Reverse mortgages may be susceptible to abuse too, regulators say

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Hidden fees and other problems that consumers experienced with subprime home loans are potentially a big problem for reverse mortgages as well, the nation’s top regulator for national banks said at an Orlando, Fla., conference today.

In prepared remarks for an American Bankers Assn. meeting, U.S. Treasury Department official John C. Dugan said regulators need to get out ahead of the issue so that the loans are made ‘in a way that is prudent for both lenders and borrowers.’

Dugan’s agency, the Office of the Comptroller of the Currency, is working with other federal bank regulators to develop ‘guidance,’ or general rules, that banks and thrifts are supposed to follow when making reverse mortgages, which everyone acknowledges have some attractive features.

They allow elderly people to remain in their homes while tapping their equity to receive a lump sum of money or create a stream of income. No repayment is required until the homeowner dies, permanently moves out of the home, or fails to maintain the property or pay property taxes. If the home is sold to repay the loan, any remaining equity above the amount due belongs to the borrower or the borrower’s heirs.

One risk, Dugan said, is that unscrupulous lenders may ‘simultaneously and aggressively’ market investments, insurance or annuities that may not be in the borrowers’ best interests, ‘or, worse, attempt to condition loan approval on the purchase of such products.’

Another risk, he said, is that reverse mortgage borrowers may overlook big fees attached to the loan.

‘And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, with disastrous consequences: The failure to make those payments can result in foreclosure,’ Dugan said.

A news release and a link to Dugan’s speech are available at the website of the Office of the Comptroller: www.occ.treas.gov/ftp/release/2009-61.htm.

Any of these problems sound familiar out there?

--E. Scott Reckard