Over the past year, states have shown increased interest in regulating the reverse mortgage lending market due to the foreseeable increase in the number of retirees seeking to tap into the equity in their homes as a means to secure some measure of financial stability. Most recently, in April, Washington State enacted House Bill 1311 to regulate proprietary reverse mortgage loan products. Under the new law, “proprietary reverse mortgage loan” means any reverse mortgage loan product that is not a home equity conversion mortgage (HECM) loan or other federally guaranteed or insured loan. The new law takes effect July 26, 2009. Prior to the enactment of this new law, Washington did not specifically regulate reverse mortgage transactions.
Washington’s new Reverse Mortgage Act allows non-bank lenders licensed under the Consumer Loan Act (or otherwise exempt from licensing) to originate proprietary reverse mortgage loans. The Act rectifies a Washington law passed last summer that unintentionally prevented non-bank lenders from originating reverse mortgages by amending Washington’s Consumer Loan Act to clarify that certain restrictions in the Consumer Loan Act do not apply to proprietary reverse mortgage loans made in accordance with the Reverse Mortgage Act.
The Act requires that the Washington Department of Financial Institutions pre-approve all proprietary reverse mortgage loan products. In order to offer proprietary reverse mortgage loans, brokers and lenders must (1) maintain irrevocable letters of credit in an amount necessary to fund the greater of all reverse mortgage loans anticipated over the next 12 months or $3 million; and (2) maintain a minimum capital of $10 million.
The Act exempts lenders from the first requirement if they have a credit rating of 4A1 or 5A1 from Dun & Bradstreet, which provides credit information on businesses and corporations, for three consecutive years; that is, the lender has demonstrated that its credit is “strong enough” to earn such a rating from Dun & Bradstreet. The Act exempts lenders from both requirements if they fully disburse the proceeds of the loans at the time of closing or if they sell the loans on the secondary market to an investor with either a 4A1 or 5A1 credit rating from Dun & Bradstreet.
Finally, the Act imposes substantive requirements in connection with proprietary reverse mortgage loan products, including the following:
(1) The lender must permit the borrower to refinance the loan without penalty at any time during the term of the loan;
(2) The lender must pay a late charge to the borrower for any late advance of payment under the loan;
(3) The loan may become due and payable upon the sale or transfer of the home, the borrower moving from the home, or the occurrence of an event of default specified in the loan documents;
(4) Any deed of trust securing a reverse mortgage loan must contain a specific disclosure indicating that the deed of trust secures a reverse mortgage loan;
(5) The lender cannot require an applicant to buy an annuity or insurance as a condition of obtaining a reverse mortgage loan;
(6) Prior to accepting a reverse mortgage loan application, the lender must refer the prospective borrower to an approved independent housing counseling agency;
(7) The lender can only make reverse mortgage loans to Washington residents who are at least 60 years old; and
(8) The lender must give the borrower a three-day right of rescission.
These requirements mirror those proposed in other states, such as Arizona, California, and Minnesota. It is clear that, by enacting the Reverse Mortgage Act, Washington State contemplates significant growth in the use of reverse mortgages in Washington. We anticipate that legislatures across the country will enact similar statutes in the years to come.
Catharine Andricos is an associate in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can reach Catharine at 202.327.9706 or candricos@hudco.com.