The Federal Reserve Board is proposing to base its regulation of high-yield or reverse mortgages on the Department of Housing and Urban Developments pilot home equity conversion mortgage program. In a regulation the agencies Board of Governors approved for publication for comment Nov. 23, the Feds staff said that it wants to model the disclosures mandated for reverse mortgages after the HUD matrix for HECMs, with some exceptions. The new disclosures primarily deal with the potential cost of the transaction.
The Fed proposal states that only a few lenders offer reverse mortgages without government assistance. The Fed says some of these lenders shift the risk of loss on these loans by purchasing from the loan proceeds an annuity that provides payments to the homeowner starting at consummation or after a lengthy period of time, for example, 10 years.
The regulation the Fed is publishing for comment implements a law passed by Congress in September, the Home Ownership and Equity Protection Act of 1994. Lenders under the law must disclose that consumers might face loss of their home if they don't pay the loan and must provide cost information about the transaction. Some credit terms are also restricted.
The 1994 law defines a reverse mortgage transaction as a loan that is secured by the consumers principal dwelling; ties repayment to the homeowners death, or permanent move from or sale of the home; and discharges any liability against the homeowner or the estate for amounts owed in excess of the value of the home. The law also allows creditors to demand repayment upon default, which would be determined by the agreement of the parties, and state or other law, according to the regulation.
The law is part of the Riegle Community Development and Regulatory Improvement Act of 1994. It amends the Truth-in-Lending Act, which the Fed administers as Reg Z. The law imposes disclosure requirements and substantive limitations on home mortgage transactions with high rates or fees. The Fed must implement the new rules by March 1995.
Under the proposal, Reg Z disclosures for reverse mortgages will be different than for other loans because they will be expressed as a total annual loan cost rate. Reg Zs standard measure of the cost is annual percentage rate, or APR. But the new law calls the measure for the total projected cost of reverse mortgage credit the annual interest rate, even though the rate reflects charges other than interest such as annuity premiums or a percentage of any appreciation in the consumers home. So the proposal calls for the use of the total annual loan cost rate to avoid confusion between the two rates and to more accurately describe the unique elements of reverse mortgages.
Under the proposal, creditors would calculate total annual loan cost rates by using a standard internal rate of return formula, a system consistent with HUDs HECM disclosures. Calculations would be based on the general APR equation contained in Reg Zs appendix J, the proposal says; instructions for using the formula would be placed in a new appendix K, to ease compliance and avoid confusion with appendix Js instructions.
