Alston & Bird Consumer Finance Blog

#HECM

HUD Seeks Comment on Proposed Notice to Change HECM for Purchase Program to Expand Funding Sources and Interested Party Contributions

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A&B Abstract:

On October 24, 2023, the U.S. Department of Housing and Urban Development (“HUD”) published, for public comment, a Federal Register Notice (“Proposed Notice”) to implement changes to the Federal housing Administration’s (“FHA”) Home Equity Conversion Mortgage (“HECM”) for Purchase program. The Proposed Notice expands the list of acceptable funding sources and permits additional interested party contributions to satisfy the borrower’s monetary investment requirement. Under the Proposed Notice, the FHA would also remove existing restrictions that prohibit the borrower from accepting cash from a seller or another person or entity that financially benefits from the HECM for Purchase transaction. HUD is seeking comment from interested members of the public on the Proposed Notice. The period for public comment ends on November 24, 2023.

Background

The HECM for Purchase program allows mortgagees to originate HECM for Purchase transactions to purchase a 1-to-4 family dwelling unit, one unit of which will serve as the borrower’s principal residence. The program requires borrowers to contribute substantial liquid assets to meet the negotiated contract sales price for the property plus standard origination fees and charges.

In 2009, the FHA published Mortgage Letter 2009-11 (“ML 2009-11”) which prohibited certain funding sources for the investment:

  • sweat equity;
  • trade equity;
  • rent credit; and
  • cash or its equivalent, in whole or in part, received from the seller or any other person or entity that financially benefits from the HECM for Purchase transaction, or any third party or entity that is reimbursed, directly or indirectly, by the seller or any other person or entity that financially benefits from the HECM for Purchase transaction.

In addition, ML 2009-11 prohibited seller contributions (or “seller concessions”) in any HECM for Purchase transaction. “Seller concessions” are the use of “loan points, interest rate buy-downs, closing cost down payment assistance, builder incentives, gifts or personal property given by the seller, or any other party involved in the transaction.” These limits are meant to redirect expenses customarily paid by the seller or other interest parties to the borrower.

In 2017, the FHA codified the requirements for the HECM for Purchase program, and other program changes, and also codified three permitted funding sources for the borrower’s required money investment (the “Final Rule”):

  • Cash on hand;
  • Cash from the sale or liquidation of the borrower’s assets; and
  • HECM proceeds.

The Final Rule also changed the funding source restrictions to permit interested party contributions to pay for:

  • fees required to be paid by the seller under state or local law;
  • fees that are customarily paid by the seller in the locality of the subject property; and
  • purchase of the Home Warranty policy by the seller.

The Proposed Notice

The Proposed Notice would permit interested parties to contribute up to six percent of the sales price and expand the list of permitted interested party contributions.

Under the Proposed Notice, an “interested party contribution” would be defined to mean a payment by an interested party or combination of parties, toward the borrower’s origination fees, other closing costs including any items paid outside of closing, prepaid items, and discount points. “Interested Parties” refers to sellers, real estate agents, builders, developers, mortgagees, third-party originators, or other parties with an interest in the transaction.

Under the Proposed Notice, the six percent limit on interest party contributions may be applied towards but may not exceed the cost of:

  • origination fees;
  • other closing costs paid outside of closing (e.g., credit report and appraisal);
  • prepaid items;
  • discount points;
  • interested party payment for permanent and temporary interest rate buydowns; and
  • payment of the initial mortgage insurance premium.

Additionally, the Proposed Notice would also permit the following additional funding sources to satisfy the borrower’s monetary investment:

  • premium pricing;
  • gifts;
  • disaster relief grants; and
  • employer assistance.

This would be the first time that premium pricing is permitted for use in the HECM for Purchase program. Under the Proposed Notice, borrowers would be able to receive a credit from the mortgagee or third-party originator to reduce their closing costs in exchange for a certain initial mortgage interest rate.

Premium pricing credits from the mortgagee or third-party originator would be excluded from the six percent limit if the mortgagee or third-party originator is not the seller, real estate agent, builder, or developer. The interested party contributions for the various fees permitted under 24 C.F.R. § 206.44(c)(1) will also be excluded from the six percent interested party contribution limit. The FHA will also exclude the satisfaction of a Property Assessed Clean Energy (“PACE”) lien or obligation against the property by the property seller from the definition of an interested party contribution in the HECM for Purchase program.

Takeaway

The Proposed Notice is an effort by the FHA to more closely align the HECM for Purchase program with its forward mortgage programs. If implemented, the Proposed Notice would likely make it easier for borrowers to meet their monetary investment requirement by expanding the list of funding sources and permitting interested party contributions. Lenders participating in the HECM for Purchase program should review the Proposed Notice and consider submitting a comment.

New York State Revises Restrictive HECM Foreclosure Law

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A&B ABstract

On December 15, 2020, New York State enacted legislation amending the New York Real Property Law that would have placed various restrictions and requirements on the servicing of Home Equity Conversion Mortgages secured by New York properties effective as of April 14, 2021 (the “Foreclosure Law”).  The new law would significantly hinder a servicer’s ability to foreclose on a defaulted HECM, and could conflict with existing default procedures promulgated by the Department of Housing and Urban Development (“HUD”) relating to the foreclosure of HECMs.

On January 6, 2021, legislation was introduced in the New York State Senate to eliminate certain of these burdensome provisions (the “Revised Law”).  Both the Senate and the New York State General Assembly have approved this measure, and it currently awaits Governor Cuomo’s signature.

The Foreclosure Law as Enacted

As enacted, the Foreclosure Law would impose a series of requirements on foreclosures comments on or after April 14, 2021.

First, the law would, among other things, upon the commencement of a foreclosure proceeding of a HECM secured by real property in New York State, require transmission to the New York Department of Financial Services (“NYDFS”) of

  • proof that HUD has granted prior approval to accelerate the loan,
  • proof of the default leading to the foreclosure action and notice to the mortgagor, and
  • any other information required by the NYDFS.

Second, the Foreclosure Law would require mortgagees to engage in mandatory loss mitigation activities to be specified in regulations promulgated by the NYDFS before commencing a foreclosure action.

Third, the Foreclosure Law would prohibit the making of advance payments for any obligation arising from the related Mortgaged Property and provide that payments by the Servicer for insurance premiums and taxes may only be made when they are in arrears.

The Revised Foreclosure Law

The Revised Law would eliminate many of these burdensome provisions.  Specifically, the Revised Law would:

  • require lenders to send a notice to consumers that will be promulgated by the NYDFS relating to the borrower’s rights in foreclosure,
  • authorize the NYDFS to regulate the notice of such rights,
  • require lenders to send the NYDFS proof that they received permission from HUD to foreclose on a reverse mortgage,
  • require lenders to maintain policies on loss mitigation to ensure compliance with all applicable law, and
  • require lenders to maintain certain loss mitigation and foreclosure records.

If signed by Governor Cuomo, the Revised Law would take effect 120 days after enactment.

Significant Penalties for Failure to Comply

Under both the Foreclosure Law and the Revised Law, consumers “injured” by a violation of the law are entitled to recover treble damages in a private right of action.  Further, adherence to the requirements of the law is a condition precedent to filing the foreclosure in New York State, and failure to comply with these provisions constitutes a complete defense to such foreclosure.

Takeaway

Even as amended, the legislation is cumbersome and creates additional hurdles for servicers foreclosing on delinquent HECMs in New York State.  Arguably, the existing HUD HECM pre-foreclosure procedures provide ample consumer protection.  Nevertheless, with many consumers struggling financially during the COVID pandemic, New York State seeks to provide additional consumer protections to elderly New Yorkers who have HECMs.

New York Enacts HECM Law

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A&B ABstract:

Effective March 5, 2020, New York Assembly Bill 5626 (“AB 5626”) regulates the origination and servicing of the federal U.S. Department of Housing and Urban Development (“HUD”) home equity conversion mortgages (“HECMs”).

Significant Impact to Mortgage Lenders and Servicers

With the stated purpose of providing “new regulations on reverse mortgage products pertaining to the marketing, origination, and management” of HECMs, AB 5626 will expand New York’s reverse mortgage law to apply to HECMs.  The following provides a brief summary of AB 5626’s substantive provisions:

Applicability:

The measure applies to an “authorized lender,” as defined in section 280 of the Real Property Law. Under current law, authorized lenders of proprietary reverse mortgage loans are subject to additional approval by the Superintendent of the New York Department of Financial Services. It is unclear if such additional approval will now be required to originate or service HECMs.

Advertising and Offering of Reverse Mortgages:

In addition to imposing new disclosure obligations and prohibiting an authorized lender or any other party from engaging in any unfair or deceptive practices in connection with the marketing or offering of reverse mortgage loans, AB 5626 prohibits using the words “government insured” or other similar language representing that reverse mortgage loans are insured, supported and sponsored by any governmental entity in any solicitation, or representing that any reverse mortgage loan is other than a commercial product.  This may prove challenging given that HUD characterizes its own HECM loan product as a “reverse mortgage insured by the U.S. Federal Government.”

Periodic Statements:

The measure requires an authorized lender to provide additional disclosures on the borrower’s periodic statement when the authorized lender administers payments for property obligations (such as tax payments or mortgage or homeowners insurance) and when those payments are derived from the proceeds of the mortgage.

Life Expectancy Set Aside (“LESA”): 

Under AB 5626, an authorized lender must provide notice to the borrower by telephone and first-class mail when the borrower’s home equity line of credit or LESA is depleted to ten percent or less of its value (and again when the borrower’s line of credit or LESA is depleted entirely).  The measure does not specify the timeframe for providing this notice.

Advances:

The measure prohibits an authorized lender from making an advance payment for any obligation arising from the mortgaged real property and, if there is an insurance or tax default, the authorized lender may only pay those premiums and/or taxes which are in arrears.  It is unclear if this provision applies to borrowers who have established a LESA, as HUD’s HECM regulations require a mortgagee to make disbursements for property charges before the bills become delinquent.

Occupancy Defaults:

The measure addresses situations where an authorized lender seeks to foreclose on a HECM loan because the property is no longer the primary residence of, or occupied by, the borrower.

If the authorized lender does not receive any responses to mailings related to verification of the borrower’s primary residence and/or occupancy, prior to commencing any foreclosure proceeding the authorized lender must: (a) call the borrower (or, if the borrower cannot be reached by telephone, a designated third party specified by the borrower), and (b) visit the property, in person.  During such visit, the authorized lender or its agent must provide clear information as to who they are, that the visit pertains to the reverse mortgage, the reason for the home visit, and the telephone number to call for further information.

Further, the authorized lender must wait at least 30 days following such visit, in addition to any additional time or notice requirements specified by any other provision of law, before initiating a foreclosure action on the basis that the mortgaged property is no longer the primary residence of the borrower.  If the borrower contacts the authorized lender and provides proof of residence or occupancy after such visit, but before the commencement of a foreclosure action, the authorized lender is barred from initiating such foreclosure action.  Presumably, this provision would not require an authorized lender to violate privacy laws, debt collection laws (which may only permit the authorized lender to obtain contact information and not discuss the debt), or trespassing laws.

Inspection Fees: 

AB 5626 prohibits an authorized lender from charging the borrower any fee for the visit or inspection, including any and all inspections conducted by the authorized lender to verify the status of the reverse mortgage, or any suspected or actual default condition.

Closing Attorneys: 

The measure requires both the authorized lender and the borrower to be represented at closing by an attorney, and to have at least one attorney present to conduct the closing.  It is unclear who is responsible for the cost of the borrower’s attorney.

Penalties:

Failure to comply with the requirements of AB 5626 could result in significant penalties.  For example, any person injured by new Section 280-b of the Real Property Law (which the measure creates) or HUD’s HECM regulations may bring an individual action to recover treble actual damages plus the prevailing plaintiff’s reasonable attorney’s fees.  Moreover, compliance with the provisions is a condition precedent to bringing a foreclosure action; failure to comply is a complete defense to a foreclosure. Accordingly, AB 5626 could have a significant impact on mortgage lenders and servicers of HECMs.

Takeaway:

By adding several new obligations on top of HUD’s existing requirements, this law may impose significant burdens on lenders and servicers.  We anticipate amendments to existing Banking Regulation Part 79 that, hopefully, will clarify many ambiguities.