NRMLA Publishes Ethics Code on Refinancing of HECM Loans

The National Reverse Mortgage Lenders Association published a refinancing legal advisory under its code of ethics, reminding members that one of the “Values” in the association’s Code of Ethics & Professional Responsibility is the concept of fairness.

The advisory, “Ethical Refinancing of Reverse Mortgage Loans,” discusses appropriate circumstances for refinancing a adjustable rate reverse mortgages into a fixed rate loan, with the fairness value in mind. The association underlines the importance of treating customers in a manner that is fair and reasonable, and it advises lenders to offer products and services “that they have determined may provide a ‘bona fide advantage’ to consumers.”

“In the view of the Committee, an Adjustable to Full Draw Fixed Rate Refinancing that may provide a bona fide advantage to a senior consumer generally is one that may provide to the senior consumer cash in the amount of a full draw that the senior consumer actually and reasonably wants, at a reasonable cost to the senior consumer,” says the advisory.

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Examples of loan transactions that are appropriate and those that are not can be found in the advisory as guidance.

“If a NRMLA Member were to fail either to make such a bona fide advantage determination or to make it incorrectly, prior to offering such reverse loan refinancing opportunities to senior consumers, either directly or indirectly through others, such a NRMLA Member would be engaging in unethical conduct under the Code of Ethics,” the advisory specifies.

All members must sign the code of ethics as part of new or renewed membership.

To view the refinancing advisory, click here.

Written by Elizabeth Ecker

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  • This opinion has some difficulties especially in the first example, presenting an inappropriate refinancing. Having submitted concerns to NRMLA, I hope to see it withdrawn, corrected, and reissued.

  • I too have problems with the first example. It appears to me that Stella is getting $17,000 more in the new loan than she could have drawn on the old loan. Why not put the money in the bank and draw funds as needed. In my opinion, Stella is better off with the new loan, perhaps her heirs will inherit less, but who cares about them, this is about Stella. She now has an additional cash reserve of $17,000.

    Additionally, Stella has been paying non-tax deductible interest for 5 years. When the old loan is paid off, she will receive a 1098 form for the entire 5 years of interest She will be entitled to significant mortgage interest write-offs (if needed), plus fees associated with the original loan.

    The point that I am trying to make is that what is best for Stella, may not be necessarily best for the estate after Stella has passed away. Anytime, Stella can get more money she ought to go for it.

    RM Borrower

    • Bill,

      In principle I agree with the thought behind the opinion but the opinion needs work. The first example should have been as free of ambiguities as possible but it was not. For example, the unused portion of the line of credit was the same at the time of funding as it was five years later; that says the borrower had need for and used some of the proceeds in that five year period.

      The interest deduction related to all mortgages became complicated through 1986 and 1987 legislation. It was further complicated through the introduction of the treatment of specified mortgage insurance premiums as interest beginning in 2006. All form 1098 indicates is the amount of interest paid in a calendar year, it does not indicate the amount of interest which is deductible. The “lender” does not have the records to determine how much of interest which is paid is deductible but the “lender” has the duty to notify the borrower about the amount of interest which was paid that year.

      Since home mortgage interest for most individual taxpayers is only deductible in the tax year paid, I do not understand you second paragraph. I also have a problem with your opening paragraph as the unused portions of HECM lines of credit normally grow faster than the after tax earnings most taxpayers can earn on the same amount of money invested in the market. While I understand your point, we do not agree on your conclusion. I do not say that lightly since that statement means, I would not recommend refinancing from one HECM to another for the borrower in the example and would thus lose a sale.

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