You asked if reverse mortgages are exempt from laws against predatory lending practices in Connecticut and if so, why.

The Connecticut Abusive Home Loan Lending Practices Act (the Act) was adopted by the legislature during the 2001 session (C. G. S. §§ 36a-746a et seq. ) The act requires certain disclosures and prohibits certain loan agreement provisions and actions by a lender in the course of making high cost loans. (For an explanation of Connecticut’s predatory lending laws, see OLR Report 2002-R-0855. ) The act defines a “high cost loan” as a mortgage (1) for a one to four family residence; (2) made to someone who lives or plans to live there; and (3) whose interest rate when the loan is made is more than 8 percentage points higher than the most recent rate for Treasury bills, notes, and bonds (10 percentage points for subordinate-lien loans). However, it excludes reverse mortgage transactions from the definition of high cost loans. (For an explanation of reverse mortgages see OLR Report 2004-R-0007. )

Bill Nahas, the consumer credit division director for the Connecticut Department of Banking (DOB), which submitted the legislation as part of its legislative program in 2001, points to several reasons for this exclusion. First, reverse mortgages are not typical high cost mortgage loans. Reverse mortgages are home equity loans that allow certain seniors to convert some of the equity in their homes to cash and still retain ownership. Generally, the loan is repaid from the sale of the home upon the death of the last surviving borrower residing in the home. Connecticut law is consistent with the regulations implementing the federal Truth in Lending law, which, in setting out the disclosure requirements for high cost loans, excludes reverse mortgages.

Additionally, reverse mortgages do not fit neatly into the act because of the increased fees typically associated with the transactions. Because of the risks involved with the reverse mortgage (namely that the sale of the house will not yield sufficient funds to settle the debt), they are typically frontloaded with fees or prepaid finance charges. This is an accepted industry practice that is sanctioned by the federal government, with many lenders participating in the Housing and Urban Development (HUD) sponsored program that is insured by the Federal Housing Administration (FHA).

If they were not specifically exempted, the majority of reverse mortgages in Connecticut would be considered high cost loans in accordance with the act because of the associated fees. The act prohibits high cost loan lenders from requiring borrowers to pay prepaid finance charges, such as points, of more than 5% of the principal amount of the loan or $ 2,000, whichever is greater. The requirement is more stringent than those set out in other states and in federal regulation, where Truth in Lending disclosure requirements are triggered for high cost loans if the total points and fees payable by the consumer at or before closing will exceed the greater of 8% of the total loan amount, or $ 400). According to the DOB, lenders would likely be discouraged from making reverse mortgage loans in Connecticut if they were subjected to the 5% cap on prepaid finance charges and there is an overwhelming public policy interest in allowing seniors to have the option of a reverse mortgage.

Finally, the DOB points out that protections do exist for reverse mortgage borrowers. Both federal and state agencies, and organizations such as AARP are all working to increase consumer awareness about reverse mortgages. Borrowers participating in HUD-sponsored reverse mortgage programs are required to undergo financial counseling before obtaining a reverse mortgage. Additionally, lenders who incorporate unconscionable terms risk being blacklisted by HUD, which guarantees many of the loans and also purchases them on the secondary market.

SC: ro