Concern over a lack of training or expertise among licensees who modify mortgage loans or make or service reverse mortgages has prompted the Pennsylvania Department of Banking (DOB) to issue guidance.

Licensees under Pennsylvania’s Mortgage Licensing Act (MLA) and Consumer Discount Company Act are the subject of two recently issued statements of policy (SOPs). Entities that are partially exempt under the MLA are also treated as licensees for purposes of the SOPs.

The SOP designed to address concerns that licensees primarily involved in mortgage loan originations may not be equipped to properly negotiate mortgage modifications on behalf of struggling borrowers recommends various practices including the following:

  • For loans a licensee does not hold or service, the licensee should be a government-approved counselor or be employed by such a counselor, or verify and document that the borrower has received counseling from a government-approved counselor.

  • Before contracting with a borrower to perform a modification, a licensee should inform the borrower of other appropriate options, such as a modification negotiated by the borrower, a sale of the collateral, or filing for personal bankruptcy.

  • A licensee should not advise a borrower to stop making scheduled payments until a mortgage modification is completely negotiated or charge advance fees for a mortgage loan modification.

  • A mortgage broker or originator engaged in mortgage loan modification activities could be deemed a "credit services organization" under the Pennsylvania Credit Services Act (CSA) and therefore should consider the effect of the CSA on such activities. (The CSA prohibits a credit services organization from engaging in certain practices, requires a prescribed information sheet be provided to the consumer, and requires that a contract between a credit services organization and a consumer include a notice of right to cancel and other information.)

The second SOP aims to address a perceived general lack of reverse mortgage expertise among licensees as well as the risk that a licensee may become financially unable to make disbursements to borrowers or not be fully repaid at maturity because of a decline in property values. The SOP states that the DOB may require licensees who make or service reverse mortgages to have additional amounts of capital and greater liquidity, particularly those who make or service proprietary reverse mortgages that are not federally insured. Recommendations in the SOP include the following:

  • Licensees making proprietary reverse mortgage loans should consider obtaining private insurance products or taking other measures to mitigate the repayment risk, including provisions in their loan agreements that would allow the borrower to be released if the licensee or an assignee should fail to make disbursements; providing procedures for the release of liens in such event to allow the borrower to obtain other financing; and not including provisions that would allow the licensee or an assignee to stop disbursements or change the loan terms if the property value declines.

  • Licensees are strongly cautioned to disclose the possible consequences of a reverse mortgage loan to a nonborrower spouse living in the mortgaged property, such as the possibility that the nonborrower spouse may be unable to keep the property if the applicant leaves because of death or other circumstances.

  • Licensees should generally not offer ancillary or third-party products or services funded by the proceeds of a reverse mortgage loan if the licensee or an affiliate would financially benefit.

  • Licensees should not offer reverse mortgage loans that they know, or reasonably should know, would be unsuitable for an applicant and should take steps to confirm that an applicant has the mental capacity to understand the transaction.

  • If property charges are not escrowed and the borrower fails to pay such charges, a licensee should discuss with the borrower available options for curing the default and alternatives to foreclosure.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; Barbara S. Mishkin, 215.864.8528 or; or Mark J. Furletti, 215.864.8138 or

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