Rhode Island OKs Prepayment Penalties For Reverse Mortgages
July 2nd, 2008
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During the past few years reverse mortgages have become vastly more popular in some measure because they lack “gotcha” clauses. For instance, FHA-backed reverse mortgages, what HUD calls HECMs, prohibit the use of prepayment penalties.
This is an idea with a lot of sense and since roughly 90 percent of all reverse mortgages are insured by HUD, reverse loans without prepayment penalties are the norm.
Now, however, Rhode Island has become the first state to enact legislation which would allow reverse mortgages to include a prepayment penalty.
The good news about the Rhode Island law is that it does not apply to loans insured by the FHA — federal rules do not allow prepayment penalties. The bad news is that someone in Rhode Island might well buy a private-sector reverse mortgage after January 1st which allows a prepayment penalty.
The legislation came about, according to the Providence Journal, because the state wanted more disclosures. To get more disclosures state lawmakers agreed to allow the prepayment penalties. (See: Carcieri signs reverse mortgage law, June 28, 2008)
Why such an exchange was necessary is unclear. No other state allows prepayment penalties for reverse mortgages.
More disclosures are virtually worthless. No one reads or understands them. Two former HUD Secretaries, Alphonso Jackson and Mel Martinez, have plainly said they do not read loan documents — and they are both attorneys and both know something about real estate.
Hopefully Rhode Island’s law will not be duplicated elsewhere — and hopefully Rhode Island’s senior citizens will look at who voted for the bill, and who didn’t, when elections roll around in a few months.
Alternatively, savvy lenders selling private-sector reverse mortgages in Rhode Island will surely market loans without prepayment penalties — that would be a huge competitive advantage over any competitor who wanted to stick borrowers with unjustified costs.
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