Reverse mortgage cross-selling cry: Set us free!

Reverse mortgage originators, especially those with ancillary life and long-term care insurance offerings, are chafing at what they regard as “vague” rules governing product cross-selling. Last year, sweeping legislation enacted by Congress – the Housing and Economic Recovery Act (HERA) – held that “neither mortgagees nor any other party may require mortgagors to purchase insurance, annuities or other additional products as a requirement for, or a condition of, eligibility for HECM insurance.”

But, the words “require” and “requirement” have muddied the waters, according to originators who argue that such lack of clarity intimidates reverse mortgage providers and ultimately shortchanges seniors. “It’s up to insurance and investment companies” to decide such matters,” fumes Jeff Lewis, senior managing director, Guggenheim Partners, New York, who says language in the year-old law is “wrongheaded and ends up having a detrimental affect. It’s hopelessly vague,” says Lewis, insisting that “HUD knows they don’t regulate these things.”

One Florida originator flatly criticizes the HERA Act as having “disrupted the HECM industry.” As a result, he reports hearing “that seniors are having a tough time finding a qualified originator to explain this product to them.” For his part, Lewis is hopeful the housing agency will issue rules clarifying what products may or may not be sold in conjunction with reverse mortgages. “That’s when we’ll have a chance to [understand] the regulations, but it will still be on all of us to do what’s responsible.”

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And, that may be ultimately where the issue comes to rest, he says – originators acting in the best interest of seniors “who ought to have the freedom to use their home equity,” accessed with a reverse mortgage, to purchase other products. A lot of good can come about if is properly controlled,” according to Lewis. “It’s really about how people are compensated. We don’t want to gang up on senior to generate commissions.”

The Florida originator cautions against “rushing rule changes and writing hurry-up mortgagee letters [that] cause unintended consequences.” He recommends creation of a “HUD Originator Council used to vet changes.”

Written by Neil Morse

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  • I am a sr. who recently closed on a reverse mortgage. My question to you is:rnare proceeds from a reverse mortgage, exempt and subject to the same 6 month reinvestment time frame as proceeds from the sale of a home in order to maintain their judgement-proof exempt status?rn

  • Big picture? My defense of cross-selling is not that is should be promoted. I have never viewed it as a predetermined strategy to capture extra commissions on reverse mortgage dollars, but just as a reasonable alternative to the reverse mortage borrower who wants either some additional cash flow help from the other financial instruments they already own, or is looking for ways to get more net leverage out of the reverse mortgage loan dollars from somebody that they are talking to already. It’s just using some additional knowledge or skills to address one or more problems in one or more ways.rnrnBut most often the cross-selling I refer to was not any grandiose plan but just a few basic tweaks or replacements of insurance products they already owned, usually Medicare health and drug policies. We did it to improve coverage or benefits and/or reduce premiums. In other words, these were our modest extensions of the same effort to improve the borrowers’ cash flow that lead them to undertake a reverse mortgage in the first place.rnrnThe great majority of cross-selling abuses (usually unsuitable annuity sales) would have been easy to stop dead in their tracks if the same source of funds documentation and history that we are required to submit when cash is brought into closings was also part of the existing suitability requirements for insurance salespeople,agencies, vendors, and/or regulators. rnrnAll the securities principals I ever worked with required quite a bit of extra suitability documentation on the deliberately rare occasions when we were working with mortgage proceeds to begin with. The securities supervisors and regulators faced some separate abusive use of equity-stripping refinances for new investment dollars a few years earlier. The problem with securities and reverse mortgages is that FINRA allowed the individual B/Ds and RIAs decide on their own internal compliance review procedures and documentation – some were obviously deficient.rnrnThat’s not just 20:20 hindsight; it’s what I tried to persuade insurance departments in several Western states to do before they had a problem on their hands. Only one out of six responded at all, and none did anything. Several told me flat out that even if I was right that they wouldn’t act until they had resident complaints. Most spent what little time I got explaining how it was entirely their respective real estate/mortgage department’s problem, not their’s. I haven’t called any of them back to ask if they remember these conversations.rnrnNow Mr. Veale and I sometimes seem to disagree, but I think that’s mostly an artifact of assigning different and sometimes highly specific meaning to words and phrases. If his proposal for a fiduciary evaluation-only practioner or entity could be implemented, sign me up. I’d love to be part of that. I hope I could fulfill a role where you could use different product knowedge to have a larger beneficial impact for more people than as a producer. That could solve the problem of how the states that are enacting financial review requirements for reverse mortgage counseling would accomplish that goal. Conceivably, this fiduciary could allow a good plan to be implemented by one practioner who did his/her homework. I wonder about details like how we’d define scope of authority, train, license, and pay for it. Then again, it might take some existing and costly compliance measures off other entities’ shoulders, so the funds might already exist and be tasked to compliance anyway. Hmmm…

  • Hi Critic,rnrnA slow response – I missed your post when it was forwarded to an overloaded inbox. Sorry I’m late back and backtracking.rnrnThanks for sharing the observations re the CPA firm refunding commissions. I suspect that this practice is made easier if they also earn some income from the accounting business of their firm. If they were functioning solely as financial advisors with securities and insurance licenses, I missed that. I’m curious about this model, though.rnrnCorrect me if I’m wrong, but wouldn’t the CPAs who are refunding insurance commissions be violating the “rebating” prohibitions of their insurance licenses? Most states have restrictions against rebating any funds, goods, services to the client (“thank you” gifts are usually separately restricted) because the insurance sale needs to stand on its own merits without any additional inducements to the insured.rnrnSecurities commissions? They can’t be shared with anyone not licensed in the first place, and usually not with another licensee not licensed through the same company without the specific written authorization of both entity’s Principals. How did the firm do this? If they rebated the securities commissions to the client out of the firm’s own assets, I don’t quite see how that single extra step complies with the rules (as I understand them) even if it is admired and valued by the client. What am I missing? rnrnIt’s worth knowing as we try to redsign business models. Forming a group of differently licensed professionals with different skill sets doesn’t seem to be an acceptable answer anymore as HERA prohibits “association” between the various practioners.rnrnrnP.S.: I don’t claim that commissions are less expensive to the client in the long run; on the contrary I would expect fees to be the lower in most cases. My only point was that an up-front fee is a barrier to many middle class clients purely as an out-of-pocket cash-flow matter instead of a higher-level decision to minimize absolute total costs over the life of the product or investment. Many are willing to take an increase in either ongoing basis point costs or to accept surrender charge or CDSC schedules in exchange for no out-of-pocket expense even after you explain that it is likely to cost them more in the long run.rn

  • Thank you The Critic for your clear comments, your comments on this issue are right on target. This is not the time for the reverse mortgage industry to be promoting cross-selling. If LTC or another financial product is a good idea for the borrower, fine. The borrower can be referred to someone that provides that product with no financial benefit to the referring party or their company. There are just too many potential problems with making money on more than one transaction and the occasional benefit to a borrower is not worth the risk to the individual or the industry. Then it is up to the insurance industry to police the insurance products and their appropriate uses. And it would be up to the reverse professional and the counselor to advise the borrower that no other financial products are required and that they should evaluate the other products independently. No offence to Met Life but they would not be the company to follow on this issue when they have so much at stake.rnrn

  • Michael,rnrnWhose suitability standards are you proposing be used? If the combined suitability standards of Senator McCaskill and Prescott Cole were the criteria, no legitimate LTC insurance salesperson or provider would ever want to cross-sell.rnrnIn appointing JPK, Sr. as the first SEC Chairman, FDR was right in saying he could protect the hen house with the fox. However, it is absolutely wrong to advance MetLife as the party to provide cross-selling standards. The difference is JPK was prohibited from being compensated on stock exchange services. If you are proposing MetLife be prohibited from being compensated from any activities related either to reverse mortgages or insurance and financial products and services, then you have a stellar idea (but probably not to MetLife).rnrnSuitability is not the sole issue. Other commentators have brought up just a few. Even practically how would the transactions be monitored? rnrnThe decision making skills of seniors are eroding with time. Some 62 year olds are well beyond their peak while a few 90 year olds seem near it. But the trend for seniors is generally not one that rises with time.rnrnThe skills required to evaluate the need for a reverse mortgage are not the same as those needed to evaluate the need of and the differences in benefits and the financial positions of LTCi providers. Beyond that HECMs, the principal product of our industry, are federally insured but no LTCi is.rnrnAs an industry, promoting cross-selling is more than self-serving and in the current political environment borders on the suicidal. rn

  • Some have argued quite eloquently for allowing salespersons to provide multiple products. As a financial adviser who never sold any financial products before originating reverse mortgages, I bring an entirely different perspective. I strongly believe in comparison shopping and gathering information and opinions before rendering advice. Having seen offerings from the same salesperson drastically change when caught up in competition, probing and comparing saved several times the fee incurred with better products obtained by the client as a result. rnrnAs an alternative to the current methodology why not impose a third party financial advisor who is legally (not just ethically or morally) bound under licensing law through the engagement agreement to provide fiduciary care and complete independence in evaluating various alternatives. Such advisors would be prohibited from providing any financial products in this engagement, would be required to be financially independent of any compensation from the financial product providers or the salespeople involved, and would be expected to gather competitive bids. In all such engagements, the advisor would only render advice. The decisions would remain those of the client. rnrnNow the HECM cross-selling originator would have his/her view on a financial plan put to a test. At the same time, the borrower would have some assurance that an independent financial advisor had looked into the arrangement being recommended. Thus a good plan should survive the probing of the advisor and the HECM originator would have the satisfaction of having had his/her financial advice proven to be responsibly prudent.

  • Bill,rnrnYour analogy is exactly correct. I have also known people with multiple licenses for the purpose of “selling more.” They should be drowned out of all aspects of the financial industry. But having multiple licenses to better meet the needs of your client should not only be legal it should be expected of professionals that act with ethics and morality.

  • My entire business model has been based on the education of Certified Financial Planners, long term care insurance agents, elder care attorneys & in home care providers on the many ways a reverse mortgage can be utilized. rnrnTo that end I have opened a school, the American C.E. Institute, LLC., that is accredited to teach a 2 hour CE class to CFPu2019s entitled u201cReverse Mortgages-Myth vs. Reality. This class is also approved by the Florida Bar. Most importantly it was just approved by the Insurance Department of New Jersey. We chose New Jersey as it is reciprocal with 40 other states.rnrnMy class not only educates these groups on the reverse mortgage but it has an entire section dealing with the ambiguity of the cross selling law and the moral & ethical implications of offering a reverse mortgage to a senior client with the specific purpose of them obtaining an additional product with the proceeds.rnrnIt is a coincidence that this article appeared this morning. I just came back from attending the 10th Annual LTC Convention in New Orleans the last 2 days. Every major LTC carrier was in attendance and I spoke with each of them at length about the uses of a reverse mortgage as a vehicle to finance long term care insurance. They were all 100% positive and ready to be educated!rnrnAll of the comments listed have merit but there is not a yes or no answer to the question u201cshould cross selling be allowedu2019? It is about suitability! If it is right for that particular client and their circumstances then it should be allowed. If it isnu2019t, donu2019t! rnrnDuring 2010 I expect industry leaders like MetLife to provide guidance on this important subject.rnrn

  • rainmand,rnrnJust because one is an expert in more than one field is no reason to allow that same person to provide more than one product or service to a particular member of a protected class. Undue influence is a real question in all such permitted transactions.rnrnIf anything, I prefer to allow no cross-selling period for a period of 36 months; i.e. if an originator provides a HECM to a borrower, make that person ineligible to provide a financial product to the borrowers for 3 years following the date of the last funded HECM provided to a senior by that originator. Quite frankly, I would like to see violations fined with the option of egregious violations being found to be misdemeanors and repeat offenders subject to felony charges. One could make a strong case about the similarities of cross-selling to insider trading.rnrnLetu2019s end the appearance of potential conflicts of interest rather than promoting them. Let an originator decide if they want to sell financial products or originate reverse mortgages to a particular client.rnrnWhat is the matter with making referrals? Attorneys who are members of the ABA are required to refuse to accept new clients who appear to have conflicts of interests with existing clients. However, they generally refer those prospects to other reputable law firms.rnrnThe federal government insures HECMs. They are at risk for all loss in excess of the value of the home, the MIP collected from borrower, and interagency earnings on the MIP, if any (not considering net earnings or loss on interest earned and servicing fees following assignment). They decided to restrict cross-selling; maybe they just need to move to end it all together. I would support such legislation. rn

  • nIn California, brokers have a fiduciary duty to their clients. Cross-selling brokers using RMs to finance LTCi may be breaching their fiduciary duty. Being a fiduciary means not putting your interest ahead of a clientu2019s. If a broker sells an unsuitable insurance product to the client, there would be a breach of duty, and civil liability. In many instance, LTCi is not suitable. Certainly, where the only asset is a home, LTCi is unsuitable since the home is an exempt asset for purposes of qualify for Medi-Cal (California). Using RM to finance LTCi compounds the costs of a LTCi policy.t tnAARP says itu2019s unsuitable: nAARPu2019s position on using reverse mortgage to fund LTCi can be found in their national survey, #2007-22 December 2007 Reverse Mortgages: Niche Product or Mainstream Solution – Recommendation 16: u201cState governments and the Insurance Marketplace Standards Association should amend their suitability standards and cost disclosures for long-term care insurance sales to cover situations in which consumers are considering using reverse mortgage proceeds to purchase it. Sales practices that attempt to convince consumers to use home equity to pay for such insurance should be defined as violations of suitability standards. u2026u201dnNursing HomesnIn California today the average private pay in a nursing home is $82,125nTypical LTCi policies cost $3,000 to $5,000 for 2 to 3 years of LRTC coverage. nCost of policy without using a reverse mortgage:ntLTCi Premiums is $3,000 per yearntYear ten will have paid out $30,000 u2013 twenty years = $60,000nntLTCi Premiums is $5,000 per yearntYear ten will have paid out $50,000 u2013 twenty years = $100,000nnCost of suing RM to finance LTCi ntIf you use a reverse mortgage to financial LTCi u2013 the cost of the policy is substantially higher.ntCompounding debt, Loan Origination Fees plus Insurance and Services Fees, etc.nnNursing Homes stats:n70 percent of senior stay in NF for less than 90 days.nTypical LTCi policy has a 90 day exclusion provision (doesnu2019t begin to pay until after 90 days)n80 percent of seniors leave NF before 120 days.n12 percent of seniors are in NF for one yearn5 % are in NF for two or more years.nnDue to the high cost of LTCi and the low probability of being in a nursing home from an extend period of time, the chances of using LTCi and coming out u201caheadu201d for having a policy are slim to none, especially if a RM is used to fund the LTCi.nnMedi-Cal covers low-wealth senior nursing home costs:nThe one thing that a RM broker needs to know about nursing homes is that Medi-Cal covers low-wealth senior nursing home costs. If all the senior has is the house, the senior qualifies. These seniors donu2019t need LTCi. Seniors who would readily qualify for Medi-Cal but purchase LTCi with RM funding ironically will later find themselves barred from the Medi-Cal program. This happens because, assuming they are in a nursing home for any length of time, after one year the loan is due and they will be forced to sell their home. Then, after receiving the remaining equity (after the loan is paid off) they will be barred from qualifying for Medi-Cal due to the cash received (excess non-exempt asset) from the sell of the home. Many will not be happy with this outcome. This opens up the sad possibility of a suit for a breach of fiduciary duty and will put a cross-selling broker in an uncomfortable position of having to explain how this kind of transaction was in their clientu2019s best interest. n

  • HECM girl,rnrnAre counselors qualified to analyze LTC insurance and other financial products in light of the needs of seniors? Are they trained in estate planning matters and other technical areas?rnrnThen there is the issue that what applies to HECMs does not necessarily apply to other reverse mortgages. Of course, this is not much of a problem now but many in the industry expect to see the return of proprietary products in the next 15 months.rnrnI like the heart of “why can’t we all just get along” but Congress said otherwise.

  • In the LTCI example, it may not as cut and dried as it sounds. Should they use a stand-alone LTCI policy, or would a hybrid product using a life insurance or annuity chassis work better? Throw a variable life policy with an LTCI rider into the mix if you really want a licensing challenge. If you’re not making sure that your borrower is getting great service from another producer, you have to assume they’re getting the industry average, and that reflects back on you in the clients’ big picture.rnrnI know people who have used multiple licenses unethically, and I helped put a few of them out of business. However, I would challenge the idea that a loan originator acts unethically by also using another license or product to fulfill another goal of the borrower. rnrnIMHO, this is particularly so if the conversations begin with the borrower approaching the multi-licensee for solutions to financial problems instead of responding to a marketing campaign or the direct question of, “Can you help me get a reverse mortgage?”. Although loan originators and insurance licensees must meet the “suitability” standard, many act as though they were required to meet most if not all of the higher “fiduciary” standards with a duty of loyalty to the client.rnrnIf you can solve the client’s problem(s), find and use the best vendors and products, use the optional features of the various parts to create additional benefits, and document everything you did to serve the client’s best interests, then why shouldn’t you be allowed to do what the clients wants you to do and be compensated for it?rnrnAt the very least, you should be able to refer the client to a colleague that you know well and with whom you have a high and deep level of communication and also trust to develop and execute their part of the plan in the best interests of the client. Unfortunately, if you refer business to a colleague that is licensed with or employed by any company where you are also licensed or employed (which is exactly how you get to know other professionals so well), that is now a criminal offense for you. It’s unclear if the other professional is now a criminal as well. This ruins our ability to 1) organize ourselves into a tight-knit group or company of properly client-centered professionals with partially overlapping but complentary skill sets and expertise, 2) to have unitary supervisory personnel in position at that company who can supervise investigate how well the different transactions achieve the client’s goals and interests.rnrnReactionary legislation/regulation like HERA crams the licensee down deeper inside the clearly defined silo that regulators imagine to exist between solutions to this type of financial issue or that one, and forces lenders to choose between taking on supervisory responsibilities that they are unqualified, unable, and unwilling to perform or prohibition. They’re forced to become de facto enforcers of prohibition.rnrnReactions like HERA also try to move the ‘silos’ further away from each other so they appear more distinct. How would a farmer or rancher react if you told him he had to feed his livestock from only one silo instead of the other ones available on the farm? This restricts the multiple licensee’s ability to do what the market wants, which is to solve and simplify the client’s big problems by handling the details whether they involve this or that. They don’t always care how we do it, they usually just want us to get them there. That’s hard enough to do in the first place without somebody tossing new hurdles off the back of a truck while we’re running the race.

  • Why not find a way to make everyone happy? Not that more regulation is always the answer, but couldn’t it just be required that when purchasing additional items in conjunction with a Reverse Mortgage that transaction has to be covered in counseling? That way the senior has the right as an adult to make their own decisions about the use of their proceeds, but at the same time can get that third-party advice AND it can be monitored?

  • I agree with HECM Dude. I am confused by the comment, u201cthat senior’s are having a tough time finding a qualified originator to explain this product to them.u201d and do not see how that problem would be helped by allowing cross-selling. I donu2019t think the problem with knowledgeable originators is that there are not enough originators, if there is a problem, it is that there are too many that would originate a reverse mortage without specific reverse mortgage training or understanding.

  • I totally don’t agree that you “cannot find an originator to explain this program” I do not cross sell and don’t specifically want my customers going to someone who does. Certainly they can use their proceeds however they want, but they need to be free to shop around for those providors.

  • I agree with you 100%. Our niche is too saturated (maybe “was” is the better term) with originators that have dipped their toes in too many pools. All the time I’m seeing people say they offer a slew of products. Why not specialize in one and be good at that one specialty? How can you possibly keep up with everything that goes on in the reverse mortgage world, estate planning world, and financial advisory / insurance world all at the same time? When you lose track of the constant changes, you end up misinforming too many potential clients that trust what you are telling them (to some degree).

  • Many of the negative stories about Reverse Mortgages are tied to annuities. If it were legal for someone to crosssell the two, there are too many out there that would do so, citing it was legal, even if the worst possible combination. Making it legal would KILL the Reverse Mortgage business from even more negative publicity than we get now.rnCongress gets too much wrong in the Reverse Mortgage arena but this one is right.

  • I disagree – if I’m an expert in Reverse Mortgages, and Long Term Care insurance (and I mean a real expert), and both programs are compatible with each other, there’s no reason why I shouldn’t be enabled to offer both programs. I trust me, and only me, to provide my clients with the solutions that make the most sense for their situation – I don’t know any of you and your motivations may be different than mine (I’m always on the watch for the “bad guys” in our industry). If I’m educated and licensed in both solutions, and am also a responsible person (which I am), I should be enabled to write a Long Term Care insurance policy for my Reverse Mortgage client.

  • I’ve had several customers get a Reverse Mortgage specifically so they could afford Long Term Care Insurance premiums. The Reverse Mortgage, combined with the LTCi, ensured them they’d be able to stay in their home.rnrnPersonally, I think those two programs work well together.

  • I've had several customers get a Reverse Mortgage specifically so they could afford Long Term Care Insurance premiums. The Reverse Mortgage, combined with the LTCi, ensured them they'd be able to stay in their home.

    Personally, I think those two programs work well together.

    • Rainmand,

      Few of us would dispute the use of proceeds. It is the cross-selling aspect that is in question. Should originators be allowed to do both?

    • If you originated their reverse mortgage, they can purchase their LTC insurance from someone else. That's the ethical and legal way to do it.

      • I agree with you 100%. Our niche is too saturated (maybe “was” is the better term) with originators that have dipped their toes in too many pools. All the time I'm seeing people say they offer a slew of products. Why not specialize in one and be good at that one specialty? How can you possibly keep up with everything that goes on in the reverse mortgage world, estate planning world, and financial advisory / insurance world all at the same time? When you lose track of the constant changes, you end up misinforming too many potential clients that trust what you are telling them (to some degree).

  • I disagree – if I'm an expert in Reverse Mortgages, and Long Term Care insurance (and I mean a real expert), and both programs are compatible with each other, there's no reason why I shouldn't be enabled to offer both programs. I trust me, and only me, to provide my clients with the solutions that make the most sense for their situation – I don't know any of you and your motivations may be different than mine (I'm always on the watch for the “bad guys” in our industry). If I'm educated and licensed in both solutions, and am also a responsible person (which I am), I should be enabled to write a Long Term Care insurance policy for my Reverse Mortgage client.

    • rainmand,

      Just because one is an expert in more than one field is no reason to allow that same person to provide more than one product or service to a particular member of a protected class. Undue influence is a real question in all such permitted transactions.

      If anything, I prefer to allow no cross-selling period for a period of 36 months; i.e. if an originator provides a HECM to a borrower, make that person ineligible to provide a financial product to the borrowers for 3 years following the date of the last funded HECM provided to a senior by that originator. Quite frankly, I would like to see violations fined with the option of egregious violations being found to be misdemeanors and repeat offenders subject to felony charges. One could make a strong case about the similarities of cross-selling to insider trading.

      Let’s end the appearance of potential conflicts of interest rather than promoting them. Let an originator decide if they want to sell financial products or originate reverse mortgages to a particular client.

      What is the matter with making referrals? Attorneys who are members of the ABA are required to refuse to accept new clients who appear to have conflicts of interests with existing clients. However, they generally refer those prospects to other reputable law firms.

      The federal government insures HECMs. They are at risk for all loss in excess of the value of the home, the MIP collected from borrower, and interagency earnings on the MIP, if any (not considering net earnings or loss on interest earned and servicing fees following assignment). They decided to restrict cross-selling; maybe they just need to move to end it all together. I would support such legislation.

  • Many of the negative stories about Reverse Mortgages are tied to annuities. If it were legal for someone to crosssell the two, there are too many out there that would do so, citing it was legal, even if the worst possible combination. Making it legal would KILL the Reverse Mortgage business from even more negative publicity than we get now.
    Congress gets too much wrong in the Reverse Mortgage arena but this one is right.

  • I totally don't agree that you “cannot find an originator to explain this program” I do not cross sell and don't specifically want my customers going to someone who does. Certainly they can use their proceeds however they want, but they need to be free to shop around for those providors.

  • I agree with HECM Dude. I am confused by the comment, “that senior's are having a tough time finding a qualified originator to explain this product to them.” and do not see how that problem would be helped by allowing cross-selling. I don’t think the problem with knowledgeable originators is that there are not enough originators, if there is a problem, it is that there are too many that would originate a reverse mortage without specific reverse mortgage training or understanding.

  • Why not find a way to make everyone happy? Not that more regulation is always the answer, but couldn't it just be required that when purchasing additional items in conjunction with a Reverse Mortgage that transaction has to be covered in counseling? That way the senior has the right as an adult to make their own decisions about the use of their proceeds, but at the same time can get that third-party advice AND it can be monitored?

    • HECM girl,

      Are counselors qualified to analyze LTC insurance and other financial products in light of the needs of seniors? Are they trained in estate planning matters and other technical areas?

      Then there is the issue that what applies to HECMs does not necessarily apply to other reverse mortgages. Of course, this is not much of a problem now but many in the industry expect to see the return of proprietary products in the next 15 months.

      I like the heart of “why can't we all just get along” but Congress said otherwise.

  • In the LTCI example, it may not as cut and dried as it sounds. Should they use a stand-alone LTCI policy, or would a hybrid product using a life insurance or annuity chassis work better? Throw a variable life policy with an LTCI rider into the mix if you really want a licensing challenge. If you're not making sure that your borrower is getting great service from another producer, you have to assume they're getting the industry average, and that reflects back on you in the clients' big picture.

    I know people who have used multiple licenses unethically, and I helped put a few of them out of business. However, I would challenge the idea that a loan originator acts unethically by also using another license or product to fulfill another goal of the borrower.

    IMHO, this is particularly so if the conversations begin with the borrower approaching the multi-licensee for solutions to financial problems instead of responding to a marketing campaign or the direct question of, “Can you help me get a reverse mortgage?”. Although loan originators and insurance licensees must meet the “suitability” standard, many act as though they were required to meet most if not all of the higher “fiduciary” standards with a duty of loyalty to the client.

    If you can solve the client's problem(s), find and use the best vendors and products, use the optional features of the various parts to create additional benefits, and document everything you did to serve the client's best interests, then why shouldn't you be allowed to do what the clients wants you to do and be compensated for it?

    At the very least, you should be able to refer the client to a colleague that you know well and with whom you have a high and deep level of communication and also trust to develop and execute their part of the plan in the best interests of the client. Unfortunately, if you refer business to a colleague that is licensed with or employed by any company where you are also licensed or employed (which is exactly how you get to know other professionals so well), that is now a criminal offense for you. It's unclear if the other professional is now a criminal as well. This ruins our ability to 1) organize ourselves into a tight-knit group or company of properly client-centered professionals with partially overlapping but complentary skill sets and expertise, 2) to have unitary supervisory personnel in position at that company who can supervise investigate how well the different transactions achieve the client's goals and interests.

    Reactionary legislation/regulation like HERA crams the licensee down deeper inside the clearly defined silo that regulators imagine to exist between solutions to this type of financial issue or that one, and forces lenders to choose between taking on supervisory responsibilities that they are unqualified, unable, and unwilling to perform or prohibition. They're forced to become de facto enforcers of prohibition.

    Reactions like HERA also try to move the 'silos' further away from each other so they appear more distinct. How would a farmer or rancher react if you told him he had to feed his livestock from only one silo instead of the other ones available on the farm? This restricts the multiple licensee's ability to do what the market wants, which is to solve and simplify the client's big problems by handling the details whether they involve this or that. They don't always care how we do it, they usually just want us to get them there. That's hard enough to do in the first place without somebody tossing new hurdles off the back of a truck while we're running the race.

    • Bill,

      Your analogy is exactly correct. I have also known people with multiple licenses for the purpose of “selling more.” They should be drowned out of all aspects of the financial industry. But having multiple licenses to better meet the needs of your client should not only be legal it should be expected of professionals that act with ethics and morality.

  • In California, brokers have a fiduciary duty to their clients. Cross-selling brokers using RMs to finance LTCi may be breaching their fiduciary duty. Being a fiduciary means not putting your interest ahead of a client’s. If a broker sells an unsuitable insurance product to the client, there would be a breach of duty, and civil liability. In many instance, LTCi is not suitable. Certainly, where the only asset is a home, LTCi is unsuitable since the home is an exempt asset for purposes of qualify for Medi-Cal (California). Using RM to finance LTCi compounds the costs of a LTCi policy.
    AARP says it’s unsuitable:
    AARP’s position on using reverse mortgage to fund LTCi can be found in their national survey, #2007-22 December 2007 Reverse Mortgages: Niche Product or Mainstream Solution – Recommendation 16: “State governments and the Insurance Marketplace Standards Association should amend their suitability standards and cost disclosures for long-term care insurance sales to cover situations in which consumers are considering using reverse mortgage proceeds to purchase it. Sales practices that attempt to convince consumers to use home equity to pay for such insurance should be defined as violations of suitability standards. …”
    Nursing Homes
    In California today the average private pay in a nursing home is $82,125
    Typical LTCi policies cost $3,000 to $5,000 for 2 to 3 years of LRTC coverage.
    Cost of policy without using a reverse mortgage:
    LTCi Premiums is $3,000 per year
    Year ten will have paid out $30,000 – twenty years = $60,000

    LTCi Premiums is $5,000 per year
    Year ten will have paid out $50,000 – twenty years = $100,000

    Cost of suing RM to finance LTCi
    If you use a reverse mortgage to financial LTCi – the cost of the policy is substantially higher.
    Compounding debt, Loan Origination Fees plus Insurance and Services Fees, etc.

    Nursing Homes stats:
    70 percent of senior stay in NF for less than 90 days.
    Typical LTCi policy has a 90 day exclusion provision (doesn’t begin to pay until after 90 days)
    80 percent of seniors leave NF before 120 days.
    12 percent of seniors are in NF for one year
    5 % are in NF for two or more years.

    Due to the high cost of LTCi and the low probability of being in a nursing home from an extend period of time, the chances of using LTCi and coming out “ahead” for having a policy are slim to none, especially if a RM is used to fund the LTCi.

    Medi-Cal covers low-wealth senior nursing home costs:
    The one thing that a RM broker needs to know about nursing homes is that Medi-Cal covers low-wealth senior nursing home costs. If all the senior has is the house, the senior qualifies. These seniors don’t need LTCi. Seniors who would readily qualify for Medi-Cal but purchase LTCi with RM funding ironically will later find themselves barred from the Medi-Cal program. This happens because, assuming they are in a nursing home for any length of time, after one year the loan is due and they will be forced to sell their home. Then, after receiving the remaining equity (after the loan is paid off) they will be barred from qualifying for Medi-Cal due to the cash received (excess non-exempt asset) from the sell of the home. Many will not be happy with this outcome. This opens up the sad possibility of a suit for a breach of fiduciary duty and will put a cross-selling broker in an uncomfortable position of having to explain how this kind of transaction was in their client’s best interest.

  • My entire business model has been based on the education of Certified Financial Planners, long term care insurance agents, elder care attorneys & in home care providers on the many ways a reverse mortgage can be utilized.

    To that end I have opened a school, the American C.E. Institute, LLC., that is accredited to teach a 2 hour CE class to CFP’s entitled “Reverse Mortgages-Myth vs. Reality. This class is also approved by the Florida Bar. Most importantly it was just approved by the Insurance Department of New Jersey. We chose New Jersey as it is reciprocal with 40 other states.

    My class not only educates these groups on the reverse mortgage but it has an entire section dealing with the ambiguity of the cross selling law and the moral & ethical implications of offering a reverse mortgage to a senior client with the specific purpose of them obtaining an additional product with the proceeds.

    It is a coincidence that this article appeared this morning. I just came back from attending the 10th Annual LTC Convention in New Orleans the last 2 days. Every major LTC carrier was in attendance and I spoke with each of them at length about the uses of a reverse mortgage as a vehicle to finance long term care insurance. They were all 100% positive and ready to be educated!

    All of the comments listed have merit but there is not a yes or no answer to the question “should cross selling be allowed’? It is about suitability! If it is right for that particular client and their circumstances then it should be allowed. If it isn’t, don’t!

    During 2010 I expect industry leaders like MetLife to provide guidance on this important subject.

    • Michael,

      Whose suitability standards are you proposing be used? If the combined suitability standards of Senator McCaskill and Prescott Cole were the criteria, no legitimate LTC insurance salesperson or provider would ever want to cross-sell.

      In appointing JPK, Sr. as the first SEC Chairman, FDR was right in saying he could protect the hen house with the fox. However, it is absolutely wrong to advance MetLife as the party to provide cross-selling standards. The difference is JPK was prohibited from being compensated on stock exchange services. If you are proposing MetLife be prohibited from being compensated from any activities related either to reverse mortgages or insurance and financial products and services, then you have a stellar idea (but probably not to MetLife).

      Suitability is not the sole issue. Other commentators have brought up just a few. Even practically how would the transactions be monitored?

      The decision making skills of seniors are eroding with time. Some 62 year olds are well beyond their peak while a few 90 year olds seem near it. But the trend for seniors is generally not one that rises with time.

      The skills required to evaluate the need for a reverse mortgage are not the same as those needed to evaluate the need of and the differences in benefits and the financial positions of LTCi providers. Beyond that HECMs, the principal product of our industry, are federally insured but no LTCi is.

      As an industry, promoting cross-selling is more than self-serving and in the current political environment borders on the suicidal.

  • Some have argued quite eloquently for allowing salespersons to provide multiple products. As a financial adviser who never sold any financial products before originating reverse mortgages, I bring an entirely different perspective. I strongly believe in comparison shopping and gathering information and opinions before rendering advice. Having seen offerings from the same salesperson drastically change when caught up in competition, probing and comparing saved several times the fee incurred with better products obtained by the client as a result.

    As an alternative to the current methodology why not impose a third party financial advisor who is legally (not just ethically or morally) bound under licensing law through the engagement agreement to provide fiduciary care and complete independence in evaluating various alternatives. Such advisors would be prohibited from providing any financial products in this engagement, would be required to be financially independent of any compensation from the financial product providers or the salespeople involved, and would be expected to gather competitive bids. In all such engagements, the advisor would only render advice. The decisions would remain those of the client.

    Now the HECM cross-selling originator would have his/her view on a financial plan put to a test. At the same time, the borrower would have some assurance that an independent financial advisor had looked into the arrangement being recommended. Thus a good plan should survive the probing of the advisor and the HECM originator would have the satisfaction of having had his/her financial advice proven to be responsibly prudent.

  • Thank you The Critic for your clear comments, your comments on this issue are right on target. This is not the time for the reverse mortgage industry to be promoting cross-selling. If LTC or another financial product is a good idea for the borrower, fine. The borrower can be referred to someone that provides that product with no financial benefit to the referring party or their company. There are just too many potential problems with making money on more than one transaction and the occasional benefit to a borrower is not worth the risk to the individual or the industry. Then it is up to the insurance industry to police the insurance products and their appropriate uses. And it would be up to the reverse professional and the counselor to advise the borrower that no other financial products are required and that they should evaluate the other products independently. No offence to Met Life but they would not be the company to follow on this issue when they have so much at stake.

  • Hi Critic,

    A slow response – I missed your post when it was forwarded to an overloaded inbox. Sorry I'm late back and backtracking.

    Thanks for sharing the observations re the CPA firm refunding commissions. I suspect that this practice is made easier if they also earn some income from the accounting business of their firm. If they were functioning solely as financial advisors with securities and insurance licenses, I missed that. I'm curious about this model, though.

    Correct me if I'm wrong, but wouldn't the CPAs who are refunding insurance commissions be violating the “rebating” prohibitions of their insurance licenses? Most states have restrictions against rebating any funds, goods, services to the client (“thank you” gifts are usually separately restricted) because the insurance sale needs to stand on its own merits without any additional inducements to the insured.

    Securities commissions? They can't be shared with anyone not licensed in the first place, and usually not with another licensee not licensed through the same company without the specific written authorization of both entity's Principals. How did the firm do this? If they rebated the securities commissions to the client out of the firm's own assets, I don't quite see how that single extra step complies with the rules (as I understand them) even if it is admired and valued by the client. What am I missing?

    It's worth knowing as we try to redsign business models. Forming a group of differently licensed professionals with different skill sets doesn't seem to be an acceptable answer anymore as HERA prohibits “association” between the various practioners.

    P.S.: I don't claim that commissions are less expensive to the client in the long run; on the contrary I would expect fees to be the lower in most cases. My only point was that an up-front fee is a barrier to many middle class clients purely as an out-of-pocket cash-flow matter instead of a higher-level decision to minimize absolute total costs over the life of the product or investment. Many are willing to take an increase in either ongoing basis point costs or to accept surrender charge or CDSC schedules in exchange for no out-of-pocket expense even after you explain that it is likely to cost them more in the long run.

  • Big picture? My defense of cross-selling is not that is should be promoted. I have never viewed it as a predetermined strategy to capture extra commissions on reverse mortgage dollars, but just as a reasonable alternative to the reverse mortage borrower who wants either some additional cash flow help from the other financial instruments they already own, or is looking for ways to get more net leverage out of the reverse mortgage loan dollars from somebody that they are talking to already. It's just using some additional knowledge or skills to address one or more problems in one or more ways.

    But most often the cross-selling I refer to was not any grandiose plan but just a few basic tweaks or replacements of insurance products they already owned, usually Medicare health and drug policies. We did it to improve coverage or benefits and/or reduce premiums. In other words, these were our modest extensions of the same effort to improve the borrowers' cash flow that lead them to undertake a reverse mortgage in the first place.

    The great majority of cross-selling abuses (usually unsuitable annuity sales) would have been easy to stop dead in their tracks if the same source of funds documentation and history that we are required to submit when cash is brought into closings was also part of the existing suitability requirements for insurance salespeople,agencies, vendors, and/or regulators.

    All the securities principals I ever worked with required quite a bit of extra suitability documentation on the deliberately rare occasions when we were working with mortgage proceeds to begin with. The securities supervisors and regulators faced some separate abusive use of equity-stripping refinances for new investment dollars a few years earlier. The problem with securities and reverse mortgages is that FINRA allowed the individual B/Ds and RIAs decide on their own internal compliance review procedures and documentation – some were obviously deficient.

    That's not just 20:20 hindsight; it's what I tried to persuade insurance departments in several Western states to do before they had a problem on their hands. Only one out of six responded at all, and none did anything. Several told me flat out that even if I was right that they wouldn't act until they had resident complaints. Most spent what little time I got explaining how it was entirely their respective real estate/mortgage department's problem, not their's. I haven't called any of them back to ask if they remember these conversations.

    Now Mr. Veale and I sometimes seem to disagree, but I think that's mostly an artifact of assigning different and sometimes highly specific meaning to words and phrases. If his proposal for a fiduciary evaluation-only practioner or entity could be implemented, sign me up. I'd love to be part of that. I hope I could fulfill a role where you could use different product knowedge to have a larger beneficial impact for more people than as a producer. That could solve the problem of how the states that are enacting financial review requirements for reverse mortgage counseling would accomplish that goal. Conceivably, this fiduciary could allow a good plan to be implemented by one practioner who did his/her homework. I wonder about details like how we'd define scope of authority, train, license, and pay for it. Then again, it might take some existing and costly compliance measures off other entities' shoulders, so the funds might already exist and be tasked to compliance anyway. Hmmm…

    • I am a sr. who recently closed on a reverse mortgage. My question to you is:
      are proceeds from a reverse mortgage, exempt and subject to the same 6 month reinvestment time frame as proceeds from the sale of a home in order to maintain their judgement-proof exempt status?

  • I am a sr. who recently closed on a reverse mortgage. My question to you is:rnare proceeds from a reverse mortgage, exempt and subject to the same 6 month reinvestment time frame as proceeds from the sale of a home in order to maintain their judgement-proof exempt status?rn

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