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. These mortgages allow seniors to convert their home equity into flexible cash advances while living in their homes. 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) misleading HECM marketing, (2) the sale of potentially unsuitable products in conjunction with HECMs, and (3) the oversight of HECM counseling providers. This testimony is based on a GAO report being released today (GAO-09-606).
section_title: What GAO Found
paragraphs: While 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, the product is relatively complex and costly and the population it serves is vulnerable. GAO's work identified areas of consumer protection that require further attention, including the area of HECM marketing. Various federal agencies have responsibility 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. Consumers who have not been cautioned about such claims could pursue HECMs with misunderstandings about the product. To date, federal agencies have had a limited role in addressing concerns about the sale of potentially unsuitable insurance and other financial products in conjunction with HECMs (known as "inappropriate cross-selling"). States generally regulate insurance products, and 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 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 in the preliminary stages of developing regulations. 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 required information to prospective HECM borrowers, but 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: I am pleased to be here to participate in today’s hearing on reverse  mortgages. 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. 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 for 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. 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). This program has  experienced dramatic growth with an increase in both the number of  HECM loans and the number of lenders participating in the HECM  program. Since the inception of the HECM program, Congress has  required prospective borrowers to obtain counseling by an independent  third party so that they can make informed decisions about whether to  obtain a HECM.
My testimony today is based on work we conducted at the request of  Chairman Kohl and Senator McCaskill for a report that we are issuing  today. My statement discusses federal agency activities for (1) protecting  consumers from misleading HECM marketing, (2) protecting HECM  borrowers from inappropriate cross-selling, and (3) overseeing HECM  counseling providers.
To do this work, 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). 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. We  also conducted our own review of HECM marketing materials, including  Internet and mailed materials for major HECM lenders. We also  conducted Internet searches for materials with potentially misleading  statements and collected materials from seven reverse mortgage  information seminars. 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. The findings from the 15 counseling sessions cannot be  generalized to all HECM counseling sessions or sessions conducted by  particular 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. In addition, our investigative  work was performed in accordance with standards prescribed by the  Council of the Inspectors General on Integrity and Efficiency.
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 that borrowers 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  decrease the loan balance.
The HECM program began in 1988, when Congress authorized HUD to  insure reverse mortgages to meet the financial needs of elderly  homeowners. While HECMs can provide senior homeowners with  multiple types of benefits, including flexibility in how they use the loan  funds and protection against owing more than the value of the house when  the loan comes due, HECM costs can be substantial. The volume of  HECMs made annually has grown rapidly, rising from 157 loans in fiscal  year 1990 to more than 112,000 loans in fiscal year 2008. In addition, recent  years have seen a large 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.
A number of federal and state agencies have roles in overseeing the  reverse mortgage market. These agencies include HUD, which administers  the HECM program and oversees entities that provide mandatory  counseling to prospective HECM borrowers. In addition, the Federal Trade  Commission (FTC), federal and state banking regulators, and state  insurance regulators are involved with various aspects of consumer  protections for HECM borrowers.
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 reverse mortgage products, including FTC, federal and state  banking regulators, and HUD. The agencies each have a responsibility for  different segments of the reverse mortgage market, but have reported  taking few, if any, enforcement actions against an entity as a result of  misleading reverse mortgage marketing. FTC has responsibility for  protecting consumers against unfair or deceptive practices originating  from nonbank financial companies, such as mortgage brokers. FTC  officials said they have not systematically searched for potentially  misleading reverse mortgage marketing, but noted that they are  maintaining an awareness of the potential risks associated with reverse  mortgage marketing and have formed a task force of state and federal  regulators and law enforcement agencies, in part to learn about  complaints related to reverse mortgages. In addition, 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), the Federal Deposit Insurance Corporation  (FDIC) and the National Credit Union Administration (NCUA)—include a  review of reverse mortgage marketing materials in their compliance  examinations of lenders for whom they have responsibility, but, because  few of their regulated lenders offer reverse mortgages, they have not  conducted many examinations that have included these loans. Like FTC,  federal banking regulators are maintaining an awareness of the potential  risks associated with reverse mortgages, which could include those  associated with reverse mortgage marketing. For example, 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.  Finally, some HECM lenders are regulated at the state level, with HECM  marketing materials subject to state compliance examinations.  Information we obtained from 22 of the 35 state banking regulators that  responded to our information request indicated that their states 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, HUD exercises limited regulatory authority over the marketing  activity of HECM lenders to ensure that lenders’ advertisements do not  imply endorsement by HUD or the Federal Housing Administration. HUD  officials cited one instance in which it referred a lender to the Mortgagee  Review Board for misrepresenting the HECM as a “government rescue  loan.” 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.
Some agencies with whom we spoke indicated that while complaints are  one factor that could trigger more extensive assessments of marketing  materials, they have received few, if any, complaints about reverse  mortgage marketing. However, FTC officials noted that the low volume of  complaints could be a result of consumers not being aware that they have  been deceived, not knowing to whom to complain, or elderly consumers  being less likely to complain.
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. 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 a s  FTC and state regulators; it also includes both members and nonmembers  of NRMLA. We selected seven advertisements that represented these  claims and submitted them to the regulators for review. 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. 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.
The six potentially misleading claims that we identified, and agency  officials generally agreed raised concern, 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 was the most common of the potentially misleading statements we  found in the marketing materials we reviewed. This claim was made by  HUD itself in its instructions to approved HECM lenders; however, in  December 2008, HUD issued guidance to HECM lenders explaining the  inaccuracy of this claim.
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.” “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). “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.
Misrepresenting government affiliation: An example of this type of claim  would include use of government symbols or logos and claims that imply  that the lender is 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.”
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. Therefore, the report we are issuing  today recommends that HUD, FTC, and the federal banking regulators  take steps to strengthen oversight and enhance industry and consumer  awareness of the types of marketing claims discussed in this testimony.
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 certain  annuity products may be suitable for some HECM borrowers, such as  those who wish to receive payments for life regardless of where they live,  there is concern that elderly reverse mortgage borrowers may be sold  other 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.
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. However, with the passage of HERA, HUD now has  responsibility for enforcing the cross-selling provisions in the legislation  and is in the preliminary stages of developing regulations to implement  them. The provisions are intended to curb the sale of unsuitable financial  products to consumers using HECM funds. According to HUD officials,  HUD is drafting a Federal Register notification to solicit feedback on  issues concerning these provisions, including HUD’s ability to monitor and  enforce them; the usefulness of disclosures, education, and counseling in  preventing cross-selling; what would constitute appropriate firewalls  between a firm’s reverse mortgage sales and sales of other financial  products; and what types of financial products should be covered. HUD  has also instructed 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.
A number of state insurance regulators have reported cases of  inappropriate cross-selling involving violations of state laws governing the  sale of insurance and annuities. Many states have passed suitability laws  that are designed to protect consumers from being sold unsuitable  insurance products, including annuities. Of the 29 state insurance  regulators that responded to questions we sent all states and the District of  Columbia, 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. For  example, 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. In another case, 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.
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. HUD has a range of  internal control mechanisms to help ensure that HECM counselors comply  with counseling requirements. These controls include (1) counseling  standards as set forth in regulations, mortgagee letters, and a counseling  protocol; (2) a counselor training and examination program, and (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. Although federal  standards encourage agencies to test the effectiveness of their internal  controls, HUD has not done so for its controls for HECM counseling.
Our independent evaluation of 15 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. For each session, we  determined whether the counselors covered required topics, primarily  those referenced in the counseling certificate. The certificate identifies or  refers to counseling requirements originally set forth in statute, HUD  regulations, or mortgagee letters. Our undercover counselees participated  in telephone counseling sessions because HUD estimated that about 90  percent of all HECM counseling sessions were conducted by telephone. All  but one of the counselors who conducted our counseling sessions were  examination-certified by HUD to provide HECM counseling.
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, most  counselors explained that the loan would become due and payable when  no borrower lives on 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.
However, despite certifying on the counseling certificate that they had  covered all of the information HUD requires, all of the counselors omitted  at least some required information. 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.
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 that do not need to be repaid until the house is sold for  payment of taxes or making major repairs.
The financial implications of entering into a HECM: Fourteen of the   15 counselors only partially met this requirement, and 1 completely did not  meet the requirement, because they omitted information that HUD directs  counselors to convey. For example, 6 of the counselors did not provide  estimates of the maximum amount of funds that might be available to the  counselee under the HECM payment plan options. A HUD official said that  this information would help counselees understand how reverse  mortgages would address their financial situations. Additionally,   14 counselors did not tell counselees that they could elect to have the loan  provider withhold funds to pay property taxes and insurance.
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.
Asking if a homeowner had signed a contract or agreement with an  estate planning service: HUD implemented this requirement based on a  statutory provision intended to protect HECM borrowers from paying  excessive fees for third-party services of little or no value. 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.
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. However, 6 of the 15 counselors for  our undercover sessions overstated the length of the counseling sessions  on the counseling certificates. 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 another instance, the session lasted about 20 minutes, but the  counselor recorded 30 minutes. These 4 sessions omitted much of the  required information, particularly the discussion of options and various  aspects of the financial implications of a HECM. The counselors for the  remaining 2 sessions recorded the sessions as lasting 2 hours when 1  lasted 45 minutes, and the other 57 minutes.
Another area of noncompliance we identified concerned the requirement  that counseling agencies assess a client’s ability to pay the counseling fee.  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 this determination by considering factors  including, but not limited to, the client’s income and debt obligations.  While HUD guidance states that agencies may use “objective criteria” in  assessing a client’s ability to pay, the guidance does not specify what types  of criteria are appropriate. 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 assess the counselee’s ability to pay. For example, 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; and counselors for four other sessions, asked about the undercover  counselees’ income but not their debts. In the absence of clear guidance,  similarly situated counselees could be treated differently, and those facing  financial hardships might be paying for counseling when they should not  have to.
Because of the weaknesses in HUD’s internal controls, some prospective  borrowers may not be receiving the information necessary to make  informed decisions about obtaining a HECM. Therefore, we are  recommending that HUD take steps to improve the effectiveness of its  internal controls, such as by verifying the content and length of HECM  counseling sessions.
In closing, HECMs can provide senior homeowners with multiple types of  benefits, but borrowers may not always fully understand the complexities  of the product’s terms and costs. Thus, the types of marketing claims  discussed in this report, as well as the potential for seniors to be sold  unsuitable products with their HECM funds, are causes for concern,  particularly in a market with potential for substantial growth. These  factors underscore the need for improvements in HUD’s controls over  HECM counseling.
Mr. Chairman, Ranking Member Martinez, and Members of the Special  Committee, this concludes my prepared statement. I would be happy to  respond to any questions that you may have at this time.
section_title: Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact Mathew J.  Scirè, Director, at 202-512-8678 or sciremj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this statement. Individuals making key contributions to this  testimony include Steven K. Westley (Assistant Director), Sonja J. Bensen,  Christine A. Hodakievic, Winnie Tsen, and Barbara M. Roesmann.
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