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Gina LaGuardia has more than 25 years of experience in senior editorial roles, and is an expert in personal finance topics, including banking and lending. She has created content for financial powerhouses such as Chase Bank, American Express Canada, First Horizon Bank, BBVA, and SoFi.
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A reverse mortgage is designed for homeowners who are 62 or older who want to access some cash flow from their home equity and also eliminate having to make a mortgage payment. Instead of you owing money, the reverse mortgage pays out a lump sum, a line of credit, or a monthly amount, which is based on your age, the interest rate, and the home value. You will still be responsible for paying property taxes and insurance.
Over time, your equity will go down as funds are taken, and monthly interest and fees will add up. The reverse mortgage comes due if you choose to sell or leave the home, or if you pass away.
Because it’s a tricky product and there have been unscrupulous lenders in the mix, there are a number of regulating bodies that help protect consumers and ensure they understand how reverse mortgages work. Learn more about which entities regulate reverse mortgages, how guidelines are enforced, and how regulators can help protect you.
For the majority of reverse mortgages—also known as home equity conversion mortgages (HECMs)—the U.S. Department of Housing and Urban Development (HUD) is the main regulatory body. HUD oversees the Federal Housing Authority (FHA), which insures HECMs.
Because these loans are federally backed, borrowers must meet FHA guidelines, including the completion of counseling to ensure they understand their responsibilities and how their HECM will work. Homeowners also have to work with an FHA-approved lender, and the property must meet certain standards.
HUD assumed authority over HECMs with the passing of Section 255 of the National Housing Act in 1988. HUD was granted even more oversight of the program via the 2013 Reverse Mortgage Stabilization Act, which is a National Housing Act amendment. This ACT authorizes HUD to make changes to HECM as needed to keep the product stable and reduce risk for the borrower. As such, HUD is able to better protect older adults by making sure the HECM program is continually monitored, assessed, and improved.
One of the key ways HUD regulates reverse mortgages is by setting standards and making sure they are followed by lenders. HUD reverse mortgages require:
If you have a non-borrower spouse or a power or attorney is invoked, they must also complete counseling before you can be approved for a reverse mortgage.
In addition, your home must meet all FHA property standards and flood requirements. And FHA lenders also have to follow a set of HUD rules for reverse mortgages, which is another layer of protection for the borrower.
In addition to HUD, there are a couple of other federal bodies involved in regulating reverse mortgages.
The Consumer Financial Protection Board (CFPB), created in 2011, has the authority to regulate lenders, including those that offer reverse mortgages. The CFPB is mostly dedicated to making sure loan transactions are transparent—namely, that lenders follow the Truth in Lending Act, Regulation Z. This requires reverse mortgage lenders to provide specific disclosures to borrowers. When it’s reported that a lender has violated this regulation, the CFPB can take them to court to hold them accountable. For example, in 2021, the CFPB took action against one of the largest reverse mortgage lenders for deceptive advertising that misrepresented estimated home values to consumers, and asked for compensation for the borrowers.
Another federal agency that regulates reverse mortgages is the Federal Trade Commission (FTC). The FTC handles consumer complaints and enforces laws for non-HECM loans. For instance, if companies use illegal tactics against people facing foreclosure, the FTC can step in.
State regulators may also implement guidelines for reverse mortgages that add to what federal law requires. For example, the Massachusetts Division of Banks made an allowance that counseling could take place virtually during the COVID-19 pandemic. In New York, licensed mortgage bankers that wish to engage in reverse mortgage lending activity must apply for authority with the Department of Financial Services. In California, borrowers have seven days from completing their counseling to cancel without any fees.
To find your state’s bank agency, which will typically be the entity enforcing reverse mortgage regulations, visit the Conference of State Bank Supervisors website.
There are three main types of reverse mortgages, each with their own pros and cons. Depending on which one you choose, the regulations may vary slightly.
These are HECMs that are federally-insured reverse mortgages backed by the U.S. Department of Housing and Urban Development (HUD). In order for a reverse mortgage to be HUD-insured, the amount must be under the loan limits, which for 2022 is $970,800. Anyone choosing this reverse mortgage program may benefit from lower interest rates than other types because of the FHA backing and the fact that HECM funds can be used for any purpose. However, you will have to pay mortgage insurance premiums. The loan process itself is also more regulated when HUD is involved, which can be a good thing for consumer protections, but involves a few more hoops to jump through.
You also have the option to get a proprietary reverse mortgage (sometimes called a private or jumbo reverse mortgage) that isn’t HUD-insured or federally regulated, giving you more flexibility. For starters, there are no loan limits to constrain you if you have a high-value home. Private lenders are also not bound to the same counseling requirements as FHA lenders, although they are encouraged to make sure borrowers are educated. Without government insurance, expect interest rates and fees to be higher. The other downside of having less regulations to follow is that consumers have to be extra cautious when vetting potential reverse mortgage lenders to find one that doesn’t use predatory or deceptive practices.
Single-purpose reverse mortgages are usually offered by state and local government agencies and nonprofits. As the name implies, the funds from these loans must be used toward one lender-approved purpose, such as a home improvement project or to pay owed property taxes.
To avoid being foreclosed when you have a HUD-insured reverse mortgage, you must stay current with your property tax and home insurance payments, maintain the home to abide by FHA standards, and keep the home as your primary residence.
If someone with an HECM is foreclosed on, HUD takes ownership of the home, then quickly puts it up for sale.
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