A new state law designed to protect consumers from the risks of “reverse mortgages” mandates greater disclosure of fees charged by lenders but still permits them to penalize borrowers who pay off their loans early.

The allowance for prepayment penalties was described by supporters of the legislation as a compromise measure crafted in the wake of opposition by a national industry lobby group which a year ago scuttled efforts to approve similar legislation.

“Nobody wanted the prepayment penalties,” the state Department of Business Regulation’s director, A. Michael Marques, said yesterday, “[but] if the bill didn’t pass this year, the only one who benefits are the people who are trying to take advantage of the elderly.”

Reverse mortgages allow cash-strapped homeowners who are 62 or older and have paid off their houses to borrow against the equity. The loans do not come due until the borrower sells the house or dies.

If the borrower lives longer than anticipated or the property’s value declines - or both - the homeowner may be unable to sell the house for enough money to repay the mortgage.

Governor Carcieri yesterday signed the reverse mortgage legislation into law at a State House ceremony. (The event was largely a formality; the governor already had signed a House version of the bill, H-7723 Sub A, on June 6.)

The new reverse-mortgage law, effective Jan. 1, mandates greater disclosure of fees charged by lenders, and requires that borrowers receive financial counseling from a government-approved agency prior to entering the loan agreement. The measure also creates a three-day waiting period before the closing is finalized, and prohibits lenders from requiring that borrowers also purchase an annuity as a condition of closing the mortgage.

The new law also sets the terms under which a lender can charge prepayment penalties - a practice prohibited for reverse mortgages that are federally insured.

The prepayment penalties permitted in the new law are designed to enable lenders to recoup the cost of closing the loan “because they are very expensive loans to close,” said Marques, the state regulator. “From a business standpoint … I think that’s just fair.”

The AARP Rhode Island, a lobbying group for the elderly, had opposed allowing for any prepayment penalties because they “trap people in loans that they may have decided weren’t a good thing for them,” said the group’s associate director of advocacy, Stephen Jennings.

Rhode Island is the only state that the AARP is aware of, he said, where prepayment penalties for reverse mortgages are “explicitly permitted.”

Despite these misgivings, Jennings said, “we supported the bill because we think other things in it are important.”

Peter Bell, president of the National Reverse Mortgage Lenders Association, in Washington, said the new law satisfied the concerns of his membership that lenders would still be able to offer reverse mortgages with reduced or no up-front fees in exchange for a requirement that the borrower agree to immediately draw down 75 or 100 percent of the loan.

The association represents about 600 companies involved in originating reverse mortgages, from credit unions to giant financial companies such as Bank of America.

Nationally, about 90 percent of all reverse mortgage loans are federally insured, said Donald L. Redfoot, of the national AARP’s Public Policy Institute.

In fiscal 2007, 536 government-insured reverse mortgages originated in Rhode Island, up from 144 in 2004, according to Redfoot. So far this fiscal year, the originations number 330.

Federally insured reverse mortgages set limits on the loan size, so people whose homes exceed the limit - including most jumbo loans - can only qualify for ones that don’t have government insurance, he said.

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