unfair or deceptive acts and practices, the Reserve Banks are to evaluate whether an institution has incorporated the guidance into its compliance risk management program, policies and procedures, and whether it is using the principles set forth in the guidance to manage the risks associated with reverse mortgage lending. Findings should be considered in the evaluation of the institution's risk exposure, reflected in discussions of the compliance management program, and taken into account when determining an appropriate compliance rating and corrective measures.

Please distribute this letter and the attached guidance to supervised institutions in your district. If you have any questions, please contact Kathleen Conley, Senior Supervisory Consumer Financial Services Analyst, at (202) 452-2389 or Paul Robin, Manager, Oversight and Policy, at (202) 452-3140.

Sincerely,
(signed)

Sandra F. Braunstein
Director
Division of Consumer and Community Affairs

Notes:

^1.   The other financial regulators are the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the FFIEC State Liaison Committee.  Return to text

^2.   The guidance can be found at http://www.ffiec.gov/press.htm  Return to text

^3.   Federally-insured reverse mortgages, called Home Equity Conversion Mortgages, are insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development, and subject to a range of federal consumer protection and other requirements.  Return to text

Attachment: Mortgage Products: Guidance for Managing Compliance and Reputation Risk (93 kb PDF)