FHA Proposes Revisions to Reverse Mortgage Program

On May 18, HUD announced that the FHA proposed a new rule that is intended to “strengthen” its Home Equity Conversion Mortgage (HECM) Program by reinforcing reforms that have taken place in the past two years, and by adding new consumer protections. New revisions to the HECM program outlined in the proposed rule include, but are not limited to, (i) ensuring that required HECM counseling occurs before a mortgage contract is signed; (ii) amending the definition of “property charges” to include utilities as a borrower responsibility; (iii) capping lifetime interest rate adjustments for adjustable interest rate products at 5%; (iv) requiring as a condition of eligibility for loan assignment that the HECM mortgage be in lien status prior to homeowners association and condo association liens; and (v) creating a “cash for keys” program to “incentivize parties with legal authority to dispose of a property that serves as the security for a HECM to complete a deed in lieu of foreclosure more quickly.” Comments on the proposal are due by Monday, July 18, 2016.

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Mortgage Banking Firm Settles with DOJ for Participation in Fraudulent Reimbursement Scheme

On September 4, the DOJ announced a settlement of more than $29 million with a Florida-based mortgage banking firm in connection with violations of the False Claims Act. The firm’s subsidiaries participated in HUD’s Home Equity Conversion Mortgages (HECM) program, which insures reverse mortgage loans by reimbursing lenders that are unable to recoup the full amount of a reverse mortgage loan once the loan becomes due and payable. HUD will reimburse sales commissions paid to real estate agents in connection with the liquidation of foreclosed properties, but will not reimburse fees paid to real estate agents for referrals of loans to be liquidated. According to the DOJ, from July 2010 to October 2014, the firm used straw companies to split commissions with real estate agents, and then later submitted claims to HUD for reimbursement of the full commission amount. Additionally, from August 2009 to March 2015, the firm encouraged its subsidiaries to submit false debenture interest claims to HUD. Specifically, the subsidiaries neglected to disclose that they had failed to meet certain required regulatory deadlines and were therefore not entitled to interest payments. The DOJ stated that the settlement “represents a significant milestone in [the DOJ’s] long standing campaign against mortgage fraud.”

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Illinois Governor Signs Reverse Mortgage Act

On August 10, Illinois Governor Bruce Rauner signed into law Senate Bill 1440, the Reverse Mortgage Act which provides new consumer protections for borrowers with respect to reverse mortgage loan transactions. Among other things, the legislation establishes a regulatory framework to govern reverse mortgage loan transactions made within the state including provisions that (i) require lenders to provide certain mortgage disclosures to potential borrowers; and (ii) implement a three-day “cooling off” period in which a potential borrower can rescind the loan. The Act also grants the Illinois Attorney General sole enforcement authority to pursue any violations of the Reverse Mortgage Act, which would constitute as an unlawful practice under the state’s Consumer Fraud and Deceptive Business Practices Act. The law becomes effective January 1, 2016.

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Florida Appellate Court Rules Non-Signing Spouse in Reverse Mortgage is Protected from Foreclosure

On July 15, a three-judge panel of the Florida Third District Court of Appeal issued its opinion in Smith v. Reverse Mortgage Solutions, Inc., 2015 WL 4257632. In 2008, Mr. Smith took out a reverse mortgage on his home where he lived with his wife; only Mr. Smith signed the promissory note, but both spouses signed the mortgage. Mr. Smith died in late 2009, and Reverse Mortgage Solutions filed a complaint for foreclosure, although Mrs. Smith was still alive. The mortgage allowed foreclosure if “a Borrower dies and the Property is not the principal residence of at least one surviving Borrower.” The lower court ruled in favor of Reverse Mortgage Solutions. On appeal, however, the court interpreted the documents de novo and found that Mrs. Smith was a “borrower” “based on the plain and unambiguous language of the mortgage,” and therefore was protected from foreclosure until she died. Although the court stated that this finding would be sufficient to decide the case, it also noted several other bases for its decision, including that (i) Mrs. Smith was identified as the “Borrower” on the signature page of the mortgage; (ii) Florida’s homestead provisions require the spouse’s signature on a mortgage of jointly held property to validly convey the interest in property; and (iii) federal law applicable to reverse mortgages contemplates the foreclosure of mortgaged property and expressly defines “homeowner” to include the spouse of the homeowner. The court remanded the case to the lower court to decide whether the other condition precedent preventing foreclosure, that the property was Mrs. Smith’s primary residence, had been met. A dissenting judge argued that neither the Florida homestead provisions nor HUD requirements should affect the interpretation of the loan note. Although he was prepared to affirm the lower court decision based on the unavailability of a trial transcript, he stated that if it was necessary to address the question of whether Mrs. Smith was a “borrower,” he would conclude that she was not because both the mortgage and the promissory note generally identified Mr. Smith as the only borrower.

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CFPB Details Complaints About Reverse Mortgages

On February 9, the CFPB released a report detailing complaints associated with reverse mortgages. According to the report, a high volume of complaints concern requests for changes to loan terms, issues related to loan servicing, and foreclosure activities. The report covers approximately 1,200 complaints received from December 1, 2011 through December 31, 2014. The report also notes that “[s]ince the CFPB began accepting reverse mortgage complaints in December, 2011, HUD has issued more than 10 policy changes to the HECM [Home Equity Conversion Mortgage] program.” One of these policy changes, effective after March 2, 2015, will require lenders to conduct financial assessments of prospective borrowers prior to approving the loan. The change is expected to decrease defaults due to non-payment of real estate taxes and insurance for loans originated after March 2.

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