Two state agencies have announced new guidelines for reverse-mortgage lenders aimed at protecting older homeowners from getting bad advice or being duped by fraudulent operators.
"Because reverse-mortgage products are specifically designed for and marketed to older residents, we feel a particular responsibility to safeguard their interests by making sure that they are not unfairly taken advantage of," said Steve Kaplan, secretary of the Pennsylvania Department of Banking, which joined with the Pennsylvania Department of Aging in announcing the new policy.
A reverse mortgage is a way to borrow money by using a home as collateral.
Unlike a regular mortgage in which the borrower makes payments to build equity in a home, reverse mortgages provide homeowners with monthly payments, lump sums or lines of credit by tapping the equity from their homes. The money does not have to be repaid until the borrower dies, sells the home or moves out.
While a reverse mortgage can be a good option for some homeowners, the cost is often much steeper than more traditional kinds of financing, such as a home equity loan.
Most lenders offer reverse mortgages under the Federal Housing Administration's Home Equity Conversion Mortgage program. FHA-backed reverse mortgages -- which can be sold to only those home-owners age 62 or older -- are insured, meaning that if a lender goes belly-up, the borrower continues to receive the scheduled payments.
The state's new guidelines primarily are aimed at lenders selling proprietary reverse-mortgage loans that don't carry the same eligibility guidelines, fee limits, insurance and counseling requirements that FHA-backed reverse mortgages carry.
Some of the most important safeguards in the new state policy are aimed at eliminating conflicts of interest and ensuring that a reverse mortgage is a suitable option for a particular homeowner.
The policy prohibits a lender from offering a reverse mortgage to a homeowner for the purpose of obtaining money to buy an investment or other product or service offered by the lender.
It also prohibits the lender from receiving fees or other benefits for referring applicants to other entities selling products or services to be financed with the reverse mortgage proceeds.
The new rules also say a reverse mortgage should not be offered if the lender "knows, or reasonably should have known" that it was unsuitable for the homeowner.
Some reasons the loan might be considered unsuitable are when the borrower does not intend to live in the home long term; when the homeowner does not understand the terms and conditions of the loan; when the disbursements would not cover the homeowner's stated needs; or when the proceeds would be used to buy products, such as annuities or other investments, that are not appropriate for the borrower.
To read the new reverse-mortgage guidelines, published in the Pennsylvania Bulletin on July 10, visit http://www.pabulletin.com/secure/data/vol40/40-28/1253.html . For the banking department's brochure "Understanding Reverse Mortgages," click the "Pamphlets" tab under consumer information at www.banking.state.pa.us . Patricia Sabatini: email@example.com or 412-263-3066.