Reverse Mortgages and Regulation Z
The mortgage crisis and economic struggle that ensued afterward has led many Americans to feel reluctant about taking out a home loan. Thankfully, there are specific laws in place to help educate consumers and protect them from unscrupulous lending practices. The Truth In Lending Act (TILA) of 1968 provided these laws, specifically Regulation Z, the Federal Reserve Board regulation that requires lenders to disclose information about a given loan.
Combined with due diligence on the consumer’s part, Regulation Z can help provide borrowers with peace of mind when applying for a home equity conversion mortgage. One of the reasons HECMs (reverse mortgages) got such a bad rap years ago was because many of the senior homeowners who applied did not fully understand the parameters of the loan and thus suffered financial setbacks. For instance, some lenders may have neglected to disclose information relating to property tax and insurance premiums with reverse mortgages – which, if the homeowner didn’t pay, could result in foreclosure.
Another benefit of Regulation Z is that it requires lenders to disclose information relating to the amount of interest the loan is subject to. In other words, the bank must clearly state how much interest will be charged on the loan in terms of an annual percentage rate (APR). This prohibits the lender from quoting a super low interest rate to attract borrowers while stating in the fine print that the rate is actually expressed in per week terms. Such shifty practices were often used in selling reverse mortgages to senior homeowners, many of whom were taken advantage of due to their lack of knowledge about the TILA. This is why it’s always important to know your rights as a consumer and to understand the legal obligations of your lender.
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When applying for a reverse mortgage, you should shop around until you find a lender who has a proven track record of fair lending. A good reverse mortgage lender will review your information and candidly discuss your best options while also informing you of the risks involved.
Reverse mortgage loans can be a very valuable part of an overall retirement plan, or a good way to increase your cash flow if you anticipate having a major expense in the near future, but they aren’t always the best choice for everyone. Talk to your lender or financial counselor to determine whether a reverse mortgage makes sense in your situation.
For more information on the Truth In Lending Act, visit this link: http://files.consumerfinance.gov/f/201306_cfpb_laws-and-regulations_tila-combined-june-2013.pdf