Advertising Compliance: Big Issue Facing Industry

During the Acceptable Advertising – and the Language You Must Avoid session at the National Reverse Mortgage Lenders Association Annual Conference in San Diego, panelists called advertising the biggest issue we have to deal with because it is the most visible and offered some insight into an extremely significant and sensitive issue within the reverse mortgage industry.

As NRMLA President Peter Bell pointed out repeatedly during the conference, Senator Claire McCaskill, the source behind much of today’s troublesome reverse mortgage legislation, found out about the issue after her mother received marketing material from a reverse mortgage company informing her that she was eligible for a new government program—leading McCaskill to investigate further.

While a Government Accountability Office (GAO) report had focused on some terms to avoid in reverse mortgage advertising, the session added some terminology. New phrases to avoid include:

Advertisement
  • “Eliminate your current mortgage debt payment” – Mortgage debt is not eliminated by a reverse mortgage, only postponed.
  • “Make no payments during your lifetime” – This makes borrowers think that they do not have tax and insurance obligations, which they still must pay during their lifetime.
  • “Tax free” – The panel advised against using this phrase, as loan officers are not tax specialists and are not licensed to give tax advice. Furthermore, a reverse mortgage is only tax free at certain points, depending on how the funds are dispersed.
  • “Stay in your home as long as you live” – This is only true if the terms of the reverse mortgage are complied with.
  • “Your heirs will inherit all remaining equity”
  • “The lender cannot take or own your home” – If a borrower defaults on a reverse mortgage, the lender can take the home.
  • “NO income or credit requirements to qualify.”

Other HUD hot buttons include the use of logos that do not belong to the lender, especially government logos, the use of the term “government backed program,” and deadlines for responses. The panel added that costs of a reverse mortgage should not be ignored because a reverse mortgage does have significant costs, and the borrower should be aware of that.

Finally, the panel made a point of pointing out that companies are in fact responsible for their ads, and advised lenders to be sure they know what their loan officers are sending out and that it is compliant. Complaint advertising remains one of the largest issues facing the industry, and it is extremely important that the industry stops sending out misleading advertisements. As Bell said to close the session, “This is killing us.”

Write to Reva Minkoff

Join the Conversation (24)

see all

This is a professional community. Please use discretion when posting a comment.

  • One topic that was addressed in that meeting but does not appear above was the illustration of using the phrase “retirement income” to describe proceeds. Proceeds are not “income” and this word should never be used to
    describe proceeds; it is misleading. Mr. Peter Bell touches on this in his presentation in the excellent AARP 30 minute video featuring Chairman and Representative Barney Frank.

    As to the taxablility of proceeds, it is important to realize that loan proceeds are generally not taxable but there are events that will trigger taxability. Forgiveness or cancellation of any portion of the debt is one of them. The rules on taxability in such situations are much different for nonrecourse mortgages than they are for recourse mortgages.

    In the past a common term in marketing was describing reverse mortgage proceeds as “tax-free income.” Even with “appropriate” caveats and disclosures, this phrase should be totally avoided. It is terribly misleading as borrowers will discover if any part of the debt is forgiven. When debt is cancelled or forgiven servicers will be sending out Forms 1099-C.

    Some believe that the FHA repayment of losses to lenders makes HECM proceeds cancelled or forgiven, nontaxable. This is NOT the case. Nor should you risk a lawsuit over it.

    • If a HECM borrower ends up owing more than the home is worth and they cannot come up with the difference is the lender / servicer going to report to the credit bureaus that “lender settled for less than was owed” and will the lender be sending a 1099-C to the HECM borrower or their estate? Will this happen every time that the lender settles for less than owed on a HECM loan?

      • Reporting to credit agencies is outside of the scope of what I can speak to. However, the filing of Form 1099-C is not optional.

  • These terms are important reminders what not to do in your advertsing and promotional efforts, and reiterate the caution our industry must take on a daily basis to insure our senior clients and governmental bodies understand that our industry is all about doing the right thing for our senior clients.

    In our senior clients minds, the idea of perception is often reality, therefore being perfectly clear and using the right terminology is even more important.

  • I recommend that everyone establish a relationship with an attorney that is well versed in this subject, and have all advertisements reviewed and approved prior to use. We have found this to be helpful.

  • How really difficult is it to be transparent and honest in the reverse mortgage Industry? Item One:
    How about “If you qualify according to the FHA HECM Formula (Age, Home Value and any and how much morgage debt), postpone all mortgage payments until one passes or chooses to leave the home (last surviving partner, if married). Item two: The Homeowner is required by FHA to pay annual real estate taxes (unless participating in a State Senior deferred real Estate Tax Program), keep and pay for a current Homeowners Insurance Policy, and maintain the property to FHA standards. Failure to comply with all three requirements could force the homeowner from the home. Real Estate taxes and Homeowners Insurance could be paid by the Lender out of The Homeowner's Line of Credit if funds are available and requested by the Homeowner. Item Three: Loan proceeds are not considered Income; it is a loan and has to be paid back when the last Occupant leaves the home permanently. Consult a Certified or knowledgeable Tax Advisor for individual tax questions about the effect of an FHA HECM on one's tax status. Item Four: Stay in your Home as long as you live as long as all FHA requirementas are complied with. Item Five: Heirs will inherit any equity leftover after the Mortgage debt has been paid off. Should the debt be greater than the home value at passing, the FHA Insurance , which the borrower pays for, will pay the Lender the difference between the debt and the proceeds of the home sale; thus a debt will never be left for the heirs. Item Six: Failure to comply with certain FHA Regulations could force a Senior from his/her home. Item Seven: Income is not part of the FHA HECM Qualification Formula; however, past due Real Estate Taxes or certain US Government debt (Guaranteed Student Loans are not considered,as I understand it.) must be paid in full or be brought current to
    qualify for an FHA HECM.
    I know this isn't perfect but what's wrong with full disclosure? And, maybe I have some things wrong here. If I do, someone please correct me.

    • Mr. Nelson,

      This is a nonrecourse debt; that means it is not recourse. Even if FHA cannot or will not insure the mortgage, the lender cannot collect any more than the proceeds from the sale of the home, if the borrower surrenders the home or in compliance with the lender sells the home. The nonrecourse nature of the debt is totally unrelated to FHA insurance; that is why whenever a payoff is short, a Form 1099-C must be issued.

      There are several other points that need correction. As to other issues you should seek the counsel of your lender.

  • Nothing is ever wrong with full disclosure! The problem for marketers is that full disclosure is long, tedious, slightly scary, hard to fit on a postcard, and the object of marketing is to get someone to call you if they want the product you are selling. If they do call, full disclosure should be the first priority. If they don't call, you have wasted hard earned money.

    I agree with Lance. The best way to be assured you are doing all you can to prevent poor, faulty, and downright misleading advertising is to bring all your marketing pieces to legal counsel, but only if that counselor is aware of the most current advertising restrictions placed on you by both federal and state agencies .

    As for the session being discussed, one of the ways to use cash listed on an illustrated ad was to purchase an airplane. I'm sorry, but did a senior actually do that? If the state of Florida is talking about seniors taking driving tests to continue unrestricted driving of a car, maybe an ad about them buying an airplane should raise a red flag with both the marketer and the purchaser of the advertising. Just a thought. Of course if a thought doesn't work, there is always a fine. . .

  • Well for one thing, if you have defaulted on a government loan and are on LDP, GSA, or CAIVRS lists, you could be disqualified. And if you are in the process of bankruptcy that might be another disqualification.

    It also looks as though you might have to eventually prove that you have the funds for insurance and property tax payments as well although that is in the not too distant future.

  • lBecause a credit check is made, Mr Broderick, as we all know. Sometimes
    unpaid Real Estate taxes on other pieces of property (oh have I had that happen,) or delinquent US Goverment debt other than Guaranteed Student
    Loans (Have a client now with that problem.) can jeopardize an FHA HECM. For when there are no funds at closing to pay these debts, it
    may halt the process.

  • Forgive me Mr Veale: Your statement “…the lender cannot collect any more than the proceeds from the sale of the home…”. I thought the reason for the borrower being required to purchase FHA Insurance was to gurantee the lender against loss should the home value at sale be less than the debt. (That the FHA HECM Insurance assures Parents that at death –or when the last survivor permently leaves the home– though there may not be any equity left for heirs, there will be no debt left either.)
    Where am I going wrong here. If that is not the reason, what is? Are you really saying because the loan is non-recourse, the lender only gets the proceeds from the sale of the house? I guess I don.t understand the reason for the FHA Insurance then, if it isn't to protect the Lender's investment. Concerning the statement “…cannot or will not insure the debt,,,”: I thought the borrower with an FHA HECM is REQUIRED to purchase FHA Insurance. Under what circumstances would FHA refuse to provide FHA HECM Insurance for an FHA HECM? Or do I totally, in my ignorance, misunderstand your meaning? Finally, I know what an IRS 1099 payroll form is–Lord knows I received enough of them in my many years of selling as an Independent Contractor. But an 1099-C? Are you saying that heirs (or the estate) receive an IRS form showing the difference between the home sale proceeds and the debt and that sum is considered income by the IRS and heirs are (or may be depending upon what else is in the estate) on the hook for paying income taxes on that money? That the FHA HECM Insurance,
    for which the borowers may have been paying a hefty premium for perhaps a long, long time, does not eliminate that difference. If that is the case, I guess I am in total ignorance as to what the FHA HECM Insurance is truly for. Please forgive my questions: I am not an academically educated
    man. All my life I have had to learn the hard and stupid way–by doing and trying to learn from my mistakes and reading and absorbing as much as I can–and asking those like you who really know the facts. You are obviously a very well educated man with years of experience at your craft; this web site and its readers are very fortunate indeed to have your counsel. I am VERY concerned about what I tell Senior Clients; that what I state is indeed the truth. I always emphasize that the FHA HECM Insurance guarantees the
    parent's will NEVER leave ANY debt for their Children. However, If there may be a chance, because the last Parent outlives his/her home equity and then some leaving behing an IRS Income tax bill, that is a different situation entirely.

    • Mr. Nelson,

      Happy Thanksgiving!

      My education on HECMs comes through asking questions (too many for some people), originating, reading loan and application documents, reading law and HUD documents, reading treatises, and attending NRMLA conventions and conferences such as the one that will be held in DC this year. The poor processors at the first place I originated.

      One must be very careful when discussing the relationship of reverse mortgages and FHA “insurance”. On any reverse mortgage, FHA has absolutely nothing to do with the lending process other than to qualify lenders for their “insurance” program, endorse or reject loans for “insurance”, discipline lenders for their lending practices, or remove lenders from participation in their programs.

      No lender in her/his right mind would originate a HECM unless FHA “insured” it. The LTVs are too high, the borrowers are generally risky, and the returns for lenders are far too low for the risk lenders accept. If it were not for the efforts of the Reagan and Bush Administrations and Congress, there would be no HECMs right now.

      The FHA “insurance” makes HECMs all but risk free for lenders. If a lender creates a reverse mortgage that does not meet FHA HECM standards, FHA does not have to “insure” it. The FHA “insurance” is the lender inducement that makes HECMs possible.

      FHA “insurance” is a lender requirement; in getting a HECM, a borrower has no choice. A borrower cannot obtain FHA “insurance” and then find the lender. It is not like car insurance. The only way FHA provides this “insurance” is through lenders. In economic realities, the “insurance” is “insurance” for lenders for which the borrower reimburses the lender. The “insurance” has many borrower benefits but it is essentially lender “insurance” so that lenders will provide these loans.

      Ms. Shawna James wrote a RMD article about her hope that one day there will be private insurers who can offer policies comparable to FHA so that we are not solely dependent on FHA for HECM type loans. As Ms. James points out the trouble with her idea is that no insurance company can afford to provide such low cost “insurance” as FHA offers. FHA does not charge operating or administrative costs and makes no profit so that the savings are passed through to borrowers/seniors. The HECM program is a real blessing for seniors.

      For what it is worth, that is my economic view of the FHA “insurance” in the HECM program. I hope that helps. I am sure others can provide more clarity.

      Until recently, FHA insurance had absolutely no relationship to tax law. For now MIP may be (not is) deductible if certain requirements are met. Yes, heirs or borrowers can face tax liabilities if the amount due at termination is not paid in full but that is far, far beyond the scope I want to write on a Thanksgiving day.

      Enjoy the holiday.

    • James,
      Keep in mind that there is another scenario in which the borrower can leave debt. If the family is going to keep the home then they must pay back the full loan balance, not the property's value. In this scenario a senior can leave the family with debt.

      • hecmcounselorguy,

        In that case the borrower is not leaving debt, the heirs are accepting debt. In this country, no one can force an heir to accept an inheritance, period. It is not the borrower who is leaving the debt; it is the heirs who have decided to accept the debt as part of obtaining the underlying property.

        When property is purchased for more than its market value, the transaction is not a tax reportable transaction unless there is a personal gift, charitable gift, or compensation element in the excess price. Here on the surface none of those elements appear to exist so it would be a nonreportable event for income tax purposes as to the mortgagor/heir.

        I do not understand your point. Please expand it.

  • Thank you, Mr. Veale, for taking your valuable Holiday time to respond in a most informative way to my questions. Happy Thanksgiving to you and I, too, must go to carve the turkey, so my lovely daughter and long suffering
    Wife says.

  • Back to the issue at hand, advertising practices and the lack of policing them that allows the “good guys” out there to once again become part of the “problem” by default when other Reverse originators use deceptive ads.

    I have in my hand (email me if you want a copy) a direct mail piece from a lender in the top 10 – wherein the company's “DIRECTOR OF GOVERNMENT LOANS” is the title that accompanies the signature.

    This letter was sent to the Florida Office of Financial Regulation, as well as the Director, Office of RESPA
    US Department of Housing and Urban Development. This was sent by a colleague of mine in JULY, and to date, this has never been addressed. In fact, this lender moved up a spot on the top 10 list in the past few months……

    So, if the agencies that are supposed to help are not, what is next?

    According to all of the noise I am hearing after the NRMLA event, there should only be about three of us left soon, so we should be able to police ourselves at that point! (tongue in cheek)

    • Kevin,

      I just went to your website and you are still advertising loan proceeds as “tax-free”. Will you please adjust your own website? (“Q4. Does the IRS consider the monthly advances from the reverse mortgage income? A. No, the cash advances are actually loan distributions and are not considered income. The cash advances are tax-free.”)

      Someone mentioned you were in the meeting discussed above. I heard the panel had real problems with the phrase “tax-free” and discussed it in particular.

      Besides the title of the signer, what else was wrong with the mail piece you are so bothered by? If the name of the lender was displayed, the product was clearly identified as a mortgage, and other things were in order, what is the problem with using an actual title? Perhaps those with such titles should be restricted from signing marketing pieces using those titles but what rule currently prohibits it? Is that really the only thing wrong with the mailing piece? After hearing the comments from the NRMLA session I personally consider declaring proceeds to be “tax-free” on a website far worse.

      Not that many of us have your email address. Now that you have attacked all of the top ten retailers (including your former employer), why not just say which entity did this really terrible thing? If it was really that terrible why not send it to the HUD OIG rather than the HUD Office of RESPA or some office in the Florida state government that may have absolutely no authority in such matters, especially if the entity was a nationally chartered bank? Did you send it to NRMLA and/or the FTC? Apparently not. I guess you did not attend the NRMLA Policy Conference or earlier conferences where this subject was discussed.

      Do you really believe this one marketing piece should cause one of the top ten retailers to be displaced or held back from advancing in the endorsement pool? Most of the loans that moved that lender up the endorsement list were probably originated before July.

      False advertising is awful and should be severely fined — with habitual violators removed from the industry and criminal charges pursued whenever the situation calls for it. But violations including your own should be handled according to the scale of the violation, not according to your idea of what a violation might be.

  • Kevin,

    I just went to your website and you are still advertising loan proceeds as “tax-free”. Will you please adjust your own website? (“Q4. Does the IRS consider the monthly advances from the reverse mortgage income? A. No, the cash advances are actually loan distributions and are not considered income. The cash advances are tax-free.”)

    Someone mentioned you were in the meeting discussed above. I heard the panel had real problems with the phrase “tax-free” and discussed it in particular.

    Besides the title of the signer, what else was wrong with the mail piece you are so bothered by? If the name of the lender was displayed, the product was clearly identified as a mortgage, and other things were in order, what is the problem with using an actual title? Perhaps those with such titles should be restricted from signing marketing pieces using those titles but what rule currently prohibits it? Is that really the only thing wrong with the mailing piece? After hearing the comments from the NRMLA session I personally consider declaring proceeds to be “tax-free,” far worse.

    Not that many of us have your email address. Now that you have attacked all of the top ten retailers (including your former employer), why not just say which entity did this really terrible thing? If it was really that terrible why not send it to the HUD OIG rather than the HUD Office of RESPA or some office in the Florida state government that may have absolutely no authority in such matters, especially if the entity was a nationally chartered bank? Did you send it to NRMLA and/or the FTC? Apparently not. I guess you did not attend the NRMLA Policy Conference or earlier conferences where this subject was discussed.

    Do you really believe this one marketing piece should cause one of the top ten retailers to be displaced or held back from advancing in the endorsement pool? Most of the loans that moved that lender up the endorsement list were probably originated before July.

    False advertising is awful and should be severely fined — with habitual violators removed from the industry and criminal charges pursued whenever the situation calls for it. But violations including your own should be handled according to the scale of the violation, not according to your idea of what a violation might be.

  • Kevin is absolutely right about one thing; violations need to be reported. A good place to report violations is NRMLA. Some believe they know how to do things but violations may slip through the reporting cracks unless they are handled by those who do this on a regular basis.

    Be prepared. Not every violation will result in an open statement against the violator or the violation. In other cases, it may end up like the lender who used a tax-exempt to market loans. In that case a state official publicly announced the violation, the violator, and the agreement and it was reported in the newspapers. It was also reported by RMD months ago.

    There is little question that marketing must be upgraded and improved. Hopefully, we will see more improvement with time.

  • Yes true, Mr. hecmcounselorguy ; however Heirs, I suspect, would have to really want the property in that situation. For sentamental reasons perhaps; but only a few would pay the bank more than fair market price, I believe.

string(93) "https://reversemortgagedaily.com/2009/11/24/advertising-compliance-big-issue-facing-industry/"

Share your opinion