Wholesalers Aim to End Unethical Reverse Mortgage Advertising Practices

Reports of misleading advertising by reverse mortgage lenders is an issue that has plagued the industry for some time, but a new advisory opinion published by the National Reverse Mortgage Lenders Association aims to end the behavior.

According to the opinion, a NRMLA member that retains or arranges with a third party to assist in the origination of reverse mortgages – through a lead company or marketing as well – will be held responsible under the association’s Code of Ethics for the actions of third parties undertaken on its behalf.  The NRMLA member could be placed on suspension, fined, and or referred to law enforcement authorities.

Going one step further, the NRMLA Wholesale Advisory Council – Reverse IT, Live Well Financial, Genworth Financial Home Equity Access, Generation Mortgage Company, Bank of America and MetLife Bank – has agreed to work cooperatively to help “stamp out unethical advertising practices” through their wholesale channels.

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Each lender has agreed to incorporate the NRMLA code of ethics within their third party originator agreements, even if the party isn’t a NRMLA member.  In addition, the ethics committee will share information on advertising and marketing materials it finds problematic with the council.

“While the company being investigated will remain anonymous, the Ethics Committee will share actual language or visuals taken from the advertisement,” said the association.  “Council Members will investigate to the best of their ability whether any TPOs (or other third-parties) they work with have distributed the same materials, and, if so, to take appropriate and reasonable action.”

To view a copy of the advisory opinion, see here.

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  • It is important that the action which is taken against the parties is consistent. It is also important that the terms constituting false claims have agreement and be disseminated to all NRMLA members. The severest actions should be taken against repetitive offenders based on current and prior known instances. Not only should the originator or company be held responsible but so also should management for failing to oversee their responsibility to ensure their company is not associated with false advertising.

  • It is important that the action which is taken against the parties is consistent. It is also important that the terms constituting false claims have agreement and be disseminated to all NRMLA members. The severest actions should be taken against repetitive offenders based on current and prior known instances. Not only should the originator or company be held responsible but so also should management for failing to oversee their responsibility to ensure their company is not associated with false advertising.

  • Two of the biggest abuses of the last 36 months are the word “income” and the term “tax-free.” Also any claims regarding the deduction of interest must have a caveat regarding seeing a tax consultant.

    Not only should printed advertising be checked but just as importantly, so should websites and the social media. This is an important and significant initiative.

  • Two of the biggest abuses of the last 36 months are the word “income” and the term “tax-free.” Also any claims regarding the deduction of interest must have a caveat regarding seeing a tax consultant.

    Not only should printed advertising be checked but just as importantly, so should websites and the social media. This is an important and significant initiative.

    • I belive what Mr. Veale is saying (and Mr. Veale correct me if I am wrong), is that a RM is a liability and therefore not income. I believe he has issue with “tax-free” and “income” being used together. To say a RM is “tax-free” income is misleading in that 1) income suggests that no repayment of a debt is involved and 2) liabilities are generally tax free anyhow as they are not income.

      • Mr. Lyles,

        You are a very responsible responder; however, your comment is both right and wrong.

        “Income” is a legal, accounting, and economic issue. Anything which must be repaid is not income; it is debt proceeds and only debt proceeds. So as to income you are absolutely right.

        Tax rules are much different. How can it be determined that loan proceeds are “tax-free” before they become due and payable? Please see my response to rsr47rsr and my series of articles on this subject in Reverse Review.

        Each of these terms are false advertising when describing the nature of reverse mortgage proceeds whether used together or separately. It does not matter if the reverse mortgage is a HECM or not.

    • I belive what Mr. Veale is saying (and Mr. Veale correct me if I am wrong), is that a RM is a liability and therefore not income. I believe he has issue with “tax-free” and “income” being used together. To say a RM is “tax-free” income is misleading in that 1) income suggests that no repayment of a debt is involved and 2) liabilities are generally tax free anyhow as they are not income.

    • rsr57rsr,

      Please point to the Internal Revenue Code (“IRC”) Section (“§”) or Regulation (“Reg.”) § which exempts loan proceeds from taxable income.

      Any debt which is cancelled or otherwise forgiven by a lender is income under IRC § 61(a)(12) unless it can be excluded under IRC § 108. HOWEVER, IRC Reg. § 1.1001-2 specifically mandates that all nonrecourse debt forgiven when a taxable disposition of the collateral occurs must be treated as additional proceeds from the disposition increasing any related gain or decreasing any related loss that otherwise is realized. Such dispositions include foreclosure, short sale, etc. Any recourse (or nonrecourse debt cancelled when a taxable disposition of collateral does not occur) debt in excess of the exclusions under IRC § 108 is ordinary income.

      Based on the Allen decision, FHA insured loans have no special protections under the IRC. They must be treated like all other nonrecourse debts.

      It is absolutely true that proceeds are rarely taxable if repaid in full. So how can a lender declare reverse mortgage proceeds to be tax-free before they are repaid? If they are not repaid, they may indeed be taxable.

      (There is a theoretical argument not yet pursued by the IRS in all cases that if the balance due on a nonrecourse debt is greater than the value of the collateral on the same day that a borrower receives proceeds related to that debt, the difference between the balance due and the value of the collateral is taxable income under IRC §61(a)(12) up to the amount of the proceeds received on that day.)

      • Mr. Stephens,

        You must be a recent reader of RMD. Two years I wrote about the IRS problem on misinformation. You can read the articles which Admin posted on 1/28/2009 and the other on 2/4/2009 by using search above or the category button above and using the commentary button you come to articles by several contributors (including me) which are presented in reverse chronological order. Then I also wrote two RMD articles on 6/12/2009 and 6/23/2009 on the issue of taxable proceeds and foreclosure.

        Unfortunately my schedule has not allowed the time needed to get the rest of the misinformation corrected; no one is paying me to do this. The IRS is willing but the time needed on my end is massive since I am one person and they are many. The approval process takes months when there is no revenue ruling on point which lays down the rule. The legal issue is clear but one needs to discuss history, court cases, regulations, and then link them together. All is done by email.

        As a tax adviser, my first concern is protecting deductions so I got it corrected immediately. The income side is harder, takes more effort, and as a tax adviser correcting IRS pubs on the taxable income side of things is not my first concern. Like all bureaucracies the IRS is divided into fiefdoms. The IRS Pub area has always been one of the weaker ones from the standpoint of knowledge and understanding. It does not rule the IRS and in fact to “correct” something they must go through the writers of the regulations, yet another layer.

        My tax adviser peers laugh about our tax-free marketing but few if any of their clients would ever get a HECM so it is of little concern to them for us to correct our marketing. They treat it like the nonsense about the “security” MBS investors had in subprime mortgages which the mortgage industry promulgated to its own detriment during the “bubble.” It just proves to them how little we understand our own product; many impolitely use the word “stupid.” By using “tax-free” we provide a basis for them to believe that they understand the product better than we do.

        I am completing the series of articles on this subject for Reverse Review. Next month I am writing on the required reporting issue. When it is done, I will have completed the reference materials I need to move forward with the IRS but I will not have the time needed to do it until next fall.

      • Mr. Stephens,

        You must be a recent reader of RMD. Two years I wrote about the IRS problem on misinformation. You can read the articles which Admin posted on 1/28/2009 and the other on 2/4/2009 by using search above or the category button above and using the commentary button you come to articles by several contributors (including me) which are presented in reverse chronological order. Then I also wrote two RMD articles on 6/12/2009 and 6/23/2009 on the issue of taxable proceeds and foreclosure.

        Unfortunately my schedule has not allowed the time needed to get the rest of the misinformation corrected; no one is paying me to do this. The IRS is willing but the time needed on my end is massive since I am one person and they are many. The approval process takes months when there is no revenue ruling on point which lays down the rule. The legal issue is clear but one needs to discuss history, court cases, regulations, and then link them together. All is done by email.

        As a tax adviser, my first concern is protecting deductions so I got it corrected immediately. The income side is harder, takes more effort, and as a tax adviser correcting IRS pubs on the taxable income side of things is not my first concern. Like all bureaucracies the IRS is divided into fiefdoms. The IRS Pub area has always been one of the weaker ones from the standpoint of knowledge and understanding. It does not rule the IRS and in fact to “correct” something they must go through the writers of the regulations, yet another layer.

        My tax adviser peers laugh about our tax-free marketing but few if any of their clients would ever get a HECM so it is of little concern to them for us to correct our marketing. They treat it like the nonsense about the “security” MBS investors had in subprime mortgages which the mortgage industry promulgated to its own detriment during the “bubble.” It just proves to them how little we understand our own product; many impolitely use the word “stupid.” By using “tax-free” we provide a basis for them to believe that they understand the product better than we do.

        I am completing the series of articles on this subject for Reverse Review. Next month I am writing on the required reporting issue. When it is done, I will have completed the reference materials I need to move forward with the IRS but I will not have the time needed to do it until next fall.

    • rsr57rsr,

      Please point to the Internal Revenue Code (“IRC”) Section (“§”) or Regulation (“Reg.”) § which exempts loan proceeds from taxable income.

      Any debt which is cancelled or otherwise forgiven by a lender is income under IRC § 61(a)(12) unless it can be excluded under IRC § 108. HOWEVER, IRC Reg. § 1.1001-2 specifically mandates that all nonrecourse debt forgiven when a taxable disposition of the collateral occurs must be treated as additional proceeds from the disposition increasing any related gain or decreasing any related loss that otherwise is realized. Such dispositions include foreclosure, short sale, etc. Any recourse (or nonrecourse debt cancelled when a taxable disposition of collateral does not occur) debt in excess of the exclusions under IRC § 108 is ordinary income.

      Based on the Allen decision, FHA insured loans have no special protections under the IRC. They must be treated like all other nonrecourse debts.

      It is absolutely true that proceeds are rarely taxable if repaid in full. So how can a lender declare reverse mortgage proceeds to be tax-free before they are repaid? If they are not repaid, they may indeed be taxable.

      (There is a theoretical argument not yet pursued by the IRS in all cases that if the balance due on a nonrecourse debt is greater than the value of the collateral on the same day that a borrower receives proceeds related to that debt, the difference between the balance due and the value of the collateral is taxable income under IRC §61(a)(12) up to the amount of the proceeds received on that day.)

  • I love it when an industry polices itself as opposed to a new government bureaucratic committee or sub-committee being formed to attempt such actions. Bravo NRMLA!

  • I love it when an industry polices itself as opposed to a new government bureaucratic committee or sub-committee being formed to attempt such actions. Bravo NRMLA!

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