The Federal Reserve and other top regulators said on Monday reverse mortgages pose compliance and reputation risks for lenders, and offered guidance to financial firms on how to avoid such pitfalls.
The Fed said reverse mortgages, which enable borrowers to get a monthly income stream by surrendering a portion of the equity in their homes, are likely to become increasingly popular given an expected rise in the elderly population.
The guidance puts no limits on fees that can be charged for reverse mortgages.
Reverse mortgages present substantial risks both to institutions and to consumers, and, as with any type of loan that is secured by a consumer's home, it is crucial that consumers understand the terms of the product and the nature of their obligations, the regulators said in a statement.
Lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the institutions themselves, they said.
Supervisors said they want to ensure that lenders determine whether or not borrowers are able to continue paying insurance and taxes on the property, and avoid conflicts of interest by lenders trying to bundle the loans with other products.
Consumers are not always adequately informed that reverse mortgages are loans that must be repaid (and not merely ways to access home equity), the agencies said.
In fact, some marketing material has prominently stated that the consumer is not incurring a mortgage, even though the fine print states otherwise.