Reverse Mortgages
Product Complexity and Consumer Protection Issues Underscore Need for Improved Controls over Counseling for Borrowers Gao ID: GAO-09-606 June 29, 2009Reverse mortgages--a type of loan against the borrower's home that is available to seniors--are growing in popularity. However, concerns have emerged about the adequacy of consumer protections for this product. Most reverse mortgages are made under the Department of Housing and Urban Development's (HUD) Home Equity Conversion Mortgage (HECM) program. HUD insures the mortgages, which are made by private lenders, and oversees the agencies that provide mandatory counseling to prospective HECM borrowers. GAO was asked to examine issues and federal activities related to (1) the potential benefits and costs of HECMs to borrowers, (2) misleading HECM marketing, (3) the sale of potentially unsuitable products in conjunction with HECMs, and (4) oversight of HECM counseling providers. To address these objectives, GAO reviewed program rules; examined HECM advertisements; analyzed consumer complaint data; performed limited tests of HUD's internal controls; and interviewed HECM borrowers and agency, industry, and nonprofit officials.
HECMs can provide borrowers with multiple benefits, but they also have substantial costs and are relatively complex. HECMs allow seniors to convert their home equity into flexible cash advances while living in their homes. Additionally, the borrowers or their heirs can fully pay off the HECM by selling the home, even if the amount owed exceeds the current home value. However, HECMs also have large insurance and origination costs. Furthermore, the long-term financial implications of a HECM can be difficult to assess because the borrower's remaining home equity depends on the amount of cash advances and interest rate and house price trends. Various federal agencies have responsibilities for protecting consumers from the misleading marketing of mortgages. Although these agencies have reported few HECM marketing complaints, GAO's limited review of selected marketing materials for reverse mortgages found some examples of claims that were potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics. Federal agency officials indicated that some of these claims raised concerns. For example, the claim of "lifetime income" is potentially misleading because there are a number of circumstances in which the borrower would no longer receive cash advances. Federal agencies have had a limited role in addressing concerns about the sale of potentially unsuitable financial products in conjunction with HECMs ("inappropriate cross-selling"). For example, an annuity that defers payments for a number of years may be unsuitable for an elderly person. HUD is responsible for implementing a provision in the Housing and Economic Recovery Act of 2008 that is intended to restrict inappropriate cross-selling, but the agency is still in the preliminary stages of developing regulations. Some of the states GAO contacted reported cases of inappropriate cross-selling involving violations of state laws governing the sale of insurance and annuities. HUD's internal controls do not provide reasonable assurance that counseling providers are complying with HECM counseling requirements. GAO's undercover participation in 15 HECM counseling sessions found that while the counselors generally conveyed accurate and useful information, none of the counselors covered all of the topics required by HUD, and some overstated the length of the sessions in HUD records. For example, 7 of the 15 counselors did not discuss required information about alternatives to HECMs. HUD has several internal controls designed to ensure that counselors convey the required information to prospective HECM borrowers, but the department has not tested the effectiveness of these controls and lacks procedures to ensure that records of counseling sessions are accurate. Because of these weaknesses, some prospective borrowers may not be receiving the information necessary to make informed decisions about obtaining a HECM.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-606, Reverse Mortgages: Product Complexity and Consumer Protection Issues Underscore Need for Improved Controls over Counseling for Borrowers
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Issues Underscore Need for Improved Controls over Counseling for
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
June 2009:
Reverse Mortgages:
Product Complexity and Consumer Protection Issues Underscore Need for
Improved Controls over Counseling for Borrowers:
GAO-09-606:
GAO Highlights:
Highlights of GAO-09-606, a report to congressional requesters.
Why GAO Did This Study:
Reverse mortgages”a type of loan against the borrower‘s home that is
available to seniors”are growing in popularity. However, concerns have
emerged about the adequacy of consumer protections for this product.
Most reverse mortgages are made under the Department of Housing and
Urban Development‘s (HUD) Home Equity Conversion Mortgage (HECM)
program. HUD insures the mortgages, which are made by private lenders,
and oversees the agencies that provide mandatory counseling to
prospective HECM borrowers.
GAO was asked to examine issues and federal activities related to (1)
the potential benefits and costs of HECMs to borrowers, (2) misleading
HECM marketing, (3) the sale of potentially unsuitable products in
conjunction with HECMs, and (4) oversight of HECM counseling providers.
To address these objectives, GAO reviewed program rules; examined HECM
advertisements; analyzed consumer complaint data; performed limited
tests of HUD‘s internal controls; and interviewed HECM borrowers and
agency, industry, and nonprofit officials.
What GAO Found:
HECMs can provide borrowers with multiple benefits, but they also have
substantial costs and are relatively complex. HECMs allow seniors to
convert their home equity into flexible cash advances while living in
their homes. Additionally, the borrowers or their heirs can fully pay
off the HECM by selling the home, even if the amount owed exceeds the
current home value. However, HECMs also have large insurance and
origination costs. Furthermore, the long-term financial implications of
a HECM can be difficult to assess because the borrower‘s remaining home
equity depends on the amount of cash advances and interest rate and
house price trends.
Various federal agencies have responsibilities for protecting consumers
from the misleading marketing of mortgages. Although these agencies
have reported few HECM marketing complaints, GAO‘s limited review of
selected marketing materials for reverse mortgages found some examples
of claims that were potentially misleading because they were
inaccurate, incomplete, or employed questionable sales tactics. Federal
agency officials indicated that some of these claims raised concerns.
For example, the claim of ’lifetime income“ is potentially misleading
because there are a number of circumstances in which the borrower would
no longer receive cash advances.
Federal agencies have had a limited role in addressing concerns about
the sale of potentially unsuitable financial products in conjunction
with HECMs (’inappropriate cross-selling“). For example, an annuity
that defers payments for a number of years may be unsuitable for an
elderly person. HUD is responsible for implementing a provision in the
Housing and Economic Recovery Act of 2008 that is intended to restrict
inappropriate cross-selling, but the agency is still in the preliminary
stages of developing regulations. Some of the states GAO contacted
reported cases of inappropriate cross-selling involving violations of
state laws governing the sale of insurance and annuities.
HUD's internal controls do not provide reasonable assurance that
counseling providers are complying with HECM counseling requirements.
GAO's undercover participation in 15 HECM counseling sessions found
that while the counselors generally conveyed accurate and useful
information, none of the counselors covered all of the topics required
by HUD, and some overstated the length of the sessions in HUD records.
For example, 7 of the 15 counselors did not discuss required
information about alternatives to HECMs. HUD has several internal
controls designed to ensure that counselors convey the required
information to prospective HECM borrowers, but the department has not
tested the effectiveness of these controls and lacks procedures to
ensure that records of counseling sessions are accurate. Because of
these weaknesses, some prospective borrowers may not be receiving the
information necessary to make informed decisions about obtaining a
HECM.
What GAO Recommends:
GAO makes recommendations designed to address potentially misleading
marketing of HECMs and improve HUD‘s oversight of HECM counseling
providers. The federal banking regulators agreed with our
recommendations. HUD and FTC did not comment on them.
View [hyperlink, http://www.gao.gov/products/GAO-09-606] or key
components. For more information, contact Mathew Scirè at (202) 512-
8678 or sciremj@gao.gov.
[End of section]
Contents:
Letter:
Background:
The Potential Benefits and Costs of HECMs Can Be Varied and Complex,
and Concerns Exist That Some Consumers May Not Fully Understand the
Product:
Although Various Agencies Have Some Responsibility for Assessing HECM
Marketing, Some Advertisements Contain Potentially Misleading Claims:
Development of HECM-Specific, Cross-Selling Regulations Is in
Preliminary Stage, and States Have Uncovered Some Evidence of
Inappropriate Cross-Selling:
HUD's Internal Controls Do Not Provide Reasonable Assurance That
Counseling Agencies Are Complying with HECM Counseling Requirements:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Copy of a Blank Certificate of HECM Counseling:
Appendix III: Our Learning Center's Evaluation of Selected Information
Presented during the Undercover Counseling Sessions:
Appendix IV: Comments from the Board of Governors of the Federal
Reserve System:
Appendix V: Comments from the Federal Deposit Insurance Corporation:
Appendix VI: Comments from the Office of the Comptroller of the
Currency:
Appendix VII: Comments from the Office of Thrift Supervision:
Appendix VIII: Comments from the Department of Housing and Urban
Development:
Appendix IX: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Government Agencies Involved with Consumer Protections for
HECM Borrowers:
Figures:
Figure 1: Comparison of 30-Year Forward and Reverse Mortgages:
Figure 2: Changes in Remaining Home Equity over a 10-Year Period under
Three Economic Scenarios (Borrower Draws Down Loan According to
Historical Patterns):
Figure 3: Example of a Reverse Mortgage Advertisement Containing
Potentially Misleading Statements:
Figure 4: Summary of Counselors' Compliance with HUD's HECM Counseling
Requirements:
Figure 5: Summary of Information Packages:
Abbreviations:
CSBS: Conference of State Bank Supervisors:
FDIC: Federal Deposit Insurance Corporation:
FHA: Federal Housing Administration:
FINRA: Financial Industry Regulatory Authority:
FTC: Federal Trade Commission:
FTC Act: Federal Trade Commission Act:
HECM: Home Equity Conversion Mortgage:
HERA: Housing and Economic Recovery Act of 2008:
HOC: Home Ownership Center:
HUD: Department of Housing and Urban Development:
NAIC: National Association of Insurance Commissioners:
NCUA: National Credit Union Association:
NFCC: National Foundation for Credit Counseling, Inc.
NRMLA: National Reverse Mortgage Lenders Association:
MMI: Money Management International, Inc.
OCC: Office of the Comptroller of the Currency:
OTS: Office of Thrift Supervision:
SEC: Securities and Exchange Commission:
SSA: Social Security Administration:
SSI: Supplemental Security Income:
TALC: total annual loan cost:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 29, 2009:
The Honorable Herb Kohl:
Chairman:
Special Committee on Aging:
United States Senate:
The Honorable Claire C. McCaskill:
United States Senate:
A reverse mortgage is a loan that converts the borrower's home equity
into payments from a lender and, typically, does not require any
repayments as long as the borrower continues to live in the home.
Available to homeowners aged 62 and older, these loans have become an
increasingly popular financial tool for seniors, but concerns have
emerged about the adequacy of consumer protections for reverse mortgage
borrowers. The potential for rapid and continued growth of the industry
has added to these concerns. By 2020, nearly 55 million people in the
United States will be at least 65 years old, many of whom will own
their homes. Furthermore, many senior homeowners rely only on Social
Security payments to meet their financial needs, making reverse
mortgages a potentially attractive source of additional income.
According to industry sources, almost all reverse mortgages are
currently made under the Home Equity Conversion Mortgage (HECM)
program, which is administered by the Department of Housing and Urban
Development (HUD). The HECM program began in 1988, when Congress
authorized HUD to insure reverse mortgages to meet the financial needs
of elderly homeowners by reducing the effect of economic hardship at a
time of reduced income for seniors, while protecting reverse mortgage
lenders and borrowers from financial losses.[Footnote 1] The volume of
HECMs made annually has grown from 157 loans in fiscal year 1990 to
more than 112,000 loans in fiscal year 2008. In addition, recent years
have seen a rapid increase in the number of lenders participating in
the HECM program, with more than 1,500 lenders originating their first
HECM in 2008, bringing the total number of HECM lenders to over 2,700.
[Footnote 2]
The complicated nature of the product and the concern that older
consumers can be more vulnerable to unscrupulous sales practices have
brought reverse mortgages to the attention of consumer advocates,
regulators, and policymakers. Since the inception of the HECM program,
Congress has required prospective borrowers to obtain adequate
counseling by an independent third party so that they could make
informed decisions about whether to obtain a HECM. Borrowers must
complete counseling with a HUD-approved housing counseling agency
before obtaining the loan. Nevertheless, concerns about consumer
protections persist. For example, some consumer advocates have
expressed concern about misleading marketing and inappropriate cross-
selling--the practice of encouraging borrowers to use reverse mortgage
funds to purchase insurance or other products that may be unsuitable to
the borrower's financial situation. The Housing and Economic Recovery
Act of 2008 (HERA) acknowledged some of these concerns by putting in
place additional consumer protection measures.[Footnote 3]
In light of concerns about potentially misleading marketing practices
and the adequacy of relevant consumer protections, as agreed with your
offices, we examine in this report (1) the potential benefits and costs
of HECMs to borrowers, (2) federal agency responsibilities for
protecting consumers from misleading HECM marketing, (3) federal agency
efforts to protect HECM borrowers from inappropriate cross-selling, and
(4) HUD's oversight of HECM counseling providers.
To address these objectives, we spoke with agency, industry, and
nonprofit officials, including those at HUD; federal and state banking
regulators; AARP; and the National Reverse Mortgage Lenders Association
(NRMLA). In addition, to examine the potential benefits and costs of
HECMs to borrowers, we reviewed HUD's regulations, guidance, and
consumer materials related to the program. We also spoke with 18
randomly selected HECM borrowers and constructed scenarios to determine
how various borrower decisions and economic conditions could affect
home equity over the long term. To examine federal agency
responsibilities to protect consumers from misleading HECM marketing,
we identified authorities, standards, and processes that HUD, the
Federal Trade Commission (FTC), and four federal banking regulators use
to identify and address misleading marketing practices. In addition, we
obtained agency information on complaints related to HECM marketing. We
also conducted our own review of HECM marketing materials, which
included a review of the Internet marketing materials for the 12 HECM
lenders that originated at least 1,000 HECMs in fiscal year 2008,
mailed materials from 11 of these 12 lenders, as well as DVDs and other
materials from HECM lenders that advertise on television. We also
conducted Internet searches for materials with potentially misleading
statements and collected materials from seven reverse mortgage
information seminars. We attended seminars in Florida and California--
states with among the largest number of HECMs--and seminars in Maryland
and Michigan, for purposes of geographic diversity. To examine the
steps federal agencies have taken to protect HECM borrowers from
inappropriate cross-selling, we reviewed the HERA provisions on cross-
selling, HUD's actions to implement the provisions, and other HUD and
federal regulator activities related to these practices. In addition,
we compiled examples from state insurance regulators of cross-selling
that violated state insurance laws. To examine HUD's oversight of HECM
counseling providers, we identified the internal controls that HUD
currently has in place to ensure compliance with HUD counseling
requirements and tested the effectiveness of these controls by
conducting 15 undercover counseling sessions with HUD-approved
counselors. For each session, we determined whether counselors covered
the required topics and met other requirements, such as accurately
recording the length of the counseling session. We interviewed HUD
field and headquarters staff about the procedures they use to evaluate
counseling agency performance. Finally, we reviewed and conducted
limited testing of HUD's controls over the process that HECM providers
are required to follow for referring potential borrowers to counseling
agencies.
We conducted this performance audit from April 2008 through June 2009,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. Our investigative work was
performed in accordance with standards prescribed by the Council of the
Inspectors General on Integrity and Efficiency. Appendix I contains a
more extensive discussion of our scope and methodology.
Background:
A reverse mortgage is a loan against the borrower's home that the
borrower does not need to repay for as long as the borrower meets
certain conditions. These conditions, among others, require the
borrower to live in the home, pay property taxes and homeowners'
insurance, maintain the property, and retain the title in his or her
name. [Footnote 4] Reverse mortgages typically are "rising debt,
falling equity" loans, in which the loan balance increases and the home
equity decreases over time. As the borrower receives payments from the
lender, the lender adds the principal and interest to the loan balance,
reducing the homeowner's equity. This is the opposite of what happens
in forward mortgages, which are characterized as "falling debt, rising
equity" loans. With forward mortgages, monthly loan payments made to
the lender add to the borrower's home equity and decrease the loan
balance. (See figure 1).
Figure 1: Comparison of 30-Year Forward and Reverse Mortgages:
[Refer to PDF for image: two stacked vertical bar graphs]
Traditional 30-year forward mortgage:
Age of loan in years: 1;
Loan Balance (debt): $236,459;
Home Equity: $69,540.9.
Age of loan in years: 2;
Loan Balance (debt): $232,737;
Home Equity: $79,382.9.
Age of loan in years: 3;
Loan Balance (debt): $228,825;
Home Equity: $89,537.7.
Age of loan in years: 4;
Loan Balance (debt): $224,712;
Home Equity: $100,018.
Age of loan in years: 5;
Loan Balance (debt): $220,389;
Home Equity: $110,835.
Age of loan in years: 6;
Loan Balance (debt): $215,845;
Home Equity: $122,004.
Age of loan in years: 7;
Loan Balance (debt): $211,068;
Home Equity: $133,537.
Age of loan in years: 8;
Loan Balance (debt): $206,047;
Home Equity: $145,451.
Age of loan in years: 9;
Loan Balance (debt): $200,769;
Home Equity: $157,759.
Age of loan in years: 10;
Loan Balance (debt): $195,221;
Home Equity: $170,477.
Age of loan in years: 11;
Loan Balance (debt): $189,389;
Home Equity: $183,623.
Age of loan in years: 12;
Loan Balance (debt): $183,259;
Home Equity: $197,213.
Age of loan in years: 13;
Loan Balance (debt): $176,815;
Home Equity: $211,267.
Age of loan in years: 14;
Loan Balance (debt): $170,042;
Home Equity: $225,802.
Age of loan in years: 15;
Loan Balance (debt): $162,922;
Home Equity: $240,839.
Age of loan in years: 16;
Loan Balance (debt): $155,438;
Home Equity: $256,398.
Age of loan in years: 17;
Loan Balance (debt): $147,570;
Home Equity: $272,502.
Age of loan in years: 18;
Loan Balance (debt): $139,301;
Home Equity: $289,173.
Age of loan in years: 19;
Loan Balance (debt): $130,608;
Home Equity: $306,436.
Age of loan in years: 20;
Loan Balance (debt): $121,470;
Home Equity: $324,314.
Age of loan in years: 21;
Loan Balance (debt): $111,865;
Home Equity: $342,835.
Age of loan in years: 22;
Loan Balance (debt): $101,769.
Home Equity: $362,025.
Age of loan in years: 23;
Loan Balance (debt): $91,155;
Home Equity: $381,914.
Age of loan in years: 24;
Loan Balance (debt): $79,999;
Home Equity: $402,532.
Age of loan in years: 25;
Loan Balance (debt): $68,272;
Home Equity: $423,909.
Age of loan in years: 26;
Loan Balance (debt): $55,946;
Home Equity: $446,079.
Age of loan in years: 27;
Loan Balance (debt): $42,988;
Home Equity: $469,077.
Age of loan in years: 28;
Loan Balance (debt): $29,368;
Home Equity: $492,939.
Age of loan in years: 29;
Loan Balance (debt): $15,051;
Home Equity: $517,702.
Age of loan in years: 30;
Loan Balance (debt): 0;
Home Equity: $543,409.
Reverse mortgage, over 30 years:
Age of loan in years: 1;
Loan Balance (debt): $200,788;
Home Equity: $83,792.
Age of loan in years: 2;
Loan Balance (debt): $208,357;
Home Equity: $81,915.
Age of loan in years: 3;
Loan Balance (debt): $216,194;
Home Equity: $79,883.
Age of loan in years: 4;
Loan Balance (debt): 224,310;
Home Equity: $77,688.
Age of loan in years: 5;
Loan Balance (debt): $232,715;
Home Equity: $75,324.
Age of loan in years: 6;
Loan Balance (debt): $241,419;
Home Equity: $72,781.
Age of loan in years: 7;
Loan Balance (debt): $250,432;
Home Equity: $70,051.
Age of loan in years: 8;
Loan Balance (debt): $259,766;
Home Equity: $67,127.
Age of loan in years: 9;
Loan Balance (debt): $269,432;
Home Equity: $63,999.
Age of loan in years: 10;
Loan Balance (debt): $279,441;
Home Equity: $60,658.
Age of loan in years: 11;
Loan Balance (debt): $289,807;
Home Equity: $57,094.
Age of loan in years: 12;
Loan Balance (debt): $300,542;
Home Equity: $53,298.
Age of loan in years: 13;
Loan Balance (debt): $311,658;
Home Equity: $49,259.
Age of loan in years: 14;
Loan Balance (debt): $323,169;
Home Equity: $44,965.
Age of loan in years: 15;
Loan Balance (debt): $335,090;
Home Equity: $40,407.
Age of loan in years: 16;
Loan Balance (debt): $347,435;
Home Equity: $35,572.
Age of loan in years: 17;
Loan Balance (debt): $36,0219;
Home Equity: $30,448.
Age of loan in years: 18;
Loan Balance (debt): $373,458;
Home Equity: $25,023.
Age of loan in years: 19;
Loan Balance (debt): $387,167;
Home Equity: $19,283.
Age of loan in years: 20;
Loan Balance (debt): $401,365;
Home Equity: $13,215.
Age of loan in years: 21;
Loan Balance (debt): $416,067;
Home Equity: $6,804.
Age of loan in years: 22;
Loan Balance (debt): $431,292;
Home Equity: $37.
Age of loan in years: 23"
Loan Balance (debt): $447,058
Home Equity: 0
Age of loan in years: 24;
Loan Balance (debt): $463,386;
Home Equity: 0.
Age of loan in years: 25;
Loan Balance (debt): $480,294;
Home Equity: 0.
Age of loan in years: 26;
Loan Balance (debt): $497,803;
Home Equity: 0.
Age of loan in years: 27;
Loan Balance (debt): $515,935;
Home Equity: 0.
Age of loan in years: 28;
Loan Balance (debt): $534,712;
Home Equity: 0.
Age of loan in years: 29;
Loan Balance (debt): $55,4157;
Home Equity: 0.
Age of loan in years: 30;
Loan Balance (debt): $574,293;
Home Equity: 0.
Source: GAO.
Note: The data in this figure are based on a starting house value of
$300,000, with an annual 2 percent home appreciation rate. The interest
rates are assumed to be fixed at 5 percent for the forward mortgage and
3 percent for the reverse mortgage.
[End of figure]
The Housing and Community Development Act of 1987 (Pub. L. No. 100-242)
authorized HECMs as a demonstration program in HUD. It was the first
nationwide reverse mortgage program--available in all 50 states, the
District of Columbia, and Puerto Rico--that offered the possibility of
lifetime home occupancy to elderly homeowners. Homeowners aged 62 or
over with a significant amount of home equity are eligible, as long as
they live in the house as the principal residence, are not delinquent
on any federal debt, and live in a single-family residence. If the
borrower has any remaining balance on a forward mortgage, this
generally must be paid off first (typically, taken up-front from the
reverse mortgage). In addition, the condition of the house must meet
HUD's minimum property standards, but a portion of the HECM can be set
aside for required repairs. The borrower makes no monthly payments, and
there are no income or credit requirements to qualify for the mortgage.
The amount of money that a lender can advance to a HECM borrower (loan
amount) depends on three main factors. First, the loan amount is based
on the "maximum claim amount," which is defined as the lesser of the
appraised value of the house or the Federal Housing Administration
(FHA) loan limit (the highest mortgage value HUD will insure). In the
past year, Congress has raised the FHA loan limit for HECMs twice, to
the current limit of $625,500 nationwide.[Footnote 5] Second, the age
of the borrower affects the borrower's loan amount--the older the
borrower, the higher the loan amount. However, if there is more than
one homeowner, the loan amount is based on the age of the youngest
borrower. Third, the interest rate also affects the loan amount.
Typically, the lower the interest rate, the higher the loan amount.
Since the inception of the HECM program, Congress has mandated that
borrowers receive information about the financial implications of these
loans, allowing consumers to make informed decisions. In response, HUD
developed a counseling program, working with nonprofits, such as the
AARP Foundation,[Footnote 6] to develop training courses and with a
network of qualified counselors. Counselors may conduct counseling
sessions face-to-face or by telephone. HUD has stated that upon the
completion of HECM counseling, prospective borrowers should be able to
make an independent, informed decision on whether this product would
meet their needs. While a lender may order a preliminary title search
before the prospective borrower receives counseling, the lender may not
process a loan application until the counseling has been completed.
Furthermore, HUD requires lenders to provide prospective borrowers with
a list of HUD-approved counseling agencies from which to choose.
A number of federal and state agencies have roles in overseeing the
reverse mortgage market. FHA administers the HECM program and issues
mortgagee letters to HECM lenders to communicate or clarify HUD
requirements. HUD's four Home Ownership Centers (HOC) perform a number
of insurance processing and quality control functions and conduct
evaluations of HECM counseling providers. In addition, FTC, federal and
state banking regulators, and state insurance regulators are involved
with various aspects of consumer protections for HECM borrowers. Table
1 summarizes the agencies' responsibilities in this area.
Table 1: Government Agencies Involved with Consumer Protections for
HECM Borrowers:
Agency: HUD;
Key HECM-related responsibilities:
* Insures HECMs and enforces HECM program requirements;
* Monitors counseling agencies' compliance with HECM counseling
requirements.
Agency: FTC;
Key HECM-related responsibilities:
* Enforces the Federal Trade Commission Act (FTC Act)--which prohibits
unfair or deceptive acts or practices--with nonbank financial
companies, such as mortgage brokers.
Agency: Federal banking regulators;
* Board of Governors of the Federal Reserve System;
* Office of the Comptroller of the Currency;
* Federal Deposit Insurance Corporation;
* Office of Thrift Supervision;
* National Credit Union Association;
Key HECM-related responsibilities:
* For federally regulated lenders, including those that offer HECMs,
enforce compliance with relevant laws and regulations, such as the FTC
Act and the Truth in Lending Act, primarily through periodic
examinations.
Agency: State banking regulators;
Key HECM-related responsibilities:
* For state-regulated lenders, including those that offer HECMs,
enforce compliance with relevant laws and regulations, primarily
through periodic examinations.
Agency: State insurance regulators;
Key HECM-related responsibilities:
* Enforce state insurance laws, such as those against the sale of
unsuitable insurance products.
Source: GAO.
[End of table]
The Potential Benefits and Costs of HECMs Can Be Varied and Complex,
and Concerns Exist That Some Consumers May Not Fully Understand the
Product:
While HECMs can provide senior homeowners with multiple types of
benefits, including the flexibility to use the money received and
protection against owing more than the value of the house when the loan
comes due, HECM costs can be substantial. In addition, how borrowers
draw down the loan, as well as changes in house values and interest
rates, can affect the HECM borrowers' remaining home equity. Consumer
advocates and others have expressed concern that some borrowers may not
fully understand the complexities of HECM terms and costs, but some
regulators have taken actions to promote better consumer understanding.
HECMs Can Provide Multiple Types of Benefits:
Congress established the HECM program as a way to alleviate economic
hardship caused by the increasing costs of health, housing, and
subsistence needs at a time in life when income is reduced. Consistent
with this goal, HECMs allow senior homeowners to convert their home
equity into cash advances, while maintaining ownership of their homes.
HECM borrowers have indicated that the mortgages have helped them to
meet their financial needs. According to a 2006 AARP survey of reverse
mortgage borrowers, including HECM borrowers, 83 percent of respondents
said their loans had completely or mostly met their financials needs,
and another 12 percent said the loans partly met their needs.[Footnote
7] In addition, we interviewed 18 randomly selected HECM borrowers, 11
of whom said their loans completely met their financial needs and 6 of
whom said the loans partly met their financial needs.
The money that borrowers receive from a HECM can be used for any
purpose, and the loan does not have to be repaid until the borrower
dies, sells the house, moves, or violates other conditions of the
mortgage. Because there are no restrictions on how the money received
from a HECM can be used, borrowers can choose to use the funds for
necessities, such as housing, medication, or groceries, or for other
purposes, such as vacations. Borrowers surveyed by AARP cited "paying
off an existing mortgage," "home repairs/improvements," and "improved
quality of life" as the most common "main uses" of reverse mortgage
funds. In our interviews with HECM borrowers, borrowers cited
additional reasons for looking into a reverse mortgage, including
making insurance payments, providing money to children and
grandchildren, paying off nonmortgage loans, and supplementing limited
retirement income. Furthermore, some borrowers also may use HECM money
to address issues associated with failing health. For example, a
National Council on Aging report discusses the use of reverse mortgages
to fund in-home services to allow seniors to age in place[Footnote 8].
In addition to unrestricted use of the money, HECM borrowers are not
required to make monthly interest or principal payments to the lender
as long as the borrower lives in the house. However, borrowers must
continue to pay property taxes and homeowners' insurance, and they must
maintain the condition of the house.
Borrowers also can choose different ways to receive money from a HECM--
as monthly payments, a line of credit, or a combination of both.
Monthly payments can be received for a fixed period (term payments) or
for as long as the borrower has the loan (tenure payments), and lines
of credit can be accessed at any rate the borrower chooses (including
receiving all of the money up front). Borrowers who obtained HECMs in
fiscal year 2008 mostly chose the line-of-credit payment option.
According to HUD data, 89 percent of these borrowers chose to receive
their money solely as a line of credit, and an additional 6 percent
chose to receive a line of credit in combination with term or tenure
monthly payments. Generally, those choosing a line of credit withdraw
about 60 percent of their funds at the loan's inception.
Another benefit of HECMs is the potential growth over time in the
amount of funds available to the borrower under each of the payment
plans. For example, for borrowers who choose a line of credit but do
not draw down all of the funds up front, any remaining line of credit
grows by the same rate as the interest rate on the mortgage, plus 0.5
percent. To illustrate this HECM feature, consider a borrower who
receives a line of credit of $100,000, withdraws $20,000 up front, and
keeps the remaining $80,000 in the line of credit. If the borrower does
not draw down any additional funds during the next year, and the
interest rate plus 0.5 percent mortgage insurance premium were equal to
3 percent, the borrower's credit line would grow to $82,400 at the end
of 1 year.
FHA mortgage insurance benefits borrowers in several ways. First,
lenders can provide borrowers with higher loan amounts than they could
without the insurance. Second, the insurance guarantees that HECM
borrowers will have access to the full amount of promised loan funds,
regardless of how long the borrower lives in the house, of changes in
the home value, or of changes in the circumstances of the lender. For
example, the lender may assign the loan to FHA once the loan balance
reaches 98 percent of the maximum claim amount, and FHA will continue
making payments to the borrower if the borrower has remaining funds in
a line of credit or still is receiving monthly payments. According to
HUD, program experience thus far suggests that lenders assign to FHA
about 25 percent of HECMs made in any given year. Similarly, if a
lender goes out of business, the lender can assign the HECM to FHA,
protecting the borrower from any risk of losing promised loan funds.
Finally, FHA insurance protects borrowers from owing more than the
value of the house when the loan becomes due. When a HECM becomes due,
the borrower or heir to the borrower can retain ownership of the home
and repay the loan in full, including all accumulated principal and
interest charges. However, if the borrower or heir sells the home, he
or she will not be responsible for any loan amount above the value of
the house.
Finally, HERA authorized a "HECM for Purchase" program for seniors who
want to use a HECM to buy a new home. Unlike a traditional HECM, a HECM
for purchase is made against the value of the home to be purchased,
rather than against the value of a home the borrower already owns.
Before the HECM for purchase program was available, seniors wanting
both to buy a new home and obtain a HECM would have had to conduct two
transactions--first to buy the home with a forward mortgage, then to
obtain a HECM to pay off the balance of that forward mortgage. The HECM
for purchase program allows a senior to simultaneously buy a new home
and obtain a HECM in a single transaction with a single set of closing
costs, thereby reducing the cost to the senior. For example, with the
HECM for purchase program, a senior who wants to buy a $300,000 home
could use a HECM to partially finance this purchase. In this example,
the senior qualifies for an $180,000 HECM on the basis of his age, the
interest rate, and the value of the home to be purchased--the same
factors used to determine the amount of a traditional HECM. The senior
would combine the $180,000 in loan funds with $120,000 of his own--for
example, from personal savings or money from the sale of his current
home--to fully purchase the new home. He then would have no monthly
mortgage payments and would avoid the closing costs of first obtaining
a forward mortgage. As with a traditional HECM, the loan would become
due when the senior died, sold the house, or permanently moved out of
the house.
HECM Costs Can Be Substantial:
While HECMs can provide many benefits, the up-front insurance premiums
and origination fees of HECMs can be substantial. HUD permits borrowers
to finance these costs in the mortgage.
* Mortgage insurance premium: FHA charges insurance premiums to cover
the potential cost of paying insurance claims. FHA assesses a one-time,
nonrefundable initial mortgage insurance premium equal to 2 percent of
the maximum claim amount. The maximum claim amount is always higher
than the amount a borrower can receive in HECM payments from the
lender. However, because the HECM loan balance (with accumulated
interest and fees) will exceed the amount a borrower receives in
payments and potentially reach the maximum claim amount, FHA charges
the mortgage insurance premium on the basis of the maximum claim
amount.
* Origination fee: At the time of closing, lenders can charge an
origination fee equal to the greater of $2,500 or 2 percent of the
maximum claim amount, up to $200,000 plus 1 percent of any portion of
the claim amount greater than $200,000, with the total origination fee
not to exceed $6,000.[Footnote 9]
To illustrate these up-front costs, consider a HECM borrower with a
home value of $300,000. In this case, the borrower would pay (either
out of pocket or financed through the mortgage) total up-front
insurance and origination costs of $11,000 ($6,000 for the mortgage
insurance premium and $5,000 for the origination fee). HECMs also have
other up-front closing costs, such as appraisal and title search fees.
In addition to the up-front premiums and fees, lenders add monthly
servicing fees, interest charges, and monthly premiums to HECM
balances.
* Servicing fee: A lender's monthly servicing fee may not exceed $30
per month for fixed-rate or annually adjustable loans, and $35 for
monthly adjustable loans. To finance this fee with the loan, FHA
requires lenders to determine a prescribed dollar amount and deduct
that amount, called the servicing fee set-aside, from the amount of
loan funds available to the borrower. Each month, the lender deducts
the servicing fee from this set-aside and adds it to the borrower's
loan balance.
* Interest charges: Monthly interest charges are also added to the
borrower's loan balance. Most HECMs have adjustable interest rates.
* Monthly mortgage insurance premium: Finally, in addition to the up-
front mortgage insurance premium that we have previously described, FHA
charges a monthly mortgage insurance premium based on the loan balance.
FHA has set the monthly premium at an annual rate of 0.5 percent, and
lenders also add this premium to the borrower's loan balance each
month.
Because HECM borrowers do not make monthly payments to the lender,
borrowers are responsible for the total amount of servicing fees,
interest charges, and monthly mortgage insurance premiums accrued over
the life of the loan, as well as any financed origination fees and up-
front insurance premiums, when the loan becomes due. Therefore, the
longer the borrower has the loan, the longer the borrower benefits from
access to home equity without experiencing any of the costs.
Multiple Factors Can Affect the Borrower's Remaining Home Equity:
Multiple factors, including borrower decisions, interest rates, and
home values, can affect the amount of home equity remaining--that is,
the value of the home minus any debt against it--when a HECM comes due.
The contingent nature of remaining equity could have implications for
borrowers who may hope to have equity left over--whether for themselves
or their heirs--after the HECM is repaid. According to AARP Foundation
consumer education materials, prospective HECM borrowers should
consider the amount of home equity that might be left at the end of the
loan. Most of the borrowers with whom we spoke said that having
remaining equity was very or somewhat important to them, citing various
reasons, such as wanting to leave remaining equity to children or
grandchildren or to have money left over to fund their retirement.
As we have previously noted, the "rising debt, falling equity" nature
of reverse mortgages means that over time, the amount of equity the
borrower has in the home decreases as the loan balance increases
(unless the home appreciates at more than a moderate rate). Several
factors affect the rate at which equity changes and, therefore, the
amount of equity the borrower will have to keep or pass on to heirs
when the loan becomes due:
* Borrower decisions: The amount of the available funds borrowed will
affect the amount of the remaining home equity. The more the borrower
draws from the loan, the less remaining home equity the borrower will
have.
* Interest rates: As we have previously discussed, because most HECMs
have interest rates that vary, economic factors that determine interest
rates also will affect the remaining home equity over the long term.
* Home values: The amount of home equity remaining for the borrower or
heirs will be the value of the home, minus the amount owed on the HECM.
Thus, whether and how much the value of the home appreciates also will
affect the amount of remaining home equity.
Figure 2 illustrates how interest rates and home values can affect
remaining home equity over a 10-year period. The figure reflects three
different interest and house appreciation rate assumptions for a
borrower who draws down the HECM funds in a manner consistent with
historical average borrower profiles:[Footnote 10]
1. Economic forecasts: Interest and appreciation rates follow economic
forecasts for 2008 through 2017.[Footnote 11]
2. Constant rates: Interest rates remain constant at the starting rate,
and houses appreciate at a constant 4 percent per year.
3. Historical patterns: Interest and house appreciation rates repeat
the pattern seen from 1998 through 2007.[Footnote 12]
As shown in figure 2, if interest and appreciation rates were to vary
monthly on the basis of economic forecasts for 2008 through 2017, the
borrower would have about $11,750 of remaining home equity--after
repaying the HECM--at the end of 10 years. However, if interest rates
were to stay constant at the initial rate, and house values were to
appreciate by 4 percent annually, the borrower would have more than
$102,000 in remaining home equity. Finally, if interest and
appreciation rates were to repeat the pattern seen from 1998 through
2007, the borrower would have the most remaining equity of the three
scenarios--that is, more than $191,000.
Figure 2: Changes in Remaining Home Equity over a 10-Year Period under
Three Economic Scenarios (Borrower Draws Down Loan According to
Historical Patterns):
[Refer to PDF for image: multiple line graph]
Year-end: 0;
Historic Interest and appreciation rate: $128,000 net equity;
Constant Interest and appreciation rate: $128,000 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$128,000 net equity.
Year-end: 1;
Historic Interest and appreciation rate: $132,927 net equity;
Constant Interest and appreciation rate: $132,212 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$108,576 net equity.
Year-end: 2;
Historic Interest and appreciation rate: $131,939 net equity;
Constant Interest and appreciation rate: $126,058 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$89.211 net equity;
Year-end: 3;
Historic Interest and appreciation rate: $135,702 net equity;
Constant Interest and appreciation rate: $122,436 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$73,113 net equity.
Year-end: 4;
Historic Interest and appreciation rate: $142,366 net equity;
Constant Interest and appreciation rate: $119,676 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$66,052 net equity.
Year-end: 5;
Historic Interest and appreciation rate: $154,446 net equity;
Constant Interest and appreciation rate: $117,814 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$58,292 net equity.
Year-end: 6;
Historic Interest and appreciation rate: $169,111 net equity;
Constant Interest and appreciation rate: $116,532 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$53,158 net equity.
Year-end: 7;
Historic Interest and appreciation rate: $189,914 net equity;
Constant Interest and appreciation rate: $114,253 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$44.434 net equity.
Year-end: 8;
Historic Interest and appreciation rate: $211,686 net equity;
Constant Interest and appreciation rate: $111,107 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$36,133 net equity.
Year-end: 9;
Historic Interest and appreciation rate: $211,470 net equity;
Constant Interest and appreciation rate: $107.233 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$23,083 net equity.
Year-end: 10;
Historic Interest and appreciation rate: $191,625 net equity;
Constant Interest and appreciation rate: $102,773 net equity;
Variable Interest and appreciation rate, based on economic forecasts:
$11,748 net equity.
Source: GAO.
[End of figure]
Concerns Exist That Some Consumers May Not Fully Understand HECM
Complexities:
HUD and industry officials indicated that the complex nature of HECMs
may make them difficult for some borrowers to understand. Specifically,
officials expressed concern about some borrowers' understanding of the
nature and costs of the loan.
* HECM is a loan product: AARP officials told us that some borrowers
were not aware that they were borrowing money, rather than drawing
directly from the equity in their homes. Similarly, the president of
NRMLA provided an example of a consumer who did not understand why she
owed more than the amount she borrowed, not realizing that her loan was
accumulating interest and fees. In our interviews with borrowers, 2 of
the 18 borrowers with whom we spoke did not understand that the money
they were drawing was accumulating interest, indicating that they may
not have understood that their HECM was a loan.
* Costs of HECMs: Some borrowers may not readily understand some of the
costs of a reverse mortgage. For example, 1 borrower we interviewed
said he was surprised by the $35 monthly servicing charge, and another
borrower said she had not known how high the fees would be and was
surprised by the amount of servicing fees the lender charged in a year.
Similarly, some borrowers may understand the concept of interest
charges, but may not understand that their HECM interest rate is
variable and can increase over time. For example, several borrowers
with whom we spoke did not know the type of interest rate they had, and
1 borrower said he was surprised that his interest rate varied.
* Effect of a HECM on remaining home equity: AARP representatives told
us that some seniors may not understand that reverse mortgages result
in "rising debt and falling equity," which differs from the "falling
debt, rising equity" result of a forward mortgage. Furthermore, our
interviews with HECM borrowers illustrate how some may not be aware of
all of the factors that can affect how much home equity they will have
remaining after the reverse mortgage is repaid. For example, when we
asked if changes in house values could affect their remaining home
equity, several borrowers responded that they could not.
Regulators and others have taken some actions to promote better
consumer understanding of the costs and terms of HECMs. For example, as
we discuss later in this report, HUD has taken some steps to improve
the types and quality of information provided to prospective HECM
borrowers during the required HECM counseling sessions. In addition,
various entities, including FTC, the Financial Industry Regulatory
Authority (FINRA), state agencies, and consumer groups have issued fact
sheets and tips for consumers interested in reverse mortgages. For
example, FTC has issued a fact sheet on reverse mortgages to help
borrowers understand the product, and the Federal Deposit Insurance
Corporation (FDIC) has included information on reverse mortgages in its
consumer financial education program. In addition, Massachusetts has a
Web site on "What Borrowers Need to Know" about reverse mortgages.
Although Various Agencies Have Some Responsibility for Assessing HECM
Marketing, Some Advertisements Contain Potentially Misleading Claims:
Various state and federal agencies have some responsibility for
assessing marketing for mortgage products, including FTC, federal and
state banking regulators, and HUD. Agency officials indicated that
while complaints are one factor that could trigger more extensive
assessments of marketing materials, they have received few complaints
about reverse mortgage marketing. Our review of selected advertisements
found examples of marketing claims that were potentially misleading
because they were inaccurate, incomplete, or used questionable sales
tactics. Federal agency officials agreed that some of these
advertisements raised concerns.
FTC, Banking Regulators, and HUD Share Responsibility for Assessing
Marketing and Enforcing Standards:
Several federal and state agencies have a role in assessing and
enforcing standards for the marketing of mortgage products. These
agencies have responsibility over different segments of the mortgage
market and may focus on different aspects of marketing claims. However,
the federal and state agencies involved with assessing reverse mortgage
marketing have not specifically focused on this product.
FTC:
FTC has responsibility for protecting consumers against unfair or
deceptive practices originating from nonbank financial companies, such
as mortgage brokers. Specifically, FTC enforces section 5 the FTC Act,
which broadly prohibits unfair or deceptive acts or practices in
commerce. Section 5(n) of the FTC Act defines "unfair" to mean
practices that cause or are likely to cause substantial injury that
cannot be reasonably avoided by consumers and is not outweighed by
countervailing benefits to consumers or to competition. FTC has defined
"deceptive" to mean any material representation or omission of
information, or practice that is likely to mislead consumers who are
acting reasonably under the circumstances. Misleading information is
"material" to consumers if it is likely to affect the consumer's
decision to purchase a product or service. For some products, including
forward mortgage products, FTC officials stated that they have
conducted systematic searches of all forms of media, including
Internet, print, and television advertisements for potential violations
of the FTC Act. Violators of the FTC Act could be subject to actions
ranging from warning letters to cease-and-desist orders. For example,
in 2007, FTC sent warning letters to 200 forward mortgage lenders
identifying potentially deceptive advertisements that the lenders had
run and advising the lenders to review their marketing practices to
ensure they complied with the law.
FTC officials said they have not systematically searched for
potentially misleading reverse mortgage marketing, and have not brought
any law enforcement actions related to reverse mortgage marketing.
However, FTC officials did note that they are maintaining an awareness
of the potential risks associated with reverse mortgage marketing. For
example, FTC staff said that they monitor their consumer complaint
database for complaints about reverse mortgage marketing. In addition,
FTC formed a task force of state and federal regulators and law
enforcement agencies, in part to learn about complaints related to
reverse mortgages that may not be captured by FTC's database. The FTC
officials said the task force will allow them to take early action if
problems related to reverse mortgages begin to surface. In addition,
FTC has developed educational materials for reverse mortgage
counselors, which include information on identifying deceptive claims
related to reverse mortgages. The FTC officials noted that because
counselors are informed about the product, they may be well-positioned
to help consumers identify questionable marketing claims and practices.
Furthermore, FTC officials told us that they plan to speak about
marketing issues at an upcoming reverse mortgage industry conference.
Federal Banking Regulators:
HECM lenders that are regulated by one of the federal banking
regulators--the Board of Governors of the Federal Reserve System
(Federal Reserve), Office of the Comptroller of the Currency (OCC),
Office of Thrift Supervision (OTS), FDIC, or the National Credit Union
Association (NCUA)--are subject to compliance examinations that could
include a review of HECM marketing materials.[Footnote 13] Each of the
banking regulators with whom we spoke said that reverse mortgages have
been included in compliance examinations of lenders, but because few of
their regulated lenders offer reverse mortgages, they have not
conducted many examinations that have included these loans. In
addition, among lenders who offer the product, reverse mortgages do not
make up a significant portion of bank activity--by one estimate, 1
percent of mortgage portfolios. Federal regulators said when compliance
examinations are conducted, they could include an assessment of whether
the materials comply with FTC Act standards. In addition, OTS prohibits
the thrifts that it regulates from using marketing materials that
contain inaccurate information or misrepresents the services offered--
a standard that an OTS official described as being broader than that
set by the FTC Act.[Footnote 14] Officials at each of these federal
banking regulators noted that they are not aware of any violations
related to reverse mortgage marketing. As FTC has been doing, federal
banking regulators are maintaining an awareness of the potential risks
associated with reverse mortgages, which could include those associated
with reverse mortgage marketing. Specifically, the Consumer Compliance
Task Force of the Federal Financial Institutions Examination Council--
the interagency body that includes the federal banking regulators and
develops guidance for federal bank examiners--recently formed a working
group on reverse mortgages.
State Banking Regulators:
Some HECM lenders are regulated at the state level, with HECM marketing
materials subject to state compliance examinations. We obtained
information on state agency efforts to review reverse mortgage
marketing materials through the Conference of State Bank Supervisors
(CSBS), which sent a set of standardized questions we developed to all
50 states and the District of Columbia. Of the 35 state banking
regulators that responded to the questions, 22 said they routinely
examine marketing materials as part of compliance examinations.
However, only 1 state banking regulator--the Idaho Department of
Finance--reported taking action against a lender because of reverse
mortgage marketing. In addition, we learned that the Massachusetts
Division of Banks issued a HECM lender a cease-and-desist order for
marketing HECMs as "government benefits."
State banking regulators also are maintaining an awareness of the
potential risks associated with reverse mortgages. For example, these
regulators also formed a task force to examine consumer protections for
reverse mortgages, including those related to reverse mortgage
marketing. In addition, CSBS and the American Association of
Residential Mortgage Regulators recently developed reverse mortgage
examination guidelines for state regulators conducting reverse mortgage
compliance examinations.[Footnote 15] These guidelines contain items
that state regulators could review, including whether the institution
uses any form of solicitation that appears to be generated by the
government or can be interpreted to be misleading to the consumer.
HUD:
HUD also exercises limited regulatory authority over the marketing
activity of HECM lenders to ensure that lenders' advertisements do not
imply endorsement by HUD or FHA. Actions that HUD could take range from
asking for the removal or clarification of a marketing claim to a
referral to the Mortgagee Review Board.[Footnote 16] HUD officials
cited one instance in which they referred a lender to the board for
misrepresenting the HECM as a "government rescue loan." HUD may also
make a referral to the Department of Justice, which has jurisdiction
over criminal prosecution.[Footnote 17]
Of the federal regulators, HUD is the only agency that has taken action
against an entity as a result of misleading reverse mortgage marketing.
However, HUD officials said they do not actively monitor HECM
marketing, and do not review HECM marketing materials as part of
routine assessments of HECM lenders.
Agencies Have Received Few Complaints about HECM Marketing:
Some agencies with whom we spoke indicated that while complaints could
trigger more extensive assessments of marketing material, they have
received few, if any, complaints about reverse mortgage marketing. For
example, FTC officials said that they have not conducted systematic
searches for misleading reverse mortgage advertisements as they have
for products about which they have received many complaints. In
addition, an FDIC official explained that consumer complaints related
to a lenders' marketing are one of several factors that could cause
compliance examiners to review marketing materials. Similarly, OTS
officials said a consumer complaint could trigger an examination of a
reverse mortgage lender. However, FDIC and OTS officials told us that
they have received few complaints related to reverse mortgage
marketing.
Consistent with these examples, FTC, the Federal Reserve, OCC, OTS,
FDIC, and HUD all reported receiving few HECM marketing complaints from
calendar year 2005 through 2008. FTC officials said they received 50
complaints related to reverse mortgage marketing in this period, out of
more than 4 million complaints in their database. Of these 50
complaints, 8 involved a reverse mortgage lender implying an
affiliation with a government agency; 9 involved other questionable
marketing tactics, such as a mailing appearing to be from a personal
friend; and the others were not directly related to inaccurate claims
within the marketing materials. OTS officials reported 1 HECM marketing
complaint over this period, and officials at the Federal Reserve and
FDIC did not report any complaints related to HECM marketing in this
period. In addition, OCC officials said a review of reverse mortgage
complaints in this period did not reveal any concerns with marketing.
Similarly, among the 123 HECM complaints that HUD received from
calendar year 2005 through 2008, only a few related to HECM marketing.
In addition, representatives of state banking regulators told us that
they have not received many complaints related to reverse mortgage
marketing. However, while the low volume of complaints could indicate
few problems with reverse mortgage marketing, FTC officials noted that
it also could be a result of consumers not being aware that they have
been deceived, consumers not knowing to whom to complain, or elderly
consumers being less likely to complain.
Extent of Misleading HECM Marketing Is Unknown, but Selected Materials
Contained Some Potentially Misleading Claims:
While the extent of misleading HECM marketing is unknown, our limited
review of marketing materials found some examples of claims that were
potentially misleading because they were inaccurate, incomplete, or
employed questionable sales tactics. We reviewed Internet marketing
material from the 12 HECM lenders that originated at least 1,000 loans
in fiscal year 2008, and reviewed mailed material from 11 of these 12
lenders.[Footnote 18] In addition, we reviewed mailed, Internet,
information seminar, and DVD materials from other entities that
advertised HECMs, for certain potentially misleading claims (discussed
in the following paragraphs). We found few such claims among the
materials from the top 12 HECM lenders, and some examples in the
materials from the other entities.[Footnote 19]
Some of the potentially misleading marketing claims we found raised
concern among officials at FTC, HUD, and the federal banking
regulators. Among the materials we reviewed, we found 26 different
entities that made potentially misleading claims in their HECM
marketing materials.[Footnote 20] This group includes entities
regulated by each of the federal banking regulators with whom we spoke,
as well as FTC and state regulators; it also includes both members and
nonmembers of NRMLA. NRMLA members are expected to adhere to the
association's Code of Ethics, which contains specific rules on ethical
advertising.[Footnote 21] We selected seven advertisements that
represented these claims and submitted them to FTC, HUD, the Federal
Reserve, OCC, FDIC, and OTS for review. We asked officials at each of
these agencies for their views on these claims and whether they would
take any action if such advertisements were the subject of a complaint
or surfaced as part of an examination. In general, the officials with
whom we spoke agreed that the claims in six of the seven advertisements
raised some degree of concern and might prompt further investigation.
[Footnote 22] In commenting on the advertisements, the officials
indicated that the claims ranged from being confusing to false. Several
of the officials noted that they would need to consider the fuller
context of the advertisement to determine if the claims were misleading
and the level of action they would take if these six advertisements
were the subject of complaints or compliance examinations. For example,
an official at FTC said that if its staff were to follow typical
investigative procedures, they would request more information from the
advertisers, such as data on the number of consumers who responded to
the advertisement. Similarly, officials at OTS noted that an assessment
of consumer reactions to the advertisements might be needed to
determine if the advertisements violated the FTC Act. An FTC official
also said that the counseling requirement for HECMs would factor into
their assessment of HECM marketing. He said that the counseling
requirement would not, as a matter of law, prevent FTC from taking law
enforcement action against a HECM lender for deceptive marketing.
However, FTC would consider the likelihood that counseling would
mitigate the effect of the potentially misleading information. In
addition to the regulators, we spoke with the president of NRMLA to
obtain his views on these seven advertisements. He generally agreed
with the regulators' assessment that these claims raised concerns.
The six potentially misleading claims that we identified and agency
officials generally agreed raised concerns were as follows:[Footnote
23]
* "Never owe more than the value of your home": The claim is
potentially misleading because a borrower or heirs of a borrower would
owe the full loan balance--even if it were greater than the value of
the house--if the borrower or heirs chose to keep the house when the
loan became due. This claim was made by HUD itself in its instructions
to approved HECM lenders; however, in December 2008, HUD issued a
mortgagee letter to HECM lenders explaining the inaccuracy of this
claim. This was the most common of the potentially misleading
statements we found in the marketing materials we reviewed. Of the
potentially misleading statements found among the top 12 HECM lenders,
variations of this statement were the most prevalent.
* Implications that the reverse mortgage is a "government benefit" or
otherwise not a loan: While HECMs are government-insured, the product
is a loan that borrowers or their heirs must repay, not a benefit.
Examples of this type of claim include the following: "You may be
qualified for this government-sponsored benefit program" and "Access
the equity in your home without having to sell, move, or take out a
loan." An FDIC official noted that consumers might be confused about
the reverse mortgage being a loan because there are no monthly
payments, and this claim plays on this confusion.
* "Lifetime income" or "Can't outlive loan": Although borrowers can
choose to receive HECM funds as monthly tenure payments, even under
this option, payments will not continue once the loan comes due (e.g.,
when the borrower moves out of the house or violates other conditions
of the mortgage). HUD officials noted that this claim could be
particularly harmful when paired with the claim that the reverse
mortgage is a government benefit. In addition, claims that a HECM
borrower cannot outlive the loan are inaccurate because a line of
credit can be exhausted during the borrower's lifetime, and term
monthly payments do not continue once the specified term has ended.
* "Never lose your home": This claim is potentially misleading because
a lender could foreclose on a HECM borrower's home if the borrower did
not pay property taxes and hazard insurance or did not maintain the
house. HUD officials told us that they were aware of cases in which
borrowers obtained a reverse mortgage without understanding these
requirements and did not have the means to meet these obligations.
* Misrepresenting government affiliation: Figure 3 illustrates an
example of this type of claim, including the use of government symbols
or logos and claims implying that the lender is a government agency.
HUD officials said that among the advertisements we asked them to
review, this would be the only one they would refer to the Mortgagee
Review Board. Officials at FDIC and OTS noted that in 2007, the federal
banking regulators jointly issued an alert to warn consumers about
similar advertisements that suggested that consumers could receive cash
grants from a "Community Reinvestment Act Program" endorsed by the
federal banking regulators. In addition, as we have previously noted,
FTC has received consumer complaints about advertisements for reverse
mortgages that appear to be from a government agency.
* Claims of time and geographic limits: These claims falsely imply that
HECM loans are limited to a certain geographic area, or that the
consumer must respond within a certain time to qualify for the loan.
Examples include "must call within 72 hours" and "deadline extended,"
as well as the claim that a consumer's residence is "located in a
Federal Housing Authority qualifying area." An OCC official said that
he would consider these to be high-pressure tactics against which he
would caution banks, even if they do not rise to the level of unfair or
deceptive practices.
Figure 3: Example of a Reverse Mortgage Advertisement Containing
Potentially Misleading Statements:
[Refer to PDF for image: illustration]
Portion of advertisement: Header: Government Lending Division:
Form 11741-A Official Notice;
Potentially misleading information: Use of government symbol and
"official notice."
Portion of advertisement: Body text: Due to the current market
conditions the U.S. Congress has introduced the Economic Stimulus Act.
On February 13, 2008 this bill was passed into law by President George
W. Bush;
Potentially misleading information: Use of government terms and
language.
Portion of advertisement: Body text: Our records indicate your
residence as being located in a Federal Housing Authority qualifying
area. Because you are over the age of 62, you are eligible for a Home
Equity Conversion Reverse Mortgage (HECM) through the U.S. Department
of Housing and Urban Development;
Potentially misleading information: Implication of geographic limit;
misuse of FHA name.
Portion of advertisement: Body text: This program enables you to:
* Never make another mortgage payment;
* receive cash in a lump sum or monthly for life;
* Own and live in your house for the rest of your life;
Potentially misleading information: Claim of cash for life.
Portion of advertisement: Body text: Call Immediately;
Potentially misleading information: Implication of time limit.
Source: GAO.
Note: We removed those parts of the advertisement that would have
identified the name of the lender.
[End of figure]
As we discuss in this report, federal agencies have mechanisms to
identify and address specific cases of misleading marketing. They also
have various means, such as conferences and educational materials, for
communicating more generally with mortgage industry participants and
the public about consumer protection issues. However, our research
showed that potentially misleading claims exist in the marketplace,
which suggests that some HECM providers may not be sufficiently
considering federal marketing standards in designing their marketing
materials. We referred the claims we identified to FTC or the
appropriate federal banking regulator for further review.
Development of HECM-Specific, Cross-Selling Regulations Is in
Preliminary Stage, and States Have Uncovered Some Evidence of
Inappropriate Cross-Selling:
Concerns exist that reverse mortgage borrowers could be vulnerable to
inappropriate cross-selling, a practice involving the sale of financial
or insurance products that are unsuitable for the borrower's financial
situation using the borrower's reverse mortgage funds. While the
federal role in addressing this practice has been limited, recent
legislation includes provisions to restrict inappropriate cross-
selling in conjunction with HEMCs, and HUD is in the early stages of
developing regulations to implement these provisions. Although the full
extent of inappropriate cross-selling is unknown, state regulators have
identified some instances of this practice in enforcing insurance laws.
Borrowers May Be Vulnerable to the Sale of Unsuitable Products, Which
Could Have Adverse Financial Consequences:
Because reverse mortgages allow borrowers access to a large amount of
money at once, consumer advocates have expressed concern that reverse
mortgage borrowers may be vulnerable to the sale of financial and
insurance products that may be unsuitable for some borrowers. According
to an AARP survey of reverse mortgage borrowers, 4 percent of
respondents said they used a reverse mortgage to make investments or
purchase an annuity or long-term care insurance.[Footnote 24] Some
consumer advocates, including representatives of AARP and the National
Association of Consumer Advocates, have expressed concern that these
products are sometimes sold inappropriately to reverse mortgage
borrowers.
In particular, consumer advocates worry that reverse mortgage borrowers
could be sold some annuity products that may be inappropriate to the
borrower's circumstances. For example, there is concern that elderly
reverse mortgage borrowers may be sold deferred annuities, where
payments may not begin for many years and high fees may be charged for
early access to the money. Inappropriate cross-selling could take
different forms. For example, an individual who has financial incentive
to sell an elderly client a reverse mortgage as well as another
product, such as a deferred annuity, could sell both products to a
senior without informing the client of the costs and potential
implications. Multiple parties, such as HECM originators and insurance
agents, also could work together for their financial gain. For example,
an insurance agent could compensate a HECM originator for referring
HECM borrowers to him, even if using the HECM money for an insurance
product is not in the borrower's best interest.
While certain annuity products may be suitable for some HECM borrowers,
such as those who want to receive payments for life regardless of where
they live, HUD has noted that HECM borrowers should be fully informed
of the advantages and disadvantages of using HECM funds to purchase
these products. HECM counselors are instructed to inform prospective
borrowers who are also interested in purchasing annuities that HECMs
also offer monthly payment options, and while these monthly payments
only last for a specified time or as long as the borrower lives in the
house, they may be more suitable to the HECM borrower's needs.
Federal Role in Regulating Cross-Selling Has Been Limited, but
Regulations to Be Developed Would Create HECM-Specific Federal
Protections:
Because cross-selling typically involves the sale of insurance products
generally regulated at the state level, the role of federal agencies in
addressing the issue of cross-selling in conjunction with HECMs has
been limited and largely has been focused on consumer education and
disclosures.[Footnote 25] For example, federal agencies have had some
role in informing HECM borrowers about the risks and costs of
purchasing other financial products using HECM funds. As we discuss
later in this report, HUD's HECM counseling protocol requires the
provision of certain consumer education materials to counselees
interested in purchasing an annuity with their HECM funds.
Additionally, pursuant to Truth in Lending Act provisions, the Federal
Reserve developed a disclosure, known as the total annual loan cost
(TALC) to illustrate the short-and long-term costs of reverse
mortgages. Lenders must provide reverse mortgage borrowers with this
disclosure, and if the lender is aware that the consumer is purchasing
an annuity with reverse mortgage funds, these costs must be accounted
for in the TALC as part of the total mortgage costs.[Footnote 26]
In addition, the Securities and Exchange Commission (SEC) is the
federal regulator for variable annuity products--annuities that are
tied to the stock market or other investments--and so has
responsibility for ensuring the appropriate sale of these products. In
May 2006, the three following entities began an initiative to protect
seniors from the sale of unsuitable securities: SEC; FINRA, which is a
nongovernmental regulator for securities firms; and the North American
Securities Administrators Association. As part of this effort, SEC and
other regulators conducted a review of 110 information seminars, many
of which were targeted to seniors, where attendees were offered a free
meal. These officials found that products sold at these seminars
included annuities and reverse mortgages, and, in some instances, those
holding the seminars recommended products that did not appear to be
suitable for the consumers.[Footnote 27] In addition, in September
2007, SEC approved a FINRA rule, which includes suitability standards
for deferred variable annuities. As with the state suitability laws we
discuss in the following text, these standards may limit the sale of
unsuitable deferred variable annuities to seniors, whether purchased
with HECM funds or not.
As we have previously noted, Congress passed HERA in 2008, which
includes provisions intended to curb the sale of unsuitable financial
products to consumers using HECM funds. According to the provisions of
the act, a borrower cannot be required by the lender or any other party
to purchase an insurance, annuity, or similar product as a condition of
obtaining a HECM. In addition, the lender either must not be associated
with any other financial or insurance product or must maintain
firewalls and other safeguards to ensure that its employees originating
the HECMs do not also sell other financial or insurance products.
Finally, HUD must conduct a study to determine appropriate consumer
protections and underwriting standards to ensure that the purchase of
other financial products is appropriate for the consumer.
HUD has responsibility for enforcing the cross-selling provisions in
HERA, but the department is in the preliminary stages of developing
regulations to implement them. According to HUD officials, HUD is
drafting a Federal Register notification to solicit feedback on this
issue. HUD officials noted that the draft notification poses a number
of questions concerning several issues, including HUD's ability to
monitor and enforce the provision; the usefulness of disclosures,
education, and counseling in preventing inappropriate cross-selling;
what would constitute "appropriate" firewalls; and what types of
financial products should be covered. To further inform development of
the new regulations, HUD also met with HECM lenders, some of which
already have cross-selling policies. For example, one large HECM lender
requires that loan officers follow up with HECM borrowers before and
after closing to confirm that the borrower has not been sold any
insurance products. Meanwhile, HUD has issued a mortgagee letter
instructing HECM lenders that until HUD issues more definitive
guidance, lenders must not condition a HECM on the purchase of any
other financial or insurance product, and should strive to establish
firewalls and other safeguards to ensure there is no undue pressure or
appearance of pressure for a HECM borrower to purchase another product.
While HUD is considering regulations to implement the HERA cross-
selling provisions, the reverse mortgage industry is also discussing
the implications of these provisions. NRMLA representatives have noted
that while HERA could prevent inappropriate cross-selling, it also
could prevent seniors from purchasing beneficial products. In
particular, the president of NRMLA noted that although some seniors who
obtain reverse mortgages do so to cover everyday living expenses,
others are financially sophisticated individuals who may desire to use
their reverse mortgages as part of long-term financial and insurance
strategies. He said that for the latter group of borrowers, purchasing
other products in conjunction with a reverse mortgage may be
beneficial. For example, some insurance products may be suitable if
they still allow seniors some access to the funds when needed. NRMLA
has submitted its legislative interpretation to HUD. According to the
NRMLA General Counsel, this interpretation allows companies to sell
multiple products to reverse mortgage borrowers, as long as (1) the
company has separate sales forces for reverse mortgages and other
products, and there is no compensation for referrals between the sales
forces; or (2) the reverse mortgage transaction is separate from the
sale of other products, and the sale of the reverse mortgage and other
products is separated in time. The president of NRMLA also indicated
that in any event, borrowers should receive a clear disclosure,
informing them that they are under no obligation to purchase any other
product or service with their reverse mortgage funds.
State Efforts to Enforce Insurance Laws Have Identified Instances of
Inappropriate Cross-Selling:
Many states have passed suitability laws that are designed to protect
consumers from being sold unsuitable insurance products, including
annuities. At least 26 states have adopted the National Association of
Insurance Commissioners (NAIC) model regulation for suitability in
annuity transactions. In addition, at least 10 other states have
adopted other legislation or regulations related to the suitability of
insurance products. The NAIC model regulation states that in
recommending to a consumer the purchase of an annuity, the insurance
producer shall have reasonable grounds for believing that the
recommendation is suitable for the consumer on the basis of the facts
disclosed by the consumer. In addition, a few states allow citizens to
cancel policies of individual life insurance or individual annuity
contracts within a certain period from the date of purchase, regardless
of whether these products were purchased with reverse mortgage funds.
Furthermore, certain states have enacted laws specific to reverse
mortgages. For example, according to the California Civil Code, a
reverse mortgage lender cannot offer, or refer the borrower to any
other party who will offer, an annuity to the borrower before closing
on a reverse mortgage.
A number of state insurance regulators reported recent examples of
violations of their state insurance laws that involved HECM funds.
Through NAIC, we sent a set of standardized questions on cross-selling
practices to insurance commissioners from all 50 states and the
District of Columbia. Of the 29 state insurance regulators that
responded to our questions, 8 said that from 2005 through January 2009,
they had at least one case of an insurance agent selling an unsuitable
insurance product that a consumer had purchased using reverse mortgage
funds. Of those 8 regulators, 4 said their states took formal or
informal action against the companies that sold these products. Cross-
selling cases that involved actual or potential violations of state
insurance laws included the following:
* An official at the Insurance Division of the Hawaii Department of
Commerce and Consumer Affairs described a case in which an independent
mortgage broker was prosecuted for misrepresentation of an annuity
product. The broker, who also owned his own insurance company, deceived
15 clients by including paperwork for an annuity in their HECM closing
documents without their knowledge. The clients did not realize they
were signing to purchase an annuity in addition to a reverse mortgage,
and the broker collected fees from the HECM sale and commission from
the annuity.
* A sales manager of an insurance company violated the Maine Insurance
Code by allowing transactions that were not in the best interest of the
customer. The sales manager had arranged for a representative of a
large reverse mortgage lender to speak with his sales agents about
reverse mortgages. The agents then referred 14 clients to the reverse
mortgage lender, all of whom obtained reverse mortgages. One particular
client, an 81-year old widow, was contacted continually until she
obtained her reverse mortgage funds, and was then sold a deferred
annuity. The interest rate accruing on the reverse mortgage was 4.12
percent, and the deferred annuity earned only 3.25 percent.
* In California, two insurance agents are accused of designing a
seminar to teach licensed insurance and real estate agents how to sell
reverse mortgages to senior citizens in conjunction with annuities. It
is further alleged that they were teaching agents to convince senior
homeowners that purchasing an annuity with reverse mortgage funds is a
condition of obtaining the loan. The California Department of Insurance
is currently investigating this case.
While state insurance laws have captured some cases of inappropriate
cross-selling to HECM borrowers, regulators may not always be aware
when suitability violations involve inappropriate cross-selling. For
example, a FINRA representative noted that the source of funds used to
purchase an unsuitable annuity may not be relevant for determining a
violation of FINRA's suitability standards, so examiners may not always
know if HECM funds were used. Consumer complaints also could indicate
the potential extent of inappropriate cross-selling; however, federal
and state agencies do not specifically track complaints related to this
practice. For example, an NAIC official told us that while NAIC's
complaint database contains a code for annuity complaints, it does not
track whether these complaints involved reverse mortgages. In addition,
of the 29 state insurance regulators who responded to our questions, 14
indicated that their agency does not have a searchable database for
complaints.
HUD's Internal Controls Do Not Provide Reasonable Assurance That
Counseling Agencies Are Complying with HECM Counseling Requirements:
HUD's internal controls for HECM counseling do not provide reasonable
assurance of compliance with HUD requirements. The results of our
limited testing of HECM counseling sessions found that counselors
omitted information required by HUD, particularly on alternatives to
HECMs and the financial implications of these loans. We also found that
HUD records did not always accurately reflect the content and length of
counseling sessions, thereby undermining the usefulness of HUD controls
that rely on these records. As a result of these control weaknesses,
some prospective borrowers may not be receiving the information needed
to make informed decisions about obtaining a HECM.
HUD Uses a Range of Internal Controls to Ensure Compliance with
Counseling Standards, but Has Not Tested Their Effectiveness:
HUD has a range of internal control mechanisms to help ensure that HECM
counselors comply with counseling requirements. GAO's guidance entitled
Standards for Internal Control in the Federal Government states that
internal controls should provide reasonable assurance that agency
objectives--in this case, ensuring that prospective HECM borrowers are
well-informed--are being achieved.[Footnote 28] According to HUD
officials, HUD's internal controls include the following:
1. counseling standards as set forth in regulations, mortgagee letters,
and a counseling protocol;
2. a counselor training and certification program;
3. a Certificate of HECM Counseling (counseling certificate) that, once
signed by the counselor and the counselee, should provide HUD with
assurance that counselors complied with counseling standards and that
prospective borrowers were prepared to make informed decisions;
4. a monitoring process in which HOC staff oversee the performance of
counseling agencies and HUD headquarters staff oversee grant agreements
with HECM intermediaries; and:
5. pre-and post-insurance checks by contractors and HUD field staff of
HECM loan files to ensure that a signed counseling certificate is
present for each loan.
Although GAO's internal control standards encourage agencies to test
the effectiveness of their internal controls, HUD has not done so for
the controls we have previously described. HUD officials told us that
they recognize the importance of such testing and have pursued methods
to determine whether HECM counseling clients were receiving required
information. For example, HOC staff survey small samples of clients for
all types of housing counseling about their counseling sessions, but
staff from two of the HOCs told us that they receive few responses.
While this survey does not currently contain any questions specific to
HECM counseling, HUD staff have drafted a new survey that will focus
exclusively on HECM counseling. Additionally, HUD funded the
development of an AARP project to independently observe HECM counseling
sessions and provide feedback to the counselors. However, a HUD
official indicated that the project will not be implemented until
fiscal year 2010 due to a transfer in project leadership from AARP to
NeighborWorks® America, another nonprofit organization involved in the
HECM counseling program. Representatives from Money Management
International, Inc. (MMI), a national intermediary that received HUD
fiscal year 2008 grant funds for HECM counseling, told us that they
record and review recordings of counseling sessions as part of their
quality control process.[Footnote 29] However, HUD officials said that
they do not see the overall results of those reviews. HUD staff also
advised us that HUD had recently revised the review checklist used by
its staff to evaluate counseling agency performance to include a
section specifically on HECM counseling.
Our Evaluation of Counseling Sessions Indicated Noncompliance with Key
HECM Counseling Requirements:
Our independent evaluation of HECM counseling sessions found that
counselors did not consistently comply with HECM counseling
requirements. To test counselor compliance with key HECM counseling
requirements, GAO staff posed as prospective HECM borrowers for 15
counseling sessions offered by 11 different agencies. We scheduled
these sessions with HECM counselors who were employed by agencies that
have provided some of the highest numbers of HECM counseling sessions.
[Footnote 30] These agencies included branches or affiliates of two
national intermediaries--MMI and the National Foundation for Credit
Counseling, Inc. (NFCC)--that received HECM counseling grant money in
fiscal year 2008, as well as other HUD-approved agencies. For each
session, we determined whether the counselors covered required topics,
primarily those referenced in HUD's counseling certificate, which
counselors are required to complete. The certificate identifies or
refers to counseling requirements originally set forth in statute, HUD
regulations, or mortgagee letters. (See appendix II for a copy of a
blank counseling certificate.) Our undercover counselees participated
in telephone counseling sessions because HUD estimated that about 90
percent of all HECM counseling sessions were conducted in this manner.
[Footnote 31] Our assessment primarily focused on whether counselors
conveyed basic information on required topics, not whether counselors
exhaustively covered each topic. In addition, we assessed limited
aspects of how the counselors presented the information (see appendix
III). The counselor for each session sent our undercover counselee a
signed counseling certificate certifying compliance with HUD
requirements.
Counselors Did Not Cover All of the Required Information to Which the
Counseling Certificate Refers:
Although none of the 15 counselors covered all of the required topics,
all of them provided useful and generally accurate information about
reverse mortgages and discussed key program features. For example, in
discussing the financial implications of the loan, most counselors
provided information on the growth in the HECM line of credit and
explained that the loan balance would increase over time. In addition,
most counselors also explained that the loan would become due and
payable when no borrower lives in the property, and that borrowers must
pay taxes and insurance. Counselors also often supplemented their
discussions with useful information, such as a description of factors
that affect available interest rates and the fact that borrowers would
receive monthly statements from the lender, even though this
information is not specifically referred to on the counseling
certificate. When our undercover counselees specifically asked for help
in finding a lender, or asked directly for a recommendation, the
counselors appropriately explained that they were not permitted to do
so and some referred the counselees to the HUD Web site for a listing
of lenders.[Footnote 32] At the end of the sessions, all of the
counselors informed the undercover counselees that they could call back
with additional questions.
However, despite certifying on the counseling certificate that they had
covered, in detail, all of the information HUD requires, all of the
counselors omitted at least some required information (see figure 4).
Figure 4: Summary of Counselors' Compliance with HUD's HECM Counseling
Requirements:
[Refer to PDF for image: table]
HECM counseling requirements: 1. Options other than a HECM that are
available to the homeowner(s), including other housing, social service,
health, and financial options;
Summary:
Yes: 8;
Partly: N/A;
No: 7.
HECM counseling requirements: 2. Other home equity conversion options
that are or may become available to the homeowner(s), such as other
reverse mortgages, sale-leaseback financing, deferred payment loans,
and property tax deferral;
Summary:
Yes: 8;
Partly: N/A;
No: 7.
HECM counseling requirements: 3. The financial implications of entering
into a HECM;
Summary:
Yes: 0;
Partly: 14;
No: 1.
HECM counseling requirements: 3. The financial implications of entering
into a HECM explaining[A] the advantages and disadvantages of each
payment plan[B];
Summary:
Yes: 6
Partly: N/A;
No: 9.
HECM counseling requirements: 3. The financial implications of entering
into a HECM explaining[A] the steps followed in determining the
borrower‘s principal limit, including all loan costs and set asides[C];
Summary:
Yes: 9;
Partly: N/A;
No: 6.
HECM counseling requirements: 3. The financial implications of entering
into a HECM explaining[A] the increase in the loan balance and likely
decrease in the borrower‘s equity over time;
Summary:
Yes: 11;
Partly: N/A;
No: 4.
HECM counseling requirements: 3. The financial implications of entering
into a HECM explaining[A] the growth of the HECM line of credit;
Summary:
Yes: 12;
Partly: N/A;
No: 3.
HECM counseling requirements: 3. The financial implications of entering
into a HECM explaining[A] the borrower‘s ongoing responsibility to pay
property taxes, ground rents, and insurance either directly or
indirectly by electing to require the mortgagee to withhold funds from
monthly payments or to charge such funds to a line of credit[D];
Summary:
Yes: 1;
Partly: N/A;
No: 14.
HECM counseling requirements: 3. The financial implications of entering
into a HECM explaining[A] calculating the maximum funds available to
HECM borrower(s) and payment plan options using a computer software;
program.
Summary:
Yes: 9;
Partly: N/A;
No: 6.
HECM counseling requirements: 4. A disclosure that a HECM may have tax
consequences, affect eligibility for assistance under federal and state
programs, and have an impact on the estate and heirs of the
homeowner(s);
Summary:
Yes: 9;
Partly: 6;
No: 0.
HECM counseling requirements: 4.a. A disclosure about tax consequences;
Summary:
Yes: 13;
Partly: N/A;
No: 2.
HECM counseling requirements: 4.b. A disclosure that some federal or
state programs, such as Supplemental Security Income, could be
affected;
Summary:
Yes: 9;
Partly: N/A;
No: 6.
HECM counseling requirements: 4.c. A disclosure about the impact on the
estate and heirs of the homeowner(s);
Summary:
Yes: 13;
Partly: N/A;
No: 2.
HECM counseling requirements: 5. Whether the homeowner(s) has signed a
contract or agreement with an estate planning service firm that
requires, or purports to require, the mortgagor to pay a fee on or
after closing that may exceed amounts permitted by the Secretary or in
Part 206 of the HUD regulations at 24 CFR;
Summary:
Yes: 1;
Partly: N/A;
No: 14.
HECM counseling requirements: 6. If such a contract has been signed,
the extent to which services under the contract may not be needed or
may be available at nominal or no cost from other sources, including
the mortgagee[E];
Summary:
Yes: N/A;
Partly: N/A;
No: N/A.
HECM counseling requirements: 7. The HECM will be due and payable when
no remaining borrower lives in the mortgaged property, or when any
other covenants of the mortgage have been violated;
Summary:
Yes: 7;
Partly: 7;
No: 1.
HECM counseling requirements: 7.a. When no borrower lives in the
property;
Summary:
Yes: 13;
Partly: N/A;
No: 2.
HECM counseling requirements: 7.b. When any of the covenants have been
violated[F];
Summary:
Yes: 7;
Partly: 7;
No: 1.
HECM counseling requirements: When any of the covenants have been
violated: Must pay taxes and insurance;
Summary:
Yes: 13;
Partly: N/A;
No: 2.
HECM counseling requirements: When any of the covenants have been
violated: Must not change the title;
Summary:
Yes: 8;
Partly: N/A;
No: 7.
Actual length of counseling time in minutes:
Counseling session 1: 39;
Counseling session 2: 22[G];
Counseling session 3: 26[G];
Counseling session 4: 46;
Counseling session 5: 57[G];
Counseling session 6: 30[G];
Counseling session 7: 52;
Counseling session 8: 66;
Counseling session 9: 64;
Counseling session 10: 41;
Counseling session 11: 52;
Counseling session 12: 26;
Counseling session 13: 20[G];
Counseling session 14: 39;
Counseling session 15: 45[G].
Source: GAO.
[A] Items "a" through "f" of this requirement are contained in HUD
Mortgagee Letter 2004-25, which specifies the criteria that counselors
must meet for explaining the financial implications of a HECM.
[B] Counselors who did not meet this requirement usually omitted a
reference to the term payment plan, although they always discussed the
line of credit payment plan and usually discussed the tenure and
combination payment plans.
[C] Counselors who did not meet this requirement provided much of the
required information, but omitted some information, such as an
explanation of the servicing fee set-aside.
[D] While most counselors explained that borrowers must pay taxes and
insurances (see row 7), they did not explain that borrowers could make
these payments directly or require the lender to do so indirectly. We
did not test for any mention of ground rents (rent paid for leasing
land) during counseling sessions, because such payments are not common.
[E] This question did not apply, since none of our undercover
counselees would have answered affirmatively to the prior question
(i.e., Did you sign a contract?), had the question been asked.
[F] The counseling certificate does not refer to specific types of
covenants. To verify this requirement, we identified whether counselors
referred to the borrower requirements to pay taxes and insurance and to
not change the title, because these are used as examples in the HUD
counseling protocol.
[G] These counselors did not accurately record the length of the
session on the counseling certificate.
[End of figure]
The required information that counselors most frequently omitted
included the following:
* Other housing, social service, health, and financial options: Seven
of the 15 counselors did not discuss options, other than a HECM, that
might be available to a homeowner, such as considering other living
arrangements, meal programs, or health services that local social
service agencies might provide. Our findings are consistent with
findings in AARP and HUD Office of Inspector General reports suggesting
that counselors may not always be discussing alternatives to a reverse
mortgage with clients.[Footnote 33] Although the other 8 counselors did
present options, most did so broadly, referring our undercover
counselees to a nationwide, toll-free telephone number for the National
Association of Area Agencies on Aging for more information, rather than
providing specific information about local resources. However, 1
counselor did provide our agents with specific telephone numbers or Web
sites for specific programs, such as those sponsored by a state's
department of aging and organizations that assist senior citizens with
meeting home energy needs and obtaining prescription drugs. Although
HUD guidance on this point is not explicit, HUD officials told us that
they expect counselors to be knowledgeable about local resources, even
if the counseling sessions were conducted by telephone.
* Other home equity conversion options: The same 7 counselors likewise
did not discuss other types of (and potentially lower-cost) reverse
mortgages that state or local governments might sponsor for specific
purposes. For example, some state governments provide reverse mortgages
for payment of taxes or for making major repairs that do not need to be
repaid until the house is sold. These loans, which also could be
contingent on the income of the applicant, may be appropriate for
borrowers who need to cover specific types of costs.[Footnote 34]
* The financial implications of entering into a HECM: Fourteen
counselors only partially met this requirement, and 1 did not, because
they omitted information that HUD directs counselors to convey.
[Footnote 35] For example, 6 of the counselors did not provide
estimates (using computer software) of the maximum amount of funds that
might be available to the counselee under the HECM payment plan
options. According to a HUD official, the purpose of providing these
estimates is to help prospective borrowers understand how reverse
mortgages would address their financial situations. For example, if a
potential borrower needs to pay off an existing mortgage, receiving
HECM funds in monthly payments might not be appropriate. Additionally,
14 counselors did not tell counselees that they could elect to have the
loan provider withhold funds to pay property taxes and insurance, and 9
counselors omitted basic information about the advantages and
disadvantages of each payment plan (i.e., they usually did not address
the term plan).
* A disclosure that a HECM may affect eligibility for assistance under
other federal and state programs: While most counselors discussed the
tax consequences of a HECM, 6 of 15 did not indicate that eligibility
for some federal and state programs could be affected if borrowers had
more money in their bank accounts than allowed under such programs'
terms. For example, eligibility for a means-tested program, such as the
federal government's Supplemental Security Income (SSI), could be
affected if borrowers deposited in their bank accounts an amount of
money that exceeded the program's threshold for countable resources by
the end of the month.[Footnote 36]
* Asking if a homeowner had signed a contract or agreement with an
estate planning service:[Footnote 37] HUD implemented this requirement
on the basis of a statutory provision intended to protect HECM
borrowers from paying excessive fees for third-party services that are
of little or no value. To illustrate, an estate planning service might
charge a fee, unauthorized by HUD, because it "arranged" for borrowers
to obtain a HECM. However, 14 of the 15 counselors did not ask this
question, although of the 14, 4 cautioned the undercover counselees
that such services were unnecessary to obtain a HECM. If a counselee
responds affirmatively to this question, HUD requires the counselor to
discuss the extent to which services under the contract may not be
needed or may be available from other sources at no or nominal costs.
The results of our review indicate that signed counseling certificates
are not a reliable indicator that the counselors complied with HUD
requirements. Nevertheless, HOC staff (consistent with their procedures
for reviewing counseling agencies) consider the presence of a signed
certificate in a counseling agency's files to be a key compliance
indicator. Additionally, HUD requires a signed certificate as a
condition of insuring a HECM and performs checks to ensure compliance
with this requirement. Thus, the fact that we observed a substantial
amount of noncompliance despite the existence of a signed counseling
certificate for each undercover session raises questions about the
effectiveness of HUD internal controls that rely on the validity of the
certificate.
In addition, HUD considers having a network of examination-certified
counselors as an internal control that helps ensure compliance with
counseling requirements. HUD expects to issue regulations in 2009 that
will require all HECM counselors to pass a written examination,
establish a roster of eligible HECM counselors, require counselors to
meet continuing education requirements, and allow HUD to remove
counselors for cause.[Footnote 38] HUD believes that this proposed rule
will help improve the quality of HECM counseling. However, all but 1 of
the counselors who conducted our counseling sessions were examination-
certified, and they all omitted required information but still signed
the counseling certificate. These results suggest that examination
certification by itself does not ensure high levels of compliance.
Some Counselors Overstated the Amount of Time That They Spent
Counseling Clients:
In addition to requiring HECM counselors to convey certain information,
HUD requires them to record the length of each counseling session on
the counseling certificate. Although HUD has not issued guidance on the
subject, HUD officials told us that the recorded time should reflect
only the time spent counseling the client. HUD does not prescribe how
long a counseling session should last, but the department uses this as
a factor in monitoring the performance of counseling providers and
awarding counseling grant funds.[Footnote 39] For example, HUD
officials told us that HOC staff responsible for overseeing HECM
counseling providers examine the times on the counseling certificates
to identify those sessions that are unreasonably short, to help
identify potential performance problems. Staff from two of the HOCs
noted that unusually short counseling times or discrepancies between
actual and recorded times would prompt follow-up actions. AARP's 2007
study indicated that counseling provided by examination-qualified
counselors, who were obligated to follow the HECM counseling protocol
in effect at the time, typically lasted over 1.5 hours.[Footnote 40]
Six of the 15 counselors for our undercover sessions overstated the
length of the counseling sessions on the counseling certificates. All 6
worked for counseling agencies that received or were eligible to
receive HUD HECM counseling grant funds in 2008. In 3 of these cases,
the sessions ranged from 22 to 30 minutes, but the recorded times
ranged from 45 minutes to 1 hour. In a 4th instance, the session lasted
about 20 minutes, but the counselor recorded 30 minutes. These 4
sessions, for which our undercover counselees were charged customary
fees of $75 to $125, were the shortest we observed and omitted much of
the required information, particularly the discussion of options and
various aspects of the financial implications of a HECM. An intake
staff person from 1 of the counseling agencies told us that the
agency's counselors generally conducted 3 to 4 HECM counseling sessions
every 2 hours, and a counselor from this agency indicated that a
session likely would last no more than 10 minutes. The counselors for
the remaining 2 sessions (1 of which was more comprehensive than many
others) also overstated the time on the certificate, recording the
sessions as lasting 2 hours, when 1 lasted 45 minutes and the other 57
minutes.
For the other 9 sessions, which typically lasted anywhere from about 30
minutes to about 1 hour (see figure 4), the counselors recorded the
entire length of the session on the counseling certificate and did so
in a generally accurate manner. However, the times they recorded
included the amounts of time they took to obtain and process credit
card information and, in some cases, to read a disclosure statement
describing the agency's counseling policies. The amounts of time
differed by agency, but in one instance, the noncounseling time totaled
about 13 minutes (out of a 39-minute session). While HUD has not issued
specific guidance regarding what activities should be recorded as part
of the counseling time, times recorded on the certificate do not
necessarily reflect the amount of time that counselors spent on
supplying HUD-required information.
The considerable variation both in the length of the sessions (ranging
from 20 to 66 minutes) and in how counselors recorded time on the
certificates raises questions about the consistency of HECM counseling
and the reliability of the information that HUD uses to monitor
counseling providers. The lack of a mechanism to ensure that counselors
record counseling times more accurately and uniformly undermines HUD's
ability to identify and act on performance problems and ensure that
counselees are getting their money's worth.
Counseling Agencies Did Not Always Obtain Minimum Information for
Applying the Counseling Fee Means Test:
In May 2008, HUD issued instructions allowing counseling agencies to
charge a fee of up to $125 for HECM counseling, as long as the fee did
not create a financial hardship for the client.[Footnote 41] The
instructions require counseling agencies to make a determination of the
client's ability to pay (means test) by considering factors, including,
but not limited to, the client's income and debt obligations. The
instructions also stress that the client should be informed of the fee
before receiving counseling, and that no client should be turned away
due to an inability to pay. These requirements are particularly
significant because federal resources dedicated to fund HECM counseling
have been limited and lenders are prohibited from paying for counseling
services.[Footnote 42] As a result, prospective HECM borrowers are more
likely to pay for the counseling themselves, either up front or by
financing the fee in the mortgage.
Consistent with HUD requirements, 12 of the 15 counseling agency staff
responsible for charging the fee, whether intake staff or counselors,
informed our undercover counselees of the fee in advance of the session
and charged $125 or less.[Footnote 43] However, staff at most of the
agencies did not collect the minimum amount of information that HUD
requires to perform the means test. More specifically:
* For 4 of the 15 sessions, agency intake staff took the counselee's
credit card information up front, without obtaining any information
about income and debt obligations, although counselors for 3 of these
sessions later asked for the person's income but not their debt. The
counselor for the other session did not ask for any additional
financial information.
* Four other counselors asked about the undercover counselees' income,
but not their debts.
* Four counselors, all from MMI, did not ask directly about income and
debts, but asked a series of screening questions to identify certain
types of potential financial hardship. Specifically, these counselors
asked whether the undercover counselees were in a hospice or had
declared bankruptcy, or whether the home was in foreclosure. The
counselors also indicated that they could waive the fee if the
counselee did not have the ability to pay. MMI confirmed that this
approach was consistent with their screening policies and noted that
should a counselee feel unable to afford the fee, qualification for a
fee waiver would be determined by completion of a debt and income
analysis during the counseling session. NFCC representatives indicated
that many of their affiliates use these types of screening questions,
as well, to determine if the counseling fee should be waived. Two
counselors did not collect any financial information from the
undercover counselees.
* Two other counselors did not collect any financial information from
the undercover counselees.
* One counselor did collect information about the undercover
counselee's income and debt, but did so to analyze the counselee's
budget.
Although HUD has instructed counseling agencies to consider a client's
debt and income, it has not developed criteria or thresholds for using
this information. Additionally, HUD guidance states that agencies may
use "objective criteria" in assessing a client's ability to pay, but
does not specify what types of criteria are appropriate. Officials from
the two national intermediaries told us that HUD's guidance could use
clarification. In the absence of clear guidance, similarly situated
counselees could be treated differently, and those facing financial
hardships may be paying for counseling when they should not have to
pay.
Counselors Did Not Always Comply with Other Provisions in HUD's
Counseling Protocol:
The HUD HECM counseling protocol, which HUD adopted in 2006 and plans
to issue in a substantially expanded version in 2009, summarizes
counseling requirements and identifies procedures that HUD Network
Counselors, which include counselors employed by the national
counseling intermediaries, must follow.[Footnote 44] While much of the
protocol summarizes counseling requirements referenced in the housing
certificate, it also requires counselors to (1) send clients
information packages about the financial implications of reverse
mortgages before or after the counseling session, (2) discuss an
estimated TALC disclosure with the client, (3) collect specific
information about the client's financial needs and goals, and (4) send
certain educational materials to clients who express an interest in
purchasing an annuity. HUD expects to issue regulations in 2009 that
will make compliance with a revised protocol mandatory for all HECM
counselors.[Footnote 45] The revised protocol, currently in draft,
expands on some of these requirements and requires counselors to ask a
series of questions to determine whether the counselees understand the
essential features of a reverse mortgage.
The counselors for all of our 15 undercover counseling sessions were
required to follow the protocol because they were HUD Network
Counselors. However, we found significant noncompliance with the
protocol requirements that we previously cited.
* The protocol requires that the information package on financial
implications be sent to the client before or after the counseling
session. Among other things, the package should contain customized
information, including estimates of cash advances that would be
available to the counselee under the different payment options, an
estimated TALC disclosure and estimates of projected loan costs, and a
loan amortization table. However, only 1 of the 15 counselors sent an
information package containing all of the required information (see
figure 5). Additionally, 8 counselors sent our undercover counselees a
package that did not contain any customized information, and 3 others
sent only some of the customized information. Furthermore, although the
protocol requires counseling agencies to offer the client the option of
receiving the information package before the counseling session, our
undercover counselees received no such offer in 13 cases.[Footnote 46]
Of the 2 counseling agencies that offered to send the package, only 1
actually did so. NFCC officials told us that sending an information
package beforehand is important, especially before telephone
counseling, so that the counselor and counselee can reference the same
documents during the session. Our evaluation of the packages we
received also suggests that the ability to refer to written material
during the counseling session can enhance counselees' understanding of
HECMs (see figure 5 and appendix III for additional information).
Figure 5: Summary of Information Packages:
[Refer to PDF for image: table]
Package requirement: HECM counseling certificates;
Counseling sessions which included this information in the package: 1,
2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 16.
Counseling sessions which did not include this information in the
package: [Empty].
Package requirement: Estimates of cash advances and itemized costs for
different payment plans and interest rates;
Counseling sessions which included this information in the package: 5,
7, 9, 11, 14, 15.
Counseling sessions which did not include this information in the
package: 1, 2, 3, 4, 6, 8, 10, 12, 13,
Package requirement: Loan amortization schedule(s);
Counseling sessions which included this information in the package: 5,
8, 11, 14, 15;
Counseling sessions which did not include this information in the
package: 1, 2, 3, 4, 6, 7, 9, 10, 12, 13.
Package requirement: Estimates of projected costs, including the
servicing fee and a representation of the TALC;
Counseling sessions which included this information in the package: 5,
8, 11, 14, 15;
Counseling sessions which did not include this information in the
package: 1, 2, 3, 4, 6, 7, 9, 10, 12, 13.
Package requirement: A brochure on using an HECM to buy an annuity;
Counseling sessions which included this information in the package: 1,
4, 7, 9, 10, 14.
Counseling sessions which did not include this information in the
package: 2, 3, 5, 6, 8, 11, 12, 13, 15.
Package requirement: A one-page summary of ’Important Information about
HECM Counselors, Lenders, Loans, and Loan Costs“;
Counseling sessions which included this information in the package: 1,
4, 7, 9, 10, 14;
Counseling sessions which did not include this information in the
package: 2, 3, 5, 6, 8, 11, 12, 13, 15.
Package requirement: A one-page summary on ’Steps in the Reverse
Mortgage Lending Process“;
Counseling sessions which included this information in the package: 1,
4, 7, 10, 14, 15.
Counseling sessions which did not include this information in the
package: 2, 3, 5, 6, 8, 9, 11, 12, 13.
Source: GAO.
Note: While only the counselors for sessions 4, 5, and 6 were obligated
to include the information on annuities (because their counselees
expressed interest), 5 other counselors included this information in
their packages.
[End of figure]
* The protocol requires that HECM counselors discuss an estimated TALC
disclosure that HECM borrowers must sign at loan closing, but 8
counselors did not describe the disclosure or its implications during
the sessions. The estimated TALC, which shows the average annual costs
of a reverse mortgage at different points in time, is important because
it illustrates that from a cost perspective, reverse mortgages are
generally not a good choice for borrowers who plan on having the loan
for only a few years. However, because the TALC is fairly complex,
borrowers could have difficulty understanding it without assistance.
Furthermore, Federal Reserve officials indicated that this disclosure
also allows borrowers to compare costs across lenders and should be
explained at the time of counseling.
* The protocol also directs counselors to collect specific information
about the client's needs and goals--such as why the client would like
to obtain a HECM, their financial situation, the condition of their
home, and how long they plan to stay in the home--because these factors
can affect the suitability of a reverse mortgage. While almost all of
the counselors asked why the undercover counselees wanted a reverse
mortgage, none asked for all of the financial information (income,
assets, liabilities, and debt) prescribed in the protocol. Furthermore,
although the protocol instructs counselors to ask if the counselee has
any unpaid federal debt (which would render a person ineligible for a
HECM until the debt was paid), 13 did not ask this question. Six
counselors did not ask how long the undercover counselees planned to
stay in their homes or if the homes needed repairs.
* Finally, if counselees indicate that they are considering purchasing
an annuity with their HECM funds, the protocol requires counselors to
send them specific information, including comparisons of the costs and
benefits of HECMs to those for different types of annuities.[Footnote
47] For 3 different counseling sessions, our undercover counselees
indicated that they were considering such a purchase.[Footnote 48]
Consistent with the protocol, the counselors provided information and
observations about taking this step, and 2 of the 3 counselors also
sent the required information. In addition, although required in the
protocol, none of the 3 counselors annotated the counseling certificate
with a note indicating that discussions about annuities took place.
Despite the importance of the protocol requirements, we also found that
HOC staff responsible for assessing the performance of counseling
agencies were not always familiar with the protocol and had not
incorporated the protocol standards in their performance reviews. For
example, the standard checklist that HOC staff use to conduct their
reviews does not include protocol requirements, such as offering to
send a package before the counseling session and providing information
about annuities. HUD officials acknowledged this shortcoming and told
us that they were planning to update the checklist to reflect a
forthcoming revision of the protocol.
HUD Lacks Internal Controls with Which to Oversee the Counselor
Referral Process:
HUD lacks controls to ensure that lenders comply with the counseling
agency referral process, which HUD designed to prevent lenders from
steering potential borrowers to particular counselors. HUD requirements
state that when first contacted by a prospective HECM borrower, a
lender must provide the individual with a list of entities that perform
HECM counseling. At the time of our fieldwork, HUD's written
instructions required that the list contain six references, including
no fewer than five HUD-approved counseling agencies in the local area
or state (except in cases in which fewer than five agencies serve a
particular state).[Footnote 49] One of those agencies had to be located
within reasonable driving distance so that the prospective borrower had
the option of receiving face-to-face counseling. In addition, the list
was to include a toll-free telephone number to reach a network of
counselors approved to conduct telephone counseling nationwide. In
March 2009, HUD increased the required number of references from 6 to
10 and restated the importance of lenders providing prospective
borrowers with such a list.[Footnote 50]
Despite HUD's renewed emphasis on the requirement, HUD officials told
us that they do not have internal control procedures in place to check
lenders' compliance. One official noted that it would be challenging to
create such a control because a prospective borrower could obtain a
list of counselors from one lender, receive the counseling, and then
decide to get the HECM from a second lender. In that situation, HUD
would have no way of knowing what the first lender provided the
borrower because there would be no loan case file from that lender for
HUD to examine. However, the frequency of this situation is unknown,
and without a control procedure, HUD lacks assurance that its referral
requirements are being followed. Furthermore, while some HECM borrowers
may obtain a list of counselors from one lender and get the loan from
another, this scenario does not rule out taking reasonable steps to
assess the compliance of the lender ultimately selected. For example,
HUD could require lenders to place the lists of counselors they provide
to prospective borrowers in the loan files. HUD's periodic examination
of loan files could include a check for these lists.
Furthermore, the results of our undercover work at reverse mortgage
information seminars sponsored by seven HECM providers and the results
of a HUD Inspector General audit suggests some noncompliance with the
referral requirement.[Footnote 51] Our staff, posing as prospective
HECM borrowers, asked representatives of the seven providers for
referrals to counselors. However, none of the five to whom this
requirement applied and replied to our request, complied fully with HUD
requirements.[Footnote 52] More specifically:
* One representative provided the telephone number typically used to
set up telephone counseling sessions with one of the two national
intermediaries.
* Two representatives said that when our undercover staff were ready to
speak with a counselor, they would make the appointment for them.
* Two California-based HECM representatives provided a list of
counselors, but each list identified only five counseling agencies, and
did not provide the minimum number of five state or local agencies.
Conclusions:
HECMs have the potential to play a key role in meeting the needs of
seniors facing financial hardship or seeking to improve their quality
of life. However, the product is relatively complex and costly and the
population it serves is vulnerable. These factors, combined with the
increasing number of borrowers and lenders participating in the HECM
program, underscore the need for federal agencies to be vigilant about
emerging consumer protection risks. Our work identified risks that
require further attention, particularly in the areas of HECM marketing
and counseling.
Although the extent of potentially misleading HECM marketing is
unknown, the types of marketing claims discussed in this report are
causes for concern, particularly in a market with potential for
substantial growth. HUD, FTC, and the federal banking regulators have
processes to address misleading marketing practices and have reported
few problems. Nevertheless, the potentially misleading marketing claims
we identified suggest that some HECM providers may not be maintaining
sufficient focus on or awareness of federal marketing standards.
Furthermore, consumers who have not been cautioned about such claims
could pursue HECMs with misunderstandings about the product.
Counseling is a critical feature of the HECM program because the
information provided can increase prospective borrowers' understanding
of a complex product and help them make informed decisions. Although
HUD is in the process of expanding and strengthening its counseling
requirements, it lacks sufficient internal controls to ensure that
counseling providers are complying with these requirements. HUD's
controls rely to a significant degree on the presence of one document,
the signed counseling certificate, as an assurance of compliance.
However, our work indicates that HUD cannot rely on this certificate
without additional verification of the content and length of the
counseling session. In the absence of a verification process, HUD's
counseling program is vulnerable to three main problems. First, and
most importantly, counselees may not be receiving the information they
need to make informed decisions. Second, HUD's information on the
amount of time that counselors are spending with clients may be
inaccurate and, therefore, of limited value to HOC staff responsible
for monitoring counselor performance. Third, HUD lacks assurance that
counseling agencies are consistently applying the means test for
counseling fees, if at all; as a result, financially distressed
individuals who are eligible for fee waivers may be paying for
counseling that they could obtain without a fee. Additionally, HUD
lacks detailed guidance on how to record counseling times and apply the
means test, which may be contributing to counseling providers'
noncompliance in these areas. Finally, because HUD lacks effective
controls over the counselor referral process, it cannot ensure that
prospective borrowers are receiving the required range of counseling
choices, including options for face-to-face and telephone counseling.
Recommendations for Executive Action:
To enhance consumer protection from potentially misleading marketing,
we recommend that the Secretary of the Department of Housing and Urban
Development; Chairman of the Federal Trade Commission; Chairman of the
Federal Deposit Insurance Corporation; Chairman of the Board of
Governors of the Federal Reserve System; Comptroller of the Currency,
Office of the Comptroller of the Currency; and Director of the Office
of Thrift Supervision, take steps, as appropriate, to strengthen
oversight and enhance industry and consumer awareness of the types of
marketing claims that we discuss in this report. These steps might
include developing guidance, potentially through the Federal Financial
Institutions Examination Council, to help bank examiners identify these
types of claims; incorporating discussion of these claims in consumer
education materials; and reviewing each advertisement we identified and
referred to the appropriate agency and taking the appropriate follow-up
actions.
To improve HUD's oversight of HECM counseling, we recommend that the
Secretary of HUD improve the effectiveness of the agency's internal
controls so that they provide reasonable assurance of compliance with
HECM counseling requirements. In doing so, HUD should take the
following steps:
* implement methods to verify the content and length of HECM counseling
sessions;
* issue detailed guidance for HECM counseling providers about how to
record the amount of counseling time on the counseling certificate;
* issue detailed procedures for HECM counseling providers on how to
assess prospective counselees' ability to pay for HECM counseling; and:
* implement internal controls to ensure that HECM providers comply with
counselor referral requirements.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Department of Housing and
Urban Development, Federal Trade Commission, Board of Governors of the
Federal Reserve System, Federal Deposit Insurance Corporation, Office
of the Comptroller of the Currency, and Office of Thrift Supervision.
We received written comments from these agencies, which are summarized
below. Appendixes IV through VIII contains reprints of these letters.
FTC provided technical comments, which we incorporated into this
report, where appropriate.
In their written comments, the federal banking regulators agreed with,
or indicated that they were taking actions consistent with, our
recommendation to strengthen oversight and enhance industry and
consumer awareness of the types of marketing claims discussed in our
report. Consistent with our recommendation, each of the regulators
reported that they were working with other members of the Consumer
Compliance Task Force of the Federal Financial Institutions Examination
Council to develop supervisory guidance on reverse mortgages. In
addition, each of the comment letters referred to other initiatives
concerning reverse mortgages that the agencies had under way or had
planned for the future.
In its written comments, HUD did not specifically address our
recommendations but noted that our draft report cited changes that HUD
has undertaken to address many of the deficiencies in HECM counseling.
HUD's letter also contained technical comments that we incorporated, as
appropriate, in the body of the report. (See appendix VIII for a copy
of HUD's letter.) We also provided draft sections of the counseling
portion of this report to representatives from NFCC and MMI--two major
counseling intermediaries--to obtain their viewpoints.
NFCC conveyed to us its support of HUD's initiatives to improve and
ensure the overall success of the HECM program. NFCC expressed its
belief that the release of the new HECM counseling protocol, as well as
HUD's recent revision of its counseling agency review checklist to
include a section on HECM counseling, would address many of the issues
highlighted in our report. In addition, NFCC indicated that HUD's plans
to have counselors meet continuing education requirements and be
reapproved every few years would afford greater consumer protections
for HECM borrowers. However, consistent with our findings, NFCC also
recommended that HUD provide additional guidance on defining what
activities should be included in the counseling time reported on the
HECM counseling certificate. NFCC also recommended that HUD require all
counseling sessions to last at least 45 minutes, consistent with the
requirements NFCC has established for its affiliated counseling
agencies.
MMI expressed to us its belief that the findings in our report, as well
as HUD's planned independent observation of counseling sessions, will
be useful to HUD in improving the effectiveness of its internal
controls. MMI also commended HUD on its recent initiatives to improve
the quality of the counseling program, specifically noting the
development of a new counseling protocol and the revision of HUD's
counseling agency review checklist to include a section on HECM
counseling. In addition, MMI provided suggestions for strengthening
HUD's oversight processes, specifying that HUD should more clearly
define counseling session learning objectives and identify how key
concepts may be addressed. While affirming the importance of covering
alternatives to HECMs, as counselors are currently required to do, MMI
also suggested that HUD consider what information might be best
conveyed by an alternative source, such as by a local Area on Aging
Office, at no cost to seniors. MMI also suggested that HUD review its
counseling requirements for current relevance to the market place, for
example, by considering whether cautions against new types of predatory
practices are necessary.
We are sending copies of this report to interested congressional
parties, the Secretary of the Department of Housing and Urban
Development; Chairman of the Federal Trade Commission; Chairman of the
Federal Deposit Insurance Corporation; Chairman of the Board of
Governors of the Federal Reserve System; Comptroller of the Currency,
Office of the Comptroller of the Currency; and Director of the Office
of Thrift Supervision, and other parties. The report also will be
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-8678 or sciremj@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs are on the last
page of this report. GAO staff who made major contributions to this
report are listed in appendix IX.
Signed by:
Mathew J. Scirè:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
This report focuses on the Home Equity Conversion Mortgage (HECM)
program, which insures reverse mortgages and is administered by the
Department of Housing and Urban Development's (HUD) Federal Housing
Administration. The objectives of this report were to examine (1) the
potential benefits and costs of HECMs to borrowers, (2) federal agency
responsibilities to protect consumers from misleading HECM marketing,
(3) federal agency efforts to protect HECM borrowers from inappropriate
cross-selling, and (4) HUD's oversight of HECM counseling providers.
Benefits and Costs of HECMs:
To identify the potential benefits and costs of HECMs to borrowers, we
reviewed HUD regulation, guidance, and consumer materials related to
the program. To more specifically identify borrower experiences with
HECMs, we analyzed AARP's 2006 survey, which included HECM borrowers,
and interviewed 18 borrowers selected at random from among the
approximately 19,000 borrowers who obtained HECMs from fiscal years
2001 through 2003. We selected borrowers from these years to ensure
that borrowers had sufficient experience with the costs and benefits of
their loans. For 16 of the 18 HECM borrowers, we also reviewed
information about the terms of their loans from files that HUD provided
to us. (HUD was not able to locate the other 2 files.) The results of
our interviews cannot be generalized to all HECM borrowers. To obtain
additional viewpoints on the benefits and costs of HECMs, including
their risks, we interviewed representatives from HUD and the HUD Office
of Inspector General; consumer advocates, including AARP, the National
Consumer Law Center, and the National Council on Aging; and an industry
group, the National Reverse Mortgage Lenders Association. To understand
how borrower choices and economic conditions could affect the amount of
home equity that a HECM borrower might have after 10 years, we
constructed scenarios for a hypothetical HECM borrower illustrating
changes in the borrower's loan balance, house value, and net equity
under different circumstances. Using 2008 as our baseline year, we
obtained information from HUD on the average age of HECM borrowers and
the value of their homes. We used HUD HECM computer software to
determine a HECM loan amount for a borrower with these characteristics.
To illustrate how changing interest and house appreciation rates could
affect the borrower's remaining home equity over time, we constructed
several scenarios using different assumptions. For example, using data
on historical 1-year Treasury yields and the Federal Housing Finance
Agency's house price index, we determined the borrower's remaining home
equity after 10 years if interest and house appreciation rate
assumptions repeated the patterns seen from 1998 through 2007. In
another scenario, we determined how much equity would remain for the
same borrower if interest and house appreciation rates followed IHS
Global Insight's projections for 2008 through 2017.[Footnote 53] We
consulted with HUD to verify the accuracy of our calculations.
To identify actions that federal agencies and others have taken to
promote better consumer understanding of HECMs, we reviewed consumer
guidance distributed by the Federal Trade Commission (FTC), federal
banking regulators, HUD, the Financial Industry Regulatory Authority
(FINRA), state agencies, and consumer groups. We also spoke with
representatives of FTC and state and federal banking regulators about
reverse mortgage task forces initiated by these agencies.
Federal Agency Responsibilities for Protecting Consumers from
Misleading HECM Marketing:
To examine federal agency responsibilities to protect consumers from
misleading HECM marketing, we identified authorities, standards, and
processes that agencies use to identify and address misleading
marketing practices. These agencies included HUD, FTC, and four federal
banking regulators--the Board of Governors of the Federal Reserve
System (Federal Reserve), the Office of the Comptroller of the
Currency, the Office of Thrift Supervision, and the Federal Deposit
Insurance Corporation. We also interviewed officials from these
agencies and obtained information about complaints they received about
reverse mortgages from calendar years 2005 through 2008. These four
banking regulators oversee and examine at least 1 of the 12 largest
HECM lenders, which we define as lenders that originated more than
1,000 HECM loans in fiscal year 2008, based on HUD data.[Footnote 54]
We also asked these regulators to provide information about any
marketing violations found through compliance examinations. Finally,
through the Conference of State Bank Supervisors, we sent a set of
standardized questions to all of the state banking regulators, asking
if they examine reverse mortgage marketing materials, have received any
complaints about or come across any misleading reverse mortgage
marketing materials, or have taken any actions against banks or other
entities as a result of their reverse mortgage marketing. We received
and reviewed responses from 35 states.
In addition, to identify potentially misleading statements about the
HECM program, we conducted a limited review of HECM marketing
materials, including the following:
* Internet materials for the 12 HECM lenders that originated at least
1,000 HECMs in fiscal year 2008, and mailed material for 11 of these 12
lenders.[Footnote 55]
* Three DVDs from HECM lenders that advertised on television, including
a DVD from 1 of the 12 lenders that we previously noted.
* Internet material from 5 other HECM lenders.
* Materials presented at seven HECM information seminars that GAO staff
attended undercover from June 2008 through December 2008 in 4 states.
More specifically, we attended seminars in Florida and California--
states with among the largest number of HECMs--and seminars in Maryland
and Michigan, for the purposes of geographic diversity.
We identified eight types of claims that were inaccurate, incomplete,
or employed questionable sales tactics and reviewed the materials we
gathered for statements implying the following:
1. The borrower cannot owe more than the value of the home.
2. The borrower cannot foreclose on a HECM or cannot lose the home.
3. HECMs will not affect a federal benefit (e.g., Supplemental Security
Income).
4. Costs are the same as those for a forward mortgage, or all HECMs
have the same costs.
5. The borrower can access lifetime income or cannot outlive a reverse
mortgage.
6. A reverse mortgage is a government "benefit" or "entitlement" or any
implication that the HECM is not a loan.
7. Geographic or time limits for obtaining a reverse mortgage.
8. Government affiliation through the use of government language and
symbols.
In total, we identified 26 entities that made one or more of these
potentially misleading claims, and we asked officials at the Federal
Reserve to identify the regulators for each of these entities. Because
our review was of a limited number of advertisements, the results of
our work cannot be used to ascertain the extent of potentially
misleading HECM marketing. We also submitted examples of each
potentially misleading claim to officials at HUD, FTC, and the banking
regulators to obtain their viewpoints on these claims (based on the
regulatory standards they would apply to HECM marketing materials they
review). In addition, we submitted these claims to the president of the
National Reverse Mortgage Lenders Association for his opinion on these
marketing claims.
Steps that Federal Agencies Have Taken to Protect Consumers from
Inappropriate Cross-Selling:
To examine the steps federal agencies have taken to protect consumers
from inappropriate cross-selling, we reviewed HUD guidance and
regulator actions to inform HECM borrowers about the costs and risks of
purchasing annuities in conjunction with HECMs. We also reviewed the
cross-selling provisions in the Housing and Economic Recovery Act of
2008, and spoke with HUD officials about their planned implementation
of these provisions.[Footnote 56] In addition, we spoke with
representatives of the National Reverse Mortgage Lenders Association to
obtain their perspectives on these cross-selling provisions. We spoke
with officials at the National Association of Insurance Commissioners
(NAIC) and obtained information on state insurance laws related to the
sale of insurance products, such as annuities. Through NAIC, we sent
standardized questions to all of the state insurance regulators, asking
if the state tracked complaints, had received any complaints or had any
cases of inappropriate cross-selling with reverse mortgages, or had
taken any action against entities for cross-selling practices. We
reviewed the 29 responses received, and obtained additional information
from the 8 respondents that reported the cross-selling of unsuitable
products with reverse mortgages. We also reviewed FINRA suitability
standards for deferred annuities, and interviewed a FINRA
representative about these standards. In addition, we spoke with an
official at HUD's Office of Inspector General about investigations
related to inappropriate cross-selling in conjunction with HECMs.
HUD's Oversight of HECM Counseling Providers:
To determine the steps HUD has taken to ensure compliance with HECM
counseling requirements, we first identified the standards with which
counselors and agencies must comply.[Footnote 57] We examined relevant
statutes, regulations, the HUD's HECM counseling protocol, and
mortgagee letters for applicable standards and discussed them with HUD
officials.[Footnote 58] To understand how the provisions of the HECM
protocol might apply, we interviewed HUD officials and representatives
from the two national intermediaries--MMI and NFCC--that received HECM
grant funding from fiscal years 2006 through 2008.[Footnote 59] We also
reviewed their fiscal year 2008 grant agreements to more fully
understand their counseling obligations. Our interviews with AARP
officials provided additional perspective on the historical development
of the HECM counseling program with which AARP has been involved. To
better understand HECM counselor training requirements, we also
attended HECM training courses sponsored by NeighborWorks® Training
Institute.[Footnote 60]
Second, we identified the range of internal controls that HUD uses to
ensure compliance with HECM counseling requirements. As a basis for
identifying activities that qualify as internal controls, we consulted
GAO's Standards for Internal Control in the Federal Government.
[Footnote 61] To identify the types of internal controls that HUD
applies to the HECM counseling program, we interviewed HUD headquarters
and field staff and obtained relevant documentation. HUD headquarters
staff have responsibility for general oversight of the grant agreements
with the national intermediaries, and HUD field staff are responsible
for conducting on-site performance reviews of counseling agencies. We
interviewed HUD field staff at all four HUD Home Ownership Centers
(HOC), which are located in Atlanta, Georgia; Denver, Colorado;
Philadelphia, Pennsylvania; and Santa Ana, California, about the
procedures they use to evaluate counseling agency performance, and
obtained relevant documentation. We also interviewed MMI and NFCC staff
to identify what internal controls they have to maintain the quality of
their HECM counseling. To better understand the nature of these
performance evaluations, we reviewed performance reviews conducted by
each HOC for counseling agencies, including those that conduct high
numbers of HECM counseling sessions.[Footnote 62]
Third, to determine whether HUD's internal controls provide reasonable
assurance that counselors comply with HECM counseling requirements, GAO
staff posing as potential HECM borrowers participated in 15 counseling
sessions with 11 different counseling agencies during January and
February 2009. For each session, the counselor sent our undercover
counselee a signed counseling certificate that certified compliance
with HUD requirements and recorded the length of the session. Because
HUD estimated that about 90 percent of counseling takes place by
telephone, we conducted the sessions by telephone. While our findings
from the 15 counseling sessions cannot be generalized to all HECM
counseling, the sessions allowed us to test compliance with HECM
counseling requirements. For these sessions, which we recorded to
facilitate our review of counselors' performance and the length of the
calls, we determined whether counselors covered key topics,
particularly those referenced on the counseling certificate. Our
assessment primarily focused on whether counselors conveyed basic
information on these topics, not whether they covered them
exhaustively. We also compared the time each counselor recorded on the
counseling certificate with (1) the actual length of the session and
(2) the amount of time they spent specifically on counseling.
These sessions took place with counseling agencies that provided some
of the highest numbers of HECM counseling. Of the counselors we
contacted:
* 4 were employed by MMI,
* 5 were employed by five different agencies affiliated with NFCC, and:
* 6 were employed by five other agencies (three of these agencies also
received HUD grant funding for HECM counseling).
Since all of the counselors for our undercover sessions had been
certified as HUD Network Counselors and passed the HECM examination, or
were associated with MMI or NFCC, they were all required to comply with
HUD's 2006 HECM counseling protocol. Accordingly, we also determined
whether the counselors complied with selected elements of the protocol,
such as sending information packages to counselees and discussing an
estimated total annual loan cost disclosure.
To evaluate how counselors might adapt their presentations on the basis
of the unique situation of prospective borrowers, we created five
different borrower profiles, including borrowers who intended to stay
in their house indefinitely and those who intended to move within a few
years. Each borrower profile included a set of predetermined responses
to questions a counselee might be asked, such as home value, existing
debt on home, and length of time the person planned to stay in the
home. The undercover agents were instructed to indicate that they had
little preexisting knowledge of reverse mortgages, to provide
counselors with the opportunity to speak comprehensively about the
program.
We also evaluated selected aspects of the counselor's presentation,
including the clarity of terminology, delivery (e.g., the rate of speed
at which the counselors presented the information), and the use of
visual aids (i.e., any information that counselors might have sent
prior to the session). For this purpose, individuals from our Learning
Center listened to the recordings of the sessions and independently
evaluated the portion of the counseling sessions in which counselors
presented information on HECM costs. See appendix III for more
information on the Learning Center's evaluation.
Finally, to test compliance with HUD's counselor referral requirements,
GAO undercover staff who attended seven HECM information seminars
(previously discussed) sponsored by HECM providers, asked for referrals
to counseling agencies if the seminar presenters had not already
provided them.[Footnote 63] We compared the number and type of
referrals we received with HUD's requirements in effect at the time of
our fieldwork.[Footnote 64] For example, we identified whether the list
of referrals included at least five agencies that were located in the
local area or state. The results of our work cannot be generalized to
all HECM providers. In addition, we interviewed HUD officials
responsible for developing the counselor referral requirements.
We conducted this performance audit from April 2008 through June 2009,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform our audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. Our investigative work was
performed in accordance with standards prescribed by the Council of the
Inspectors General on Integrity and Efficiency.
[End of section]
Appendix II: Copy of a Blank Certificate of HECM Counseling:
Figure: Copy of a Blank Certificate of HECM Counseling:
[Refer to PDF for image]
Source: HUD.
[End of section]
Appendix III: Our Learning Center's Evaluation of Selected Information
Presented during the Undercover Counseling Sessions:
Given the potential challenges of conveying complex information to
seniors by telephone, we undertook a limited assessment of the
communication and presentation skills of the 15 counselors with whom we
spoke. (See appendix I for more information about the counseling
sessions.) This evaluation was conducted by staff in GAO's Learning
Center with expertise in making oral presentations, who reviewed the
recordings we made of the counseling sessions. Our analysis focused on
the portion of each counseling session that explained HECM costs. We
chose this portion because the subject matter can be complex and
because all of the counselors explained costs to some degree, so this
approach provided us with a basis for comparison. We found that most of
the counselors--10 of 15--generally presented information in a manner
that was reasonably clear and easy to follow, although many of the
sessions might have been more effective if prospective borrowers had
received reference materials beforehand.[Footnote 65]
We assessed criteria in the following three categories: delivery of the
presentation, clarity of information presented, and use of reference
materials to convey technical content.
* Delivery of the presentation: To assess each counselor's delivery, we
evaluated rate of speech; whether the counselor varied intonation,
pitch, and pace to sustain the listener's attention; and whether the
counselor's speech had natural pauses, especially after an important
point was made. We found that most (11 out of 15) generally did well in
most dimensions of this category, although our evaluators felt that 2
spoke too quickly, 1 spoke too slowly, and 6 of the counselors only
sometimes incorporated natural pauses into their speech patterns,
especially after an important point was made. Although our assessment
did not factor in hearing impairments that are sometimes associated
with senior citizens, academic research has shown that older adults
have more difficulty than younger adults understanding information as
speech rate increases.
* Clarity of information presented: To assess the clarity of the
presentations, we noted whether each counselor explained or defined
cost-related concepts, terms, and principles when they were first
introduced. We also evaluated the clarity of the counselor's
explanations, and we noted whether the counselor tried to determine if
the listener understood the subject matter, for example, by asking
questions to confirm understanding or by responding if the listener
asked questions, started to interrupt, or sounded confused. We found
that most (11 out of 15) counselors generally did well in most
dimensions of this category, although 5 counselors were less clear than
the others with respect to explaining cost-related terms.
* Use of reference materials to convey technical content: The HECM
counseling protocol requires that counseling agencies give prospective
borrowers the option to receive an information package on financial
implications before or after the counseling session. As noted in the
body of this report, only four counselors sent information packages
with all the customized financial estimates, including the one
counselor whose package contained all of the required information. Of
these, only one counselor offered and sent the required information
before the counseling session. For the 3 counseling sessions for which
the information package came after the session, our evaluators agreed
that for 2 of the sessions, it would have been easier to understand the
presentation had they received the reference material beforehand.
However, for the other session, the evaluators were uncertain if the
presence of the reference materials would have helped, but then they
also agreed that the counselor only "sometimes" explained or defined
cost-related concepts and terms when they were first introduced. Our
evaluators also agreed that for the 1 counseling session for which the
reference material was available in advance, the presentation was easy
to understand with the assistance of these reference materials.
Although, according to HUD, about 90 percent of HECM counseling takes
place by telephone, the HECM counseling protocol does not contain any
specific procedures for telephone counseling. HUD officials indicated
that HUD is considering developing such standards and is in discussion
with one of their intermediaries.
[End of section]
Appendix IV: Comments from the Board of Governors of the Federal
Reserve System:
Board Of Governors Of The Federal Reserve System:
Sandra F. Braunstein:
Director:
Division Of Consumer And Community Affairs:
Washington, D.C. 20551:
June 16, 2009:
Mr. Mathew J. Scirè:
Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, N.W., #201:
Washington, D.C. 20548:
Dear Mr. Scirè:
The Federal Reserve appreciates the opportunity to comment on the draft
report entitled, "Reverse Mortgages: Product Complexity and Consumer
Protection Issues Underscore Need for Improved Controls over Counseling
for Borrowers," (GAO-09-606). We concur with the recommendation in the
draft report that the Federal Reserve, along with other federal
agencies[Footnote 66] involved with consumer protection for federally-
insured reverse mortgages, take steps to strengthen oversight and
enhance industry and consumer awareness of the types of marketing
claims discussed in the draft report. The report indicates these steps
might include developing guidance through the Federal Financial
Institutions Examination Council (FFIEC) to help bank examiners
identify the types of marketing claims identified in the GAO report and
incorporating discussion of these marketing claims in consumer
education materials. In addition, the GAO asked each agency to review
and follow-up on specific marketing material forwarded to it by the
GAO.
The Federal Reserve shares the concerns expressed by the GAO that
reverse mortgages, while offering financial benefits to senior
citizens, present risks to this vulnerable and growing population, due
to the product's complexities. This response outlines initiatives we
have underway to address these concerns.
In 2008, the FFIEC's Task Force on Consumer Compliance established a
working group to review reverse mortgage issues as they relate to the
banking industry and to consumers. The working group is drafting
proposed guidance to the industry on consumer protection concerns
raised by reverse mortgage products. The draft guidance focuses on the
need to provide adequate information to consumers about reverse
mortgage products, to provide qualified independent counseling to
consumers considering these products, and to establish policies,
procedures, internal controls, and third party risk management as they
relate to reverse mortgages. We anticipate publishing this guidance for
public comment in the Federal Register in the coming months.
This same interagency working group is enhancing examination procedures
for use when reviewing an institution's compliance with consumer
protection laws related to reverse mortgage products. Specifically,
current interagency examination procedures for Regulation Z (Truth in
Lending) address the regulatory requirements for reverse mortgages,
focusing on the disclosure of total annual loan cost (TALC) rates for a
reverse mortgage. The interagency working group is reviewing the
current procedures to enhance examiner guidance relating to the
accuracy of the TALC. The working group also will consider the GAO's
recommendation to provide guidance to examiners when reviewing reverse
mortgage marketing materials. The additional guidance is expected to be
final by year-end 2009.
To highlight our concerns to the public about reverse mortgages,
Federal Reserve staff members have published articles in several
Federal Reserve publications. Specifically, the Federal Reserve
System's publication, Consumer Compliance Outlook, has recently had two
articles on reverse mortgages. The third quarter 2008 issue had an
article entitled, "Reverse Mortgages and Consumer Protection Issues."
[Footnote 67] The first quarter 2009 issue included an article
entitled, "Disclosure Requirements for Reverse Mortgages."[Footnote 68]
Finally, in the publication, Partners (Issue #3, 2008), published by
the Federal Reserve Bank of Atlanta,[Footnote 69] an article entitled
"Reverse Mortgages Revisited" discussed consumer protection issues and
reverse mortgages.
In addition to its supervisory activities, the Federal Reserve Board
has exclusive rulewriting authority for the Truth in Lending Act
(TILA), which is implemented through the Board's Regulation Z (12 CFR
226). As noted previously, Regulation Z requires a specific TALC
disclosure for reverse mortgages. In its draft report, the GAO
acknowledges the complexities of reverse mortgage products and notes
that, for federally-insured reverse mortgages, a lender must certify
that a borrower has participated in credit counseling that includes a
discussion of the TALC. The GAO's study found that borrowers may not
readily understand some of the costs of a reverse mortgage. In its
rulewriting capacity, the Federal Reserve conducts regular reviews of
its regulations, including Regulation Z. The GAO's findings will be
considered as the Federal Reserve reviews Regulation Z to ensure the
existence of strong consumer protections for reverse mortgages. As part
of its review process for Regulation Z, the Board will conduct consumer
testing to ensure that required disclosures provide consumers with
meaningful information in a format that they can understand.
The Federal Reserve has several venues by which it provides financial
information to consumers. In developing this financial information, the
Federal Reserve reviews data on the consumer complaints it receives in
order to inform its consumer outreach programs. One venue for this
outreach is the community affairs program at each of the twelve Federal
Reserve Banks. The Reserve Banks conduct outreach throughout the
country either directly to consumers or indirectly through community
organizations. In addition, the Federal Reserve publishes informational
material on a variety of topics, such as mortgages and credit cards,
that is available on its website. In its continuing efforts to improve
consumer education, the Federal Reserve will review GAO's findings for
potential unmet opportunities and respond accordingly.
Finally, we are carefully reviewing the reverse mortgage marketing
materials from the two entities under our supervision that were
forwarded to us by your office, and will take appropriate follow-up
actions with the entities, as needed.
Again, we appreciate the opportunity to review and comment on the draft
report. We also appreciate the efforts and professionalism of the GAO's
review team in conducting this study.
Sincerely,
Signed by:
Sandra F. Braunstein:
Director:
[End of section]
Appendix V: Comments from the Federal Deposit Insurance Corporation:
FDIC:
Federal Deposit Insurance Corporation:
Division of Supervision and Consumer Protection:
550 17th Street NW:
Washington, DC 20429-9990:
June 18, 2009:
Mr. Richard J. Hillman,
Managing Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Mr. Hillman:
Thank you for the opportunity to review and comment on the Government
Accountability Office's (GAO) report entitled, Reverse Mortgages -
Product Complexity and Consumer Protection Issues Underscore Need for
Improved Controls over Counseling for Borrowers (GAO-09-606). In this
report, the GAO examined issues and federal activities related to: (1)
the potential benefits and costs of Home Equity Conversion Mortgage
(HECM) program loans to borrowers; (2) misleading HECM marketing; (3)
the sale of potentially unsuitable products in conjunction with HECMs;
and (4) oversight of HECM counseling providers. The GAO recommends the
FDIC, Board of Governors of the Federal Reserve (FRB), Office of the
Comptroller of the Currency (OCC) and the Office of Thrift Supervision
(OTS) take steps, as appropriate, to strengthen oversight and enhance
industry and consumer awareness of the types of marketing claims
discussed in the report. The FDIC agrees with this recommendation.
Currently, a Reverse Mortgage Working Group of the Federal Financial
Institutions Examination Council's Consumer Compliance Task Force is
drafting guidance for financial institutions to use in managing the
consumer protection and other risks of reverse mortgage products to
ensure compliance with requirements regarding disclosures and
advertising, and to review potentially unfair or deceptive practices.
This Working Group is comprised of representatives from the FDIC, OCC,
FRB, OTS, National Credit Union Administration, and State Liaison. We
will make certain that your findings and recommendations are considered
in this guidance which we expect to finalize by June 30, 2010, or
sooner.
Also by June 30, 2010, the FDIC will publish in an FDIC Consumer News
issue information about the potentially misleading claims in
advertisements for reverse mortgages of the nature discussed in your
report. The FDIC has issued industry and consumer awareness information
on the complexities of reverse mortgages through our FDIC Consumer News
and Supervisory Insights Journal in recent years. However we agree that
more information should be made available specifically addressing
advertisements for reverse mortgages. We are committed to providing
that information to consumers in our publications.
We appreciate the opportunity to comment on your review and your
suggestions on how the FDIC may enhance our industry oversight and
consumer outreach on reverse mortgages.
Sincerely,
Signed by:
Sandra L. Thompson:
Director:
[End of section]
Appendix VI: Comments from the Office of the Comptroller of the
Currency:
Comptroller of the Currency:
Administrator of National Banks:
Washington, DC 20219:
June 19, 2009:
Mr. Mathew J. Scirè:
Director, Financial Markets and Community Investment:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Scirè:
We have received and reviewed your draft report titled "Reverse
Mortgages: Product Complexity and Consumer Protection Issues Underscore
Need for Improved Controls over Counseling for Borrowers." Your report
responds to a Congressional request for information concerning the
benefits and costs of home equity conversion mortgages (HECM) to
borrowers.
You found that: (1) the potential benefits and costs can be varied and
complex and may not be fully understood by consumers; (2) some
advertisements contain potentially misleading claims; (3) borrowers may
be vulnerable to the cross-selling of unsuitable products; and (4)
counseling agencies may not be complying with requirements.
You recommended that several federal agencies, including the Office of
the Comptroller of the Currency (OCC), take steps to strengthen
oversight and enhance industry and consumer awareness of the types of
marketing claims discussed in your report.
We agree that there is more we should be doing today to address the
risks to consumers of reverse mortgages. The OCC has been working with
the other federal bank regulatory agencies and state representatives on
the Federal Financial Institutions Examination Council to develop
supervisory guidance on reverse mortgages. The interagency guidance is
still very much a "work in progress," but it will be a very important
first step in directing banks to apply to proprietary reverse mortgages
the same types of consumer protection standards applicable to HECMs,
including the requirement for independent counseling. Effective
implementation of the standards in the guidance through our supervisory
process will be critical to protecting reverse mortgage borrowers.
We already have regulations in place that we will use in our
supervision of reverse mortgage lending by national banks to supplement
our implementation of the interagency guidance in addressing two
particular consumer protection risks. The first is misleading
marketing. National banks are subject to a requirement in OCC
regulations that prohibits engaging in unfair or deceptive practices,
as those teens are defined in the FTC Act, in connection with making,
arranging, purchasing, or selling a real estate loan. We will use this
authority to require immediate correction of any potentially misleading
marketing claims by a bank in connection with reverse mortgage
products. In the case of the specific advertisements you provided us
for review and followup, we found that the national banks had revised
their materials, as necessary, to accurately reflect the features of
their products.
In addition, banks are prohibited by law from conditioning availability
of a reverse mortgage on the borrower's purchase of certain nonbanking
products. We can and will use this authority to take action to prevent
any inappropriate and illegal cross-selling activities. And, we would
expect national banks to have compensation policies that do not create
inappropriate incentives for loan officers and third parties.
Should we conclude that implementation of the interagency guidance and
enforcement of existing regulations is not sufficient to address all of
the consumer protection concerns that may arise in connection with
reverse mortgages, the OCC is prepared to adopt more definitive
regulatory standards. We also look forward to working with the
Department of Housing and Urban Development as it develops options to
enhance protections available under its federally insured HECM program.
We appreciate the opportunity to comment on the draft report.
Sincerely,
Signed by:
John C. Dugan:
Comptroller of the Currency:
[End of section]
[End of section]
Appendix VII: Comments from the Office of Thrift Supervision:
Office of Thrift Supervision:
Department of the Treasury:
Timothy T. Ward:
Deputy Director, Examinations Supervision, and Consumer Protection:
1700 G Street N.W.
Washington, DC 20552:
(202) 906-5666:
Mathew J. Scirè:
Director, Financial Markets and Community Investment:
Government Accountability Office:
441 G St., NW:
Washington, DC 20548:
Subject: Government Accountability Office (GAO) Reverse Mortgage Draft
Report 09-606: "Reverse Mortgages: Product Complexity and Consumer
Protection Issues Underscore Need for Improved Controls over Counseling
for Borrowers"
Office of Thrift Supervision (OTS) Comments:
Dear Mr. Scirè:
Thank you for the opportunity to review Draft Report 09-606, which
discusses a number of issues that arise when reverse mortgages are
offered. Because the senior citizens who obtain these complicated
products may be vulnerable to misleading marketing techniques, we share
the concerns that prompted GAO to undertake this study.
GAO's Draft Report 09-606 recommends that the federal banking
regulators consider whether reverse mortgage advertisements are
potentially misleading in describing the costs and benefits of Home
Equity Conversion Mortgage loans. GAO also recommends that OTS, along
with other agencies, take steps to strengthen oversight and enhance
consumer awareness of the types of marketing claims contained in the
report. Draft Report 09-606 suggests that these steps might include
developing examination guidance and consumer education materials.
Consistent with these recommendations, OTS is working with the other
members of the Federal Financial Institutions Examination Council
(FFIEC) Consumer Compliance '''ask Force to develop guidance on the
origination of reverse mortgages. In addition, OTS has already
published material intended to educate consumers about reverse
mortgages[Footnote 70] and is working with the other FFIEC agencies to
update the procedures used by examiners to evaluate how institutions
are calculating and disclosing the cost of reverse mortgages under the
Truth in Lending Act.
Draft Report 09-606 also notes that the GAO referred certain
advertisements that made potentially deceptive claims to the
appropriate federal banking regulators for review. As it is now
written, Draft Report 09-606 suggests that OTS is among these
regulators.[Footnote 71] While OTS staff did review certain
advertisements, it does not appear that any of these samples were used
by an institution currently under OTS supervision. Should OTS find that
any institution under its jurisdiction is making use of misleading or
deceptive advertising in the future, we will take appropriate action.
Please contact Montrice G. Yakimov. OTS Managing Director for
Compliance and Consumer Protection at (202) 906-6173 or
Montrice.Yakimov@ots.treas.gov if you have any questions or comments on
this response.
Sincerely,
Signed by:
Timothy T. Ward:
Deputy Director:
[End of section]
Appendix VIII: Comments from the Department of Housing and Urban
Development:
U.S. Department Of Housing And Urban Development:
Assistant Secretary for Housing-Federal Housing Commissioner:
Washington, DC 20410-5000:
[hyperlink, http://www.hud.gov]
June 17, 2009:
Mr. Mathew J. Scirè, Director:
Financial Markets and Community Investment:
441 G St., NW:
Washington, D.C. 20548:
Subject: GAO Draft Audit Report: Reverse Mortgages Report No.: GAO-09-
606 Report Issue Date: June 2009:
Dear Mr. Scirè:
This is in response to subject Draft audit report of the Reverse
Mortgage Program (HECM) performed by the Government Accountability
Office (GAO). The Draft report indicates the audit was performed to
determine: 1) the potential benefits and costs of HECMs to borrowers;
2) the extent and impact of misleading HECM marketing; 3) the sale of
potentially unsuitable products in conjunction with HECMs, and 4)
oversight of HECM counseling providers. GAO determined during its
review of HUD's role and responsibilities with respect to HECM
mortgages that the Department's internal controls do not provide
reasonable assurance that counseling providers are complying with HECM
counseling requirements.
The Office of Housing (Housing) reviewed the Draft audit report and
determined that while GAO noted deficiencies with respect to HUD's
oversight of HECM mortgages, the report includes proactive changes HUD
has taken to address many of the deficiencies. For example, GAO noted
that HUD's internal controls over the HECM counseling process needs to
be improved. Notwithstanding this issue, the Draft indicates that GAO
takes into consideration HUD's efforts to conduct surveys of HECM
counseling. The Draft also indicates that GAO acknowledges HUD's
development of a project in collaboration with the AARP Foundation to
independently observe HECM counseling sessions.
The Office of Housing appreciates the opportunity to provide a written
response to the findings noted in the Draft and submits the following
comments to be considered by GAO.
GAO's Determination:
Page 10 in the Draft implies that there is potential growth in the
amount of funds available to borrowers over time should the mortgagor
exercise the line of credit option.
Housing's Response:
During the exit conference with GAO, Housing stated and would like to
reiterate that the "growth" that occurs is not limited to the line of
the credit option but also occurs with any of the payment plans.
Housing recommends that GAO clarify its statement regarding this matter
in the final report.
GAO's Determination:
Page 11 in the Draft states the upfront insurance premium (UFMIP) and
origination fees associated with HECMs can be substantial.
Housing's Response:
Housing disagrees with OIG's determination. The Draft does not indicate
that the stated costs were substantial when compared to costs
associated with another similar mortgage product such as forward
mortgages. Therefore, the statement is inadequate without a baseline
that shows a comparison to a similar mortgage product was made. For
example, the UFMIP, for a HECM is 2.0 percent compared to 1.75 percent
for forward mortgages. Housing concludes that the .25 percent
difference is not substantial. In addition, the annual premium for a
HECM mortgage is .50 percent compared to .55 percent charged on forward
mortgages. Lastly, origination costs on forward mortgages are
approximately 3% excluding pre-paid items and UFMIP, and falls within
the same range for HECM mortgages.
GAO's Determination:
Page 16 in the Draft states a report written by the Office of Inspector
General (OIG) indicates that 12 borrowers interviewed during an audit
did not understand the fees or interest costs of their HECM loan.
Housing's Response:
Housing does not agree that a reference to OIG's report is appropriate.
The 12 borrowers OIG interviewed may have had an unrelated issue with
the originating lender and therefore are not representative of the HECM
borrower population as a whole. Also, OIG's targeting is generally
based on adverse selection; therefore, their findings may not be
representative of the vast majority.
GAO's Determination:
Pages 31-32 in the Draft indicates a HUD official expressed concern
about the Department's "capacity" and "authority" to enforce HERA no
cross-selling provisions.
Housing's Response:
During the exit conference with GAO, Housing stated and would like to
reiterate that the Department is not questioning its capacity and
authority to address noncompliance with HUD/FHA requirements. HUD/FHA
through its MRB process has and does exercise the authority to sanction
any FHA approved lender that egregiously violates the Department's loan
origination requirements. Also, it should be noted that insurance sales
are regulated at the state level. HUD does not have jurisdiction over
these activities. Housing requests that GAO clarify the distinction
between HUD's oversight and the state's role.
GAO's Determination:
Page 50 in the Draft is written in such a way that it appears GAO has
misinterpreted the numbers of counseling agencies that are supposed to
be on the list both previously and in accordance with the new Mortgagee
Letter 2009-10. GAO reports that at the time of the audit, lenders were
required to provide borrowers with a list that includes six entities
located within the local state area that perform HECM counseling
including one agency located within reasonable driving distance to meet
HUD/FHA face-to-face requirements. GAO further reported that in March
2009, HUD increased the number of references from 6 to 10.
Housing's Response:
Housing takes exception to GAO's interpretation of HUD's requirements.
Prior policy required lenders to provide potential HECM borrowers with
the contact information for 5 counseling agencies in the local area or
state with one of those agencies located within reasonable driving
distance. The list was to also include contact information for three
intermediaries that provided telephone counseling. The intermediaries
were MMI, NFCC and AARP. ML 2009-10 increased the number of
intermediaries to five; CCCS of Greater Atlanta and NCOA were added to
the list. The total number of counseling agencies required to be on the
list in accordance with ML 2009-10 is now ten and consists of five
local agencies and five intermediaries. Housing requests that GAO
correct or remove its statement regarding this matter.
If you have any questions regarding this matter, please feel free to
contact Mrs. Ruth Roman, Director, of HUD's Program Support Division at
202-402-2112.
Sincerely,
Signed by:
Brian D. Montgomery:
Assistant Secretary for Housing-Federal Housing Commissioner:
[End of section]
Appendix IX: GAO Contact and Staff Acknowledgments:
GAO Contact:
Mathew J. Scirè, Director, 202-512-8678 or sciremj@gao.gov:
Staff Acknowledgments:
In addition to the contact above, Steven K. Westley (Assistant
Director), Sonja J. Bensen, Christine A. Hodakievic, John T. McGrail,
Marc W. Molino, Carl Ramirez, Barbara M. Roesmann, Jennifer W.
Schwartz, Winnie Tsen, and James D. Vitarello made key contributions to
this report. In addition, members of the GAO Learning Center
contributed to this report, including Ann M. Commeree, Chris Dionis,
Linda S. Garcia, and Carol E. Willett.
[End of section]
Footnotes:
[1] 12 U.S.C. § 1715z-20 (a).
[2] About 10 percent of these lenders originated 80 percent of all
HECMs in 2008.
[3] HERA also mandated that GAO conduct a study on the cost and
availability of HECMs under the new provisions established in the act.
We plan to issue this report in July 2009.
[4] These conditions are also known as mortgage covenants.
[5] Previously, FHA loan limits were generally set at 95 percent of the
local area median house price. HERA established for the first time a
national limit for HECMs, which was set at $417,000. As a result of the
American Recovery and Reinvestment Act of 2009, the national limit was
raised again to $625,500.
[6] The AARP Foundation is AARP's affiliated charity.
[7] See AARP, Reverse Mortgages: Niche Product or Mainstream Solution?
Report on the 2006 AARP National Survey of Reverse Mortgage Shoppers
(Washington, D.C.: December 2007). The national telephone survey
portion of this study, which consisted of interviews with 1,509
individuals who completed reverse mortgage counseling between 2001 and
2006, was conducted in December 2006. We reviewed the methodology of
this survey and concluded that the results were usable for the purposes
of our report.
[8] National Council on Aging, Use Your Home to Stay at Home: Expanding
the Use of Reverse Mortgages for Long-Term Care: A Blueprint for Action
(Washington, D.C.: January 2005).
[9] The $6,000 maximum origination cap was the result of HERA. Before
this, the origination fee was 2 percent of the maximum claim amount
without a cap.
[10] For these scenarios, we used the average characteristics of a HECM
borrower in fiscal year 2008. HUD data indicate that the average HECM
borrower in fiscal year 2008 was aged 73, with a home valued at
$239,357. According to HUD, the average HECM borrower draws down 58.3
percent of the loan up front, with subsequent draw downs ranging from 3
to 6 percent.
[11] For economic forecasts of house appreciation and interest rates,
we used IHS Global Insight's 2008 through 2017 projections for the
Federal Housing Finance Agency house price index and the 1-year
Treasury yield, respectively. These projections were current as of
October 2008 and are used here for illustrative purposes only. IHS
Global Insight is a private company that forecasts a wide range of
financial and economic indicators, including interest rates and house
appreciation rates.
[12] For historical house appreciation and interest rates, we used 1998
through 2007 data on the Federal Housing Finance Agency house price
index and the 1-year Treasury yield, respectively.
[13] We did not speak with officials at NCUA because none of the HECM
lenders that originated at least 1,000 HECMs in fiscal year 2008 were
credit unions regulated by NCUA.
[14] See OTS Advertising Rule at 12 CFR 563.27.
[15] State banking regulators are not required to follow the reverse
mortgage guidelines when conducting compliance examinations, but these
regulators can use these guidelines for determining whether reverse
mortgage lenders are operating in an appropriate manner.
[16] HUD's Mortgagee Review Board, an enforcement body chaired by HUD's
Assistant Secretary for Housing-Federal Housing Commissioner, can
impose administrative sanctions against lenders, including withdrawing
the lenders' authority to make FHA-insured loans.
[17] See 18 U.S.C. §§ 709 (false advertising or misuse of names to
indicate Federal agency), 1017 (government seals wrongfully used).
[18] We requested but did not receive materials from 1 of these 12
lenders.
[19] It was not always clear from the marketing materials whether the
entities were lenders, mortgage brokers, or third-party marketers.
[20] At least 1 of these lenders has corrected its potentially
misleading claim since we first reviewed the materials, and another
lender was issued a cease-and-desist order by a state banking regulator
as a result of a misleading claim.
[21] These rules state that members shall not engage in "conduct
involving dishonesty, fraud, deceit or misrepresentation, or knowingly
making a material false or misleading statement to consumers or
others," and requires members to "accurately describe both the costs
and benefits of the products and services presented to consumers."
According to NRMLA's president, the association does not conduct
systematic reviews of marketing materials. However, NRMLA has asked
members to remove or correct misleading marketing claims; suspended
lenders' membership for a specified period as a result of misleading
marketing claims; and, in one instance, withdrew a lender's membership
because of its marketing practices.
[22] The Federal Reserve did not comment on the advertisements
individually, but indicated that the advertisements generally raised
concerns.
[23] The claim that did not raise as much concern stated that HECM
closing costs average only 1 percent more than a regular FHA mortgage.
We considered this statement to be inaccurate because while HECM
origination fees are 2 percent, FHA forward mortgage origination fees
are 1 percent--a difference of 100 percent. The officials with whom we
spoke about this claim said they would consider this an "editorial
error" or "confusing," but not intended to mislead. This is because
origination fees and interest rates are commonly quoted as a percentage
of the loan amount, and the claim would not necessarily be misleading
when interpreted in this light. In addition, we found examples of
claims that HECMs do not affect Supplemental Security Income (SSI).
This claim is inaccurate because eligibility for SSI could be affected
if a borrower's savings from HECM funds were to exceed SSI's monthly
limits. However, because there were few examples of this type of claim,
we did not submit it to the officials for review.
[24] See Reverse Mortgages: Niche Product or Mainstream Solution?
[25] Banks and savings associations that offer insurance and annuities
are prohibited from engaging in practices that would cause a reasonable
consumer to believe that an extension of credit, including a HECM, is
conditioned on the purchase of insurance or an annuity from the
creditor. See Consumer Protection in Sales of Insurance Rules, 12 CFR
§§14.30, 208.83, 343.30, and 536.30.
[26] The TALC is expressed as a percentage--the estimated total dollar
cost of a reverse mortgage, annualized into a rate, roughly comparable
to the annual percentage rate in a forward mortgage. As up-front costs
are spread over more years, the TALC rate declines.
[27] Office of Compliance Inspections and Examinations, Securities and
Exchange Commission; North American Securities Administrators
Association; and Financial Industry Regulatory Authority, Protecting
Senior Investors: Report of Examinations of Securities Firms Providing
"Free Lunch" Sales Seminars (Washington, D.C., September 2007).
[28] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999). Control activities include
establishing and reviewing performance measures, monitoring activities,
training to develop employee skills, and accurately recording
transactions and events.
[29] A national intermediary is an organization that operates in
multiple regions of the United States and provides counseling services
through its branches or affiliates. In contrast, a HUD local counseling
agency may have a main office, and one or more branch offices, in no
more than two contiguous states.
[30] HUD indicated that these numbers were only estimates because of
the way it currently collects such data.
[31] Consistent with this estimate, MMI representatives estimated that
90 percent of their HECM counseling took place by telephone, and NFCC
representatives estimated about 80 percent.
[32] HUD Mortgagee Letter 2004-25 states that housing counseling
agencies are not permitted to promote, represent, or recommend lenders
or to speak on behalf of lenders.
[33] See Reverse Mortgages: Niche Product or Mainstream Solution?. The
study's authors compared the results of two surveys, both of which
suggested counselors were omitting a discussion of options. In response
to the 2006 survey, about 30 percent of counseling clients who had
received counseling between 2001 and 2006 reported that their
counselors had discussed alternatives to a reverse mortgage. In
contrast, 60 percent of clients who responded to earlier surveys that
AARP administered more immediately to all participants after the
counseling session said counselors discussed other options. Also, see
HUD, Office of Inspector General, Audit Report from the Regional
Inspector General for Audit, Fort Worth Region: 2008-FW-1010 (Fort
Worth: July 14, 2008). On the basis of interviews with 12 borrowers and
a review of their loan files, the report concluded that counselors had
not fully informed 9 of the 12 borrowers about financing options, other
than a HECM, and about the costs of those options.
[34] For example, according to an AARP Foundation consumer education
booklet on reverse mortgages, many local and some state government
agencies offer deferred payment loans for repairing or improving a
home, with no repayment as long as the person lives in his or her home.
In addition, some state and local government agencies offer property
tax deferral loans that provide annual loan advances that can be used
only to pay property taxes.
[35] As indicated in Mortgagee Letter 2004-25, to meet this
requirement, a counselor must cover, at a minimum, (1) the advantages
and disadvantages of each payment plan; (2) how a borrower's principal
limit is determined, including all loan costs and set-asides; (3) the
increase in the loan balance and likely decrease of the borrower's
equity over time; (4) the growth of the HECM line of credit; and (5)
the borrower's ongoing responsibility to pay property taxes and hazard
insurance, either directly or indirectly by electing to require the
mortgagee to withhold funds from monthly payments or to charge such
funds to a line of credit. Furthermore, a counselor should use computer
printouts generated by HUD's computer software, or similar software,
for calculating the maximum amount of funds available to HECM borrowers
and for each payment plan option. As of March 27, 2009, HUD more
specifically required that the counselor document a client's budget on
the basis of the person's income, assets, debts, and monthly expenses.
[36] If the value of a person's countable resources exceeds the Social
Security Administration's (SSA) allowable limit at the beginning of a
month, the person cannot receive SSI for that month. The limit for
countable resources is $2,000 for an individual and $3,000 for a
couple. SSA does not consider the home a person lives in and the land
upon which it stands as countable resources.
[37] HUD implemented this requirement in Mortgagee Letter 99-2,
pursuant to a 1998 amendment to the National Housing Act.
[38] See 72 Fed. Reg. 870 HECM Counseling Standardization and Roster;
Proposed Rule (Jan. 8, 2007).
[39] As described in HUD's Fiscal Year 2008 Notice of Funding
Availability for Discretionary Programs, the rating factor that
addresses the quality and effectiveness of the applicant's historical
and proposed housing activities is scored partly on the degree to which
the applicant demonstrates, as compared with other applicants, that
sufficient time and resources were devoted to ensuring quality
counseling. HUD officials explained that HUD uses this information
across the various counseling services to better understand the level
of effort in order to award grants in a fair manner.
[40] Reverse Mortgages: Niche Product or Mainstream Solution?.
[41] HUD issued these instructions in Mortgagee Letter 2008-12 pursuant
to regulations published in 2007 (see 72 Fed. Reg. 55638) and codified
at 24 C.F.R. Part 214. The instructions state that if an agency's cost
of providing HECM counseling is less than $125, the maximum amount the
agency can charge the client is the actual cost.
[42] In Mortgagee Letter 2008-28, HUD precluded lenders from paying HUD-
approved counseling agencies for HECM counseling services in response
to a provision in HERA.
[43] While 1 of our undercover counselees was not charged for a
session, the counselor clearly stated that there would be a charge,
even though the agency's recorded message indicated that HECM
counseling was free.
[44] HECM Counseling Protocol, HUD National HECM Counseling Network,
December, 2006. The 2006 protocol is essentially identical to a 2005
counseling protocol developed by AARP. MMI and NFCC officials told us
that their counselors follow the 2005 AARP protocol and the 2006 HUD
protocol, respectively.
[45] These regulations will be promulgated pursuant to the statute,
which requires that HECM counseling be provided by counselors who meet
qualification standards and follow uniform counseling protocols that
HUD must establish within 12 months of July 30, 2008. See 12 U.S.C.
§1715z-20(f).
[46] The way in which most of the counseling agencies scheduled the
counseling sessions may have complicated their ability to comply with
the requirement. More specifically, most agencies used noncounseling
staff to schedule the sessions, but HUD policy prohibits such staff
from obtaining the type of information from clients that is needed to
prepare beforehand a customized information package with financial
information.
[47] This is the only condition under which HUD HECM counselors must
discuss annuities. In comparison with the requirement to discuss the
unnecessary fees that might be charged by estate planners, HUD decided
not to require counselors to address potential borrower misconceptions
that they might have to pay for annuities to obtain a HECM (see 64 Fed.
Reg. 2984, Jan. 19, 1999).
[48] Our undercover counselees adopted one of several different
financial scenarios for each session. One of the scenarios involved the
potential purchase of an annuity.
[49] HUD officials subsequently told us that they informed lenders of
an additional requirement during training sessions. Specifically,
lenders were instructed to add the toll-free telephone numbers for NFCC
and MMI to the required list of agencies.
[50] Mortgagee Letter 2009-10 explicitly expanded the number of
telephone counseling agencies that lender's must provide to prospective
borrowers. The list must now include 5 such agencies.
[51] Audit Report from the Regional Inspector General for Audit. The
Regional Inspector General found that the loan originator's practice of
contracting with one counseling service to assign a counselor to the
borrower did not meet HUD's requirement that the originator provide a
list of eligible counselors.
[52] One of the seminar sponsors was an estate planning firm to whom
this requirement did not apply.
[53] IHS Global Insight is a company that forecasts a wide range of
financial and economic indicators, including interest rates and house
appreciation rates.
[54] We did not obtain data or interview officials from the National
Credit Union Administration because this regulator does not oversee any
of the top HECM lenders.
[55] We requested but did not receive mailed material from 1 of these
12 lenders.
[56] According to the provisions of the act, a borrower cannot be
required by the lender or any other party to purchase an insurance,
annuity, or similar product as a condition of obtaining a HECM. In
addition, the lender either must not be associated with any other
financial or insurance product or must maintain firewalls and other
safeguards to ensure that its employees originating the HECMs do not
also sell other financial or insurance products.
[57] Since the inception of the HECM program, HECM borrowers must
receive information about the financial implications of HECMs, allowing
consumers to make an informed decision about taking out a HECM. In
response, HUD developed a counseling program, working with nonprofits,
such as the AARP Foundation, to develop a network of qualified
counselors. Counselors may conduct counseling face-to-face or by
telephone.
[58] HECM Counseling Protocol, HUD National HECM Counseling Network,
December, 2006.
[59] HUD Network Counselors and counselors employed by the national
intermediaries must comply with the provisions of a uniform counseling
protocol.
[60] NeighborWorks® America is a national nonprofit organization
created by Congress to provide financial support, technical assistance,
and training for community-based revitalization efforts. The course
materials were sponsored in part through a grant from HUD.
[61] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00.2.1.3.1]
(Washington, D.C.: November 1999).
[62] HUD staff indicated that these numbers were only estimates because
of the way it currently collects such data.
[63] In one case, we were unable to reach the seminar sponsor at the
provided phone numbers when we attempted to follow up by phone.
[64] HUD established the counselor referral requirements in effect at
the time of our fieldwork in December 2004. As discussed in the body of
this report, HUD expanded these requirements in March 2009.
[65] Ten of the counselors did well in both areas of assessment--
delivery of presentation and clarity of information presented, but two
other counselors did well in one area of assessment, but not the other.
[66] The U.S. Department of Housing and Urban Development, the Federal
Trade Commission, the Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency (OCC), and the Office of
Thrift Supervision (OTS).
[67] [hyperlink, http://www.philadelphiafed.org/bank-
resources/publications/consumer-compliance-
outlook/2008/thirdquarter/q3_Ol.cfm]
[68] [hyperlink, http://www.philadelphiafed.org/bank-
resources/publications/consumer-compliance-
outlook/2009/firstquarter/ql_03.cfm]
[69] [hyperlink, http://www.frbatlanta.org/invoke.cfm?objectid=844CE47E-
5056-9F121236D9E3BC8947D7&method=display_body]
[70] See "Reverse Mortgages: Information to Consider on Benefits and
Risks," Community Liaison, Community Affairs Newsletter Volume No.
2008, Issue I (Winter 2008).
[71] See Draft Report 09-606 at pages 28 and 53-54.
[End of section]
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