Home Equity Conversion Schemes Public Consultation

Home Equity Scheme Consultation

Appendix One - Overseas approaches to regulating HEC schemes

United Kingdom

In 1991 the main UK providers of HEC finance formed a specific group to set up a voluntary code of practice for their schemes to counter adverse publicity about some serious failures of certain HEC schemes. This self-regulatory code was called Safe Home Income Plans (SHIP).

SHIP Code of Practice - www.ship-ltd.org

The members of SHIP agreed to provide a fair, simple and complete presentation of their plans. The benefits, obligations, variables and limitations were clearly set out in their literature, including all costs to the applicant on taking up a loan, the position for the borrower on moving house, any tax implications and the effect of increases or decreases in house values.

The code specified that a client's legal work would always be completed by his or her chosen solicitor, who would provide full details of the benefits the client would receive prior to the completion of the plan. The solicitor would be required to sign a certificate to the effect that the scheme has been explained to the client.

The SHIP certificate would clearly state the main cost to the householder's assets and estate, and how the amount of the loan would change over time or whether part or all of the property is being sold.

All SHIP plans would carry a "no negative” equity guarantee that means the borrower will never owe more than the value of their home.

Regulation of the UK market

Since October 2004, as a result of growth in the use of HEC schemes and a difficult market, regulation of HEC schemes has been undertaken by the Financial Services Authority (FSA) because the schemes fall within the definition of a regulated mortgage contract. Currently, a change in legislation is being pursued that will also bring reversion mortgages within the ambit of the FSA.

The FSA also operates a compensation scheme funded by providers that offers compensation up to a maximum for borrowers of schemes that have become insolvent.

United States

In the United States, the Federal and State governments are to some degree involved with HEC schemes as providers and as mortgage guarantors. Efforts have been made to encourage the development of HEC schemes. Federally backed schemes also require:

• mandatory counselling (federally funded)
• the borrower must be at least 62 years old and own their home and live in it
• the home must be mortgage free or able to become mortgage free with the HEC loan.

General consumer protection is provided under the Truth in Lending Act which requires:

• specific disclosures of credit terms to the borrower
• disclosure of charges including percentage interest terms
• that the disclosures be available to the borrower before the loan is agreed.

A Bill to improve consumer protections in respect of mortgage transactions was introduced to Congress in June 2005. Some states also address HEC issues.

A mandatory standardised illustration calculation that enables potential consumers to compare competing plans in a sensible way was introduced in 1994. In addition, provider organisations, the National Reverse Mortgage Lenders Association (NRMLA), have developed a code of practice which urges good governance and is not dissimilar to the UK’s SHIP scheme but does not have the “no negative” equity guarantee.

NRMLA Code of Conduct - www.nrmlaonline.org

Members of the NRMLA are mindful that the soundness, usefulness, prosperity, and future of the industry depends upon the honour and integrity of all persons engaged in the business. Each member of the association agrees to observe and maintain the following standards of conduct in dealing with the senior community and their families:

• Treat all clients with respect and dignity.
• Protect the client’s privacy and confidentiality and not distribute personal financial information to any third party without permission from the client.
• Encourage clients to discuss the loan transaction with family members and/or other trusted advisors.
• Inform clients at no charge about all of the member’s reverse mortgage programs and assist each client to determine the program most suitable for his or her needs.
• When estimating potential reverse mortgage benefits, clearly and accurately identify all costs.
• Take reasonable steps to check out the background and procedures of third parties before accepting referrals of business from them, and refuse to accept referrals from those that are found unacceptable. Members shall disclose to clients any third party with a financial interest in the reverse mortgage transaction.
• Not imply to a borrower that he or she is obligated to purchase any other product or service offered by the member or any other company in order to obtain a reverse mortgage.
• Pay all loan proceeds directly to the borrower, except to retire existing debt, pay a contractor from the borrower’s repair set-aside account, or pay property taxes or hazard insurance premiums from the borrower’s set-aside account for taxes and insurance.
• Employ individuals who have passed a background check and are found to be of good moral character.
• Report any suspected violations of the Code of Conduct to the NRMLA, and cooperate with all their investigations.
• Make a good-faith effort to resolve concerns received from clients about a reverse mortgage transaction.
• In all of their loan origination arrangements, comply (with the advice of qualified counsel as appropriate) with all applicable regulatory requirements including:
  
  (i) provisions of the federal Real Estate Settlement Procedures Act barring referral fees
  (ii) state mortgage regulatory provisions requiring licensing by loan originators, if applicable
  (iii) with respect to FHA-insured HECM reverse mortgage loans, FHA provisions requiring licensing and restricting employment arrangements.

Australia

Like older people in New Zealand, older Australians have been slow to embrace home equity release schemes although there has been significant growth in the market in recent years as HEC schemes have become more widely accepted.

There are no federal or state provisions that regulate the HEC market. The Australian Securities and Investments Commission (ASIC) recently released a report into home equity release products that provided advice to potential consumers and committed ASIC to promoting industry best practice and reducing risks for consumers.

A number of Australian financial institutions formed an organisation called the Senior Australians Equity Release Association of Lenders (SEQUAL) in 2005 to develop a voluntary code for its members.

SEQUAL Code of Conduct - www.sequal.com.au

Each Member of SEQUAL agrees its equity release product(s) will adhere to, and be measured against the following Code of Conduct in dealing with Senior Australians their families and advisers. As a minimum, Members of SEQUAL shall:

• Treat all borrowers with dignity and respect.
• Participate in an ASIC approved External Dispute Resolution Scheme.
• Ensure that all products carry a clear and transparent “no negative equity” or “non-recourse” guarantee. That is, the Borrower(s) will never owe more than the net realisable value of their property, provided the terms and conditions of the loan have been met.
• Strongly encourage Borrower(s) to discuss the transaction with family members and to seek independent financial advice from a qualified financial adviser.
• Strongly encourage Borrower(s) to discuss the transaction with Centrelink to ensure they fully understand the impact, if any, on their Centrelink entitlements.
• Ensure that the Borrower(s) obtains independent legal advice performed by the solicitor of their choice. Prior to the completion of the transaction, the Borrower(s) or their solicitor will be provided with full details of the benefits the Borrower(s) will receive, and the obligations they are entering into.
• Clearly and accurately identify all costs to the Borrower(s) that are associated with the transaction.
• Not assert or imply to a Borrower(s) that the Borrower(s) is obligated to purchase any other product or service offered by the Member or any other company in order to enter into an equity release product.
• Provide in writing, a fair and complete package of equity release documents, covering the benefits and obligations of the product. This will include making available to the Borrower(s) and their advisers a tool illustrating the potential effect of future house values, interest rates and the capitalisation of interest on the loan.
• Ensure that all loans are written under the Uniform Consumer Credit Code (UCCC), irrespective of the use of proceeds from the loan. All Members will comply with the Privacy Act, Trade Practices Act any other relevant Code or Regulation at law.

Canada

In Canada the reverse mortgage market is considered to be immature but high growth is expected driven by an ageing population, high levels of home ownership, and rising property values.

While federal laws establish consumer rights and address issues such as disclosure in general terms, they do not address the home equity conversion market specifically.

In 2001, the state of Manitoba amended its legislation governing general mortgages by adding a new part to specifically address reverse mortgages. That new legislation requires disclosure of terms and conditions in a standard form, receipt of disclosure documentation to be signed for and witnessed by a lawyer and a seven day cooling off period to allow the prospective borrower to change his or her mind. The Manitoba legislation also encourages borrowers to get independent legal and financial advice and encourages consultation with family and advisers. Complaints are handled by Manitoba’s Consumers’ Bureau which can mediate or prosecute as appropriate.

A recent report on reverse mortgages in British Columbia by the Canadian Centre for Elder Law Studies and the British Columbia Law Institute recommended that British Columbia enact legislation that will specifically address reverse mortgages using the Manitoba legislation as a model.⁷

References:

• Davey, J and Wilton, V, Home Equity Release Schemes in New Zealand: Consumer Perspectives, New Zealand Institute for Research on Ageing, July 2006
• Census Snapshot 9: Older People, Census 2001, available at Statistics NZ

• Holm, M, The Investor Column: A Hec of a Good Idea available at sharechat NZ.

• Confidence, Change and Opportunity: Final Report on the Task Force on Regulation of Financial Intermediaries, Ministry of Economic Development, July 2005 available at Ministry of Economic Development.

• The Ministry of Economic Development’s Review of Financial Products and Providers, information available at Ministry of Economic Development.

• Equity Release Products: An ASIC Report, Australian Securities & Investment’s Commission, November 2005
• Report on Reverse Mortgages, The Canadian Centre for Law Studies and the British Columbia Law Institute, February 2006