Because a reverse mortgage is a financial product intended for seniors aged 62 or older that involves a major life decision, some safeguards have been built into the product to protect older consumers and their assets.
From making sure potential borrowers understand what a reverse mortgage loan is and how it works in their particular situation, to controlling the costs of originating the loan, there are several important protections in place to keep consumers safe.
Counseling
Anyone interested in the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program is required to obtain loan counseling. Borrowers can choose from a list of counseling agencies approved by the Department of Housing and Urban Development (HUD), which all have counselors that have passed an exam confirming their knowledge of the HECM product.
Counselors work independently of reverse mortgage lenders, meaning they will not steer a prospective applicant in a certain direction. It’s their job to make sure potential borrowers know important information about reverse mortgages before going through the process of getting one. They’ll address topics including the basics of how a reverse mortgage works and the costs associated with the loan, how it can benefit potential borrowers, and explore other available options or alternatives.
Once they’ve completed counseling and have been informed about the product, clients receive a certificate which must be provided to a lender if they decide to move forward with the loan process.
Anti-Cross-Selling Protections
The Housing and Economic Recovery Act of 2008 (HERA) established that lenders cannot require a borrower to buy insurance (such as a life insurance or long-term care insurance policy), annuities, or other type of product as a condition of eligibility to get a reverse mortgage.
HERA also prohibits reverse mortgage lenders from steering consumers toward specific products, whether they’re insurance policies, investments, or other financial tools.
Borrowers can choose to do what they would like with their reverse mortgage proceeds, but lenders are prohibited by law from influencing that decision.
Origination Fee Limits
To help protect borrowers from high initial fees, the government capped the origination fee lenders can require borrowers to pay as compensation for processing the loan.
The origination fee is based on the home’s value, and HUD controls the amount that can be charged for a HECM.
For example, for someone whose home is worth $125,000 or less, a lender could charge an origination fee of up to $2,500. If someone’s home is worth more than $125,000, lenders are able to charge 2% of the first $200,000 of the home’s value, plus 1% of anything over $200,000—up to $6,000.
Because of this cap, even if someone’s home was valued at $500,000, the maximum origination fee the lender could charge is $6,000, rather than $7,000 (2% of $200,000, plus 1% of $300,000).
Consumer Protections For Your Reverse Mortgage
The government has established safeguards to make sure consumers are well-informed about the product and are protected against excessive origination fees and unscrupulous lending.
These protections are in place to keep borrowers safe and ensure that reverse mortgages are a viable option for those looking to age in place. If you have any further questions, please don’t hesitate to give us a call.