Reverse Mortgages: Product Complexity and Consumer Protection Issues Underscore Need for Improved Controls over Counseling for Borrowers
Published: 2009-06-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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.
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.
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.
subsections: section_title: Background
paragraphs: 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. 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  the borrower’s home equity and  decrease the loan balance. (See fig. 1).  decrease the loan balance. (See fig. 1).
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. 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, 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.
section_title: The Potential Benefits and Costs of HECMs Can Be Varied and Complex, and Concerns Exist That Some Consumers May Not Fully Understand the Product
paragraphs: 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.
subsections: section_title: HECMs Can Provide Multiple Types of Benefits
paragraphs: 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. 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. 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.
section_title: HECM Costs Can Be Substantial
paragraphs: 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.
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.
section_title: Multiple Factors Can Affect the Borrower’s Remaining Home Equity
paragraphs: 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:  1.  Economic forecasts: Interest and appreciation rates follow economic  forecasts for 2008 through 2017. 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.
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  sis of economic forecasts for 2008 through 2017, the  borrower would have about $11,750 of remaining home equity—after  borrower would have about $11,750 of remaining home equity—after  repaying the HECM—at the end of 10 years. However, if interest rates  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  were to stay constant at the initial rate, and house values were to  appreciate by 4 percent annually, the borrower would have more than  appreciate by 4 percent annually, the borrower would have more than  $102,000 in remaining home equity. Finally, if interest and appreciation  $102,000 in remaining home equity. Finally, if interest and appreciation  rates were to repeat the pattern seen from 1998 through 2007, the  rates were to repeat the pattern seen from 1998 through 2007, the  borrower would have the most remaining equity of the three scenarios— borrower would have the most remaining equity of the three scenarios— that is, more than $191,000.  that is, more than $191,000.
section_title: Concerns Exist That Some Consumers May Not Fully Understand HECM Complexities
paragraphs: 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.
section_title: Although Various Agencies Have Some Responsibility for Assessing HECM Marketing, Some Advertisements Contain Potentially Misleading Claims
paragraphs: 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.
subsections: section_title: FTC, Banking Regulators, and HUD Share Responsibility for Assessing Marketing and Enforcing Standards
paragraphs: 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 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.
subsections: section_title: Federal Banking Regulators
paragraphs: 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. 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. 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.
section_title: State Banking Regulators
paragraphs: 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. 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 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. 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.
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.
section_title: Agencies Have Received Few Complaints about HECM Marketing
paragraphs: 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.
section_title: Extent of Misleading HECM Marketing Is Unknown, but Selected Materials Contained Some Potentially Misleading Claims
paragraphs: 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. 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.
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.  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. 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. 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:  “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.
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.
section_title: Development of HECM-Specific, Cross-Selling Regulations Is in Preliminary Stage, and States Have Uncovered Some Evidence of Inappropriate Cross- Selling
paragraphs: 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.
subsections: section_title: Borrowers May Be Vulnerable to the Sale of Unsuitable Products, Which Could Have Adverse Financial Consequences
paragraphs: 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. 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.
section_title: Federal Role in Regulating Cross-Selling Has Been Limited, but Regulations to Be Developed Would Create HECM-Specific Federal Protections
paragraphs: 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. 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.
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. 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.
section_title: State Efforts to Enforce Insurance Laws Have Identified Instances of Inappropriate Cross- Selling
paragraphs: 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.
section_title: HUD’s Internal Controls Do Not Provide Reasonable Assurance That Counseling Agencies Are Complying with HECM Counseling Requirements
paragraphs: 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.
subsections: section_title: HUD Uses a Range of Internal Controls to Ensure Compliance with Counseling Standards, but Has Not Tested Their Effectiveness
paragraphs: 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. According to HUD officials, HUD’s  internal controls include the following:  1.  counseling standards as set forth in regulations, mortgagee letters, and  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. 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.
section_title: Our Evaluation of Counseling Sessions Indicated Noncompliance with Key HECM Counseling Requirements
paragraphs: 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.  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 app. 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. 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 app. III). The counselor for each session sent our  undercover counselee a signed counseling certificate certifying  compliance with HUD requirements.
subsections: section_title: Counselors Did Not Cover All of the Required Information to Which the Counseling Certificate Refers
paragraphs: 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. 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 fig. 4).
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.  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.
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. 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.
Asking if a homeowner had signed a contract or agreement with an  estate planning service: 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. 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.
section_title: Some Counselors Overstated the Amount of Time That They Spent Counseling Clients
paragraphs: 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. 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.
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 fig. 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.
section_title: Counseling Agencies Did Not Always Obtain Minimum Information for Applying the Counseling Fee Means Test
paragraphs: 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. 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. 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. 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.
section_title: Counselors Did Not Always Comply with Other Provisions in HUD’s Counseling Protocol
paragraphs: 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. 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. 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 fig. 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. 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 fig. 5 and app. III for additional  information).
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. For 3 different  counseling sessions, our undercover counselees indicated that they were  considering such a purchase. 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.
section_title: HUD Lacks Internal Controls with Which to Oversee the Counselor Referral Process
paragraphs: 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). 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.
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. 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. 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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 app. 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 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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.
subsections: section_title: Benefits and Costs of HECMs
paragraphs: 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. 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.
section_title: Federal Agency Responsibilities for Protecting Consumers from Misleading HECM Marketing
paragraphs: 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. 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.
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.
subsections: section_title: Steps that Federal Agencies Have Taken to Protect Consumers from Inappropriate Cross- Selling
paragraphs: 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. 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.
section_title: HUD’s Oversight of HECM Counseling Providers
paragraphs: 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. We examined relevant statutes,  regulations, the HUD’s HECM counseling protocol, and mortgagee letters  for applicable standards and discussed them with HUD officials. 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. 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 Insititute.
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. 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.
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. We compared the number and type of referrals we received with  HUD’s requirements in effect at the time of our fieldwork. 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.
section_title: Appendix II: Copy of a Blank Certificate of HECM Counseling
paragraphs: OMB No. 2502-0524  (expires 2/28/2011)
Provision of this information is required to obtain benefits.  HUD may not collect this information, and you are not required to complete this form,  unless the form has a currently valid OMB control number.    Privacy Act Notice: The United States Department of Housing and Urban Development, Federal Housing Administration, is authorized to solicit the  information requested in the form by virtue of Title 12, United States Code, Section 1701 et seq., and regulations promulgated at Title 12, Code of  Federal Regulations. While no assurance of confidentiality is pledged to respondents, HUD generally discloses this data only in response to a  Freedom of Information Act request.
The U. S. Department of Housing and Urban Development (HUD) requires that homeowner(s) interested in pursuing a Home  Equity Conversion Mortgage (HECM) receive information about the implications of and alternatives to a reverse mortgage.  The HECM counselor must adhere to all of FHA’s guidelines regarding information that must be provided to the potential  HECM mortgagor and must tailor the session to address the unique financial circumstances of the household being counseled.   Counselor Certification: In accordance with Section 255 of the National Housing Act and 24CFR 206.41, I have discussed in detail the following items  with the above referenced homeowner(s)  1. Options other than a Home Equity Conversion Mortgage that are available to the homeowner(s), including other housing,  social service, health and financial options.   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.   3. The financial implications of entering into a Home Equity Conversion Mortgage.   4. A disclosure that a Home Equity Conversion Mortgage 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).   5. Whether the homeowner 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.   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.   7. The Home Equity Conversion Mortgage 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.  (Borrowers are those parties who have signed  the Note and Mortgage or Deed of Trust.)
I hereby certify that the homeowner(s) listed above have received counseling according to the requirements of this certificate  and the standards of the U.S. Department of Housing and Urban Development, as described in mortgagee letters, handbooks,  regulations, and statute. This interview was held:  above items was as follows: _______________.
Address (City/State/Zip)
HomeOwner Certification:   I/we hereby certify that I/we have discussed the financial implications of and alternatives to a HECM with the above Counselor. I/we understand the advantages and disadvantages of a HECM and each type of payment plan, as well as the costs of a HECM and when the HECM will become due and payable. This information will enable me/us  to make more informed decisions  about whether I/we want to proceed with obtaining a HECM.
Certificate Expiration Date: ________________           (180 days from date HECM counseling completed)
HUD-92902 (9/2006)
section_title: Appendix III: Our Learning Center’s Evaluation of Selected Information Presented during the Undercover Counseling Sessions
paragraphs: 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 app. 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.
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.
section_title: Appendix IV: Comments from the Board of Governors of the Federal Reserve System
section_title: Appendix V: Comments from the Federal Deposit Insurance Corporation
section_title: Appendix VI: Comments from the Office of the Comptroller of the Currency
section_title: Appendix VII: Comments from the Office of Thrift Supervision
section_title: Appendix VIII: Comments from the Department of Housing and Urban Development
section_title: Appendix IX: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: 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.