The banking regulators issued guidance Thursday governing the use of reverse mortgages and calling on banks to improve disclosure, provide independent counseling and strengthen third-party management of such loans.

Regulators said reverse mortgages can be highly complex and that borrowers, particularly elderly ones, depend on them to pay for living expenses and health care.

The guidance encourages lenders to improve their communication with consumers by reviewing advertising and marketing material and giving borrowers information that clearly lays out the costs, terms, features and risks of the product.

Specifically, institutions should disclose borrower and property eligibility, the fact that reverse mortgages are not government-insured, lump sum and other distribution amounts, fees and charges, circumstances for repayment and alternatives.

The guidance would require lenders offering proprietary products to offer qualified independent counseling and adopt policies that prohibit steering a person to one particular counseling agency.

It would also require lenders to adopt procedures to avoid conflicts of interest, policies for internal controls and third-party risk management steps, including due diligence for third-party criteria, internal monitoring and corrective actions procedures.

In June, Comptroller of the Currency John Dugan equated reverse mortgages with subprime loans and warned, "Now is the time to get out in front of this issue before real problems develop."

"Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population," Dugan said.

Comments on the guidance are due by Feb. 16.

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