Reverse Mortgages & Good Intentions

Here’s a nice idea relating to reverse mortgages. For 20 points, can you guess what’s wrong with this picture?

Last year the state of California passed a reverse mortgage consumer protection bill, SB 1609, legislation which was subsequently signed by the governor.

This law, according to Governor Arnold Schwarzenegger’s office, “prohibits a reverse mortgage lender from accepting a reverse mortgage application or assessing any fees until the potential borrower has received independent counseling regarding the loan. In addition, it prohibits a lender from requiring a borrower to purchase an annuity as a part of the reverse mortgage transaction and requires a reverse mortgage contract to be translated into Spanish, Chinese, Tagalog, Vietnamese or Korean if the contract was primarily negotiated in one of those languages.”

This is great stuff and there is no reason why any lender should have any problem meeting the standards adopted in the legislation.

Oh, there is one problem: The law applies to virtually no reverse mortgages.

In the U.S. we have two sources of financial regulation, the states and the federal government. The federal government regulates national banks and their mortgage subsidiaries and foreign banks and their mortgage subsidiaries.

If there is a conflict between state and federal regulations, then under the concept of “preemption” the federal rules apply.

In practical terms, this means that the states have little if any authority over national banks and the mortgages they create or fund.

As an example, Montgomery County, MD passed a law which raised the penalty for mortgage discrimination from $5,000 per incident to $300,000. The law was challenged by lenders, it went to court, and was then thrown out. Why? Look at the letter sent to the judge by the Office of Thrift Supervision, one of the major federal regulators:

“To the extent these provisions prohibit making mortgage loans containing one or more of the prescribed terms, OTS has repeatedly opined that such laws are preempted for federal savings associations and their operating subsidiaries. This office has previously addressed preemption of similar Georgia, New York, New Jersey, and New Mexico lending legislation. Indeed, these opinions specifically concluded that state laws that prohibit the financing of single premium credit life insurance or that restrict points, fees, and prepayment penalties or other forms of compensation are preempted.1 This result stems from the Home Owners’ Loan Act (“HOLA”),2 as implemented by OTS’s lending regulations, which together occupy the field of lending regulation for federal savings associations to the exclusion of state laws.3 Particularly relevant are OTS regulations preempting state laws purporting to impose requirements regarding: (1) the ability of creditors to require insurance or other credit enhancements; (2) the terms of credit; and (3) loan-related fees.”

In other words, local laws are great and well-intended — and unenforceable when federally-regulated lenders are involved.

This entry was posted on Thursday, July 12th, 2007 at 2:34 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.