CFPB: Lenders May Be the Answer to Funding HECM Counseling

While there is concern among the reverse mortgage industry about what the regulators may do in their oversight of the business, it may have found an ally in a surprising place: The Consumer Financial Protection Bureau.

In the CFPB’s recent report on reverse mortgages, it stresses what stakeholders have been saying for some time, namely the need for ongoing funding of required counseling. Now, it agrees, maybe lenders should be involved.

Last year, $88 million in housing counseling funding was wiped out of the Department of Housing and Urban Development budget, and was later restored at $45 million, a lower level than requested—or needed.

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To provide a consistent supply of funding the CFPB now suggests that lenders pay into a pool that all counseling agencies could access.

“One possible funding mechanism worth considering is a lender-funded pool,” the agency wrote in its report to Congress. “Lenders could contribute funds to a central pool, which would then be disbursed to counseling agencies according to need or client volume,” the CFPB writes. “The pool could be administered either by HUD or by a neutral third party.”

Industry participants agree the solution could help solve the ongoing funding problem, which only seems to be getting more difficult year after year.

HUD-approved counseling agencies are limited today in how they can be funded, under the Housing and Economic Recovery Act of 2008, which states lenders can’t contribute to Home Equity Conversion Mortgage (HECM) counseling directly or indirectly.

With the ongoing fight to fund the counseling mandate, the CFPB’s suggestion is a welcome one.

“The CFPB addressing the issue opens the door for further discussion of it,” says Peter Bell, president of the National Reverse Mortgage Lenders Association.

Whether the agency’s suggestion will actually be put into practice is unclear.

“We look forward to hearing from Congress about the report and the suggestions we offer in the report, including how to fund counseling about reverse mortgages,” a CFPB spokeswoman told RMD.

The Time Has Come

The topic of reverse mortgage counseling funding is a sensitive one, with many protections built in to prevent any conflict of interest between lenders, counseling agencies and borrowers. But lenders and counseling agencies seem to agree that now is the time to come up with some new solutions about the way counseling is funded.

“Given the difficult environment for government funding of HECM counseling and increased regulatory scrutiny, I think the pooled funding is an idea whose time has come,” says Daniel Fenton, housing director for Money Management International.

“The concept does effectively remove the conflict of interest by decoupling compensation for counseling to the number of loans closed, but the usefulness of the concept goes far beyond this.”

Counseling agencies, which are non-profits that allocate resources, typically based on the grant funding that is administered each year from HUD, agree that some form of lender-pooled funds, under the right protections, would be a welcome change.

Before HERA, lenders were allowed to contribute to counseling agencies. However, with the language specifically prohibiting any reverse mortgage lender or related party from funding reverse mortgage counseling, the interpretation today is that even a blind pool would be prohibited.

Since then, the funding for counseling has gone through Congressional appropriations each year, with funding lacking consistency year over year and lobbyists continually going to Capitol Hill for funding requests.

“Everybody is on the same page on the importance of counseling,” says Gregg Smith, President of One Reverse Mortgage. “It’s more about making sure that the cost is not a determining factor in a senior moving forward with counseling. This dialogue is starting to gain some traction and we’re hoping this is a positive sign.”

Conflict Resolution

In order to eliminate any conflict of interest, the involvement of a third party would be essential, says Setina Briggs, housing director for GreenPath Debt Solutions.

“I would propose that lenders make annual year-end financial contributions to HUD based on HECM loans closed in support of the counseling program and that HUD add those funds to make the awards as they typically do,” she says.

While an escrow-style system to cover the costs of both sessions that result in a closed loan and those that don’t would be ideal, says Jeremy Shadrick, founder of QuickCert, an agency that is funded through donations rather than government grants, the pooled funding would be a next-best alternative.

“I agree with the idea of having some way to have blind donations from the lenders that indirectly fund the counseling sessions. It would need to be handled by HUD as a third-party government agency dispersing the funds like they do the grants now, and the lenders and brokers would need to contribute based on the volume they close each month,” he says.

When asked how such a program would work, the Department of Housing and Urban Development declined a request for comment.

The benefits of such a system go well beyond keeping counseling funded on a consistent basis, Fenton says. The client who is unsure about getting a reverse mortgage would not be discouraged by a fee, nor would that counseling client be influenced by varying fees in the marketplace, as sometimes happens when funding allocations vary by agency, he says.

Further, the counseling agency would have a more predictable funding stream and lenders would not have to field borrower questions about varying fees in the market for counseling.

“There are lots of potential variations of this idea, and it is not a silver bullet in terms of improving counseling quality,” Fenton says. “But providing a sustainable and scalable funding stream for counseling without being tied to closed loans will be a huge improvement over the situation we face today.”

It may not be a fully developed solution, but lenders and counseling agencies agree it is a good starting point to developing a solution for a situation that is not sustainable.

“We know it is important and we know it has a cost. Either borrowers, the government or lenders have to contribute,” Bell says.

“The lender-funded pool is just one idea that’s on the whiteboard,” Smith says. “It isn’t a game plan. It is the funding mechanism that seems to be causing the concerns. At the end of the day, counseling agencies are non-profits, but they still have to pay their rent.”

This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry.

Written by Elizabeth Ecker

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  • As stated previous comments, rather than charging fees for counseling, HUD should charge a $250 endorsement fee which lenders would pass through to borrowers.  The fees would be used to fund counseling. 

    The reason for $250 is that HUD is estimating that the pull through rate of certified counselees is now just 48%.

    Any appropriations for counseling can be used for administrating the  program, making up any shortfalls, and also lowering then current endorsement fees.

  • Agree with Mr. Veale.  The cost of counseling should be born by the consumer just like they bear the cost of MIP,Appraisals and all other closing costs. Mr. Veale’s suggestion most closely matches the actual cost of HECM counseling when decoupled from the entire counseling budget.  Based on current volume of approx 70,000 this number becomes $17,500,000 and accounts for 140,000 counseling sessions at $125 each.  Please note that $17,500,000 is not $88,000,000.

  • Atare,

    Between fiscal 2010 and 2011, HUD had to allocate $2.2 billion out of the MMI Capital Reserve Fund to the HECM portion of the MMI Fund.  That allocation was to cover projected losses from fiscal 2009 and 2010 endorsements.

    “Taking from Paul to give to Peter” cannot keep going on forever.  Please see my suggestion below.

    • Jim —

      Congress and HUD have a duty to fund HECM counseling. You mandate it; you fund it.

      While the CFPB’s funding suggestion is attractive, it raises some questions:

       How strong will a lender-funded HECM counseling funding pool be in the long run?

      Notwithstanding the proposed third-party funds-distribution mechanism, could HECM counselors be influenced subliminally(no loan production, no funds for counseling;lenders don’t print money; they must earn it first from loan production)?

      Could the CFPB’s proposal pass the smell-test with the consumer advocacy community and the media?

      How will a lender’s share of contribution to the fund be determined?

      Should Congress and HUD be allowed to abdicate their responsibility to fund impartial HECM counseling? 

      I hope Marilu and you are staying cool.

      Thanks!

      Atare

      • Atare,

        Respectfully, Congressional mandates do not require Congressional funding.  There are many examples including the Obama health care legislation.  Like driver’s licenses, the HECM program is a privilege not a right.

        My suggestion has nothing to do with lender funding.  I believe HERA the prohibition of direct or indirect funding of the counseling by lenders might be violated if the cost is not reimbursed by borrowers directly at closing.

        In the past I have suggested that lenders pay the fee to HUD and that HUD administrate the fund.  I understand how some could deem that as a violation of the spirit of HERA (if not a violation in fact) so rather than lenders funding it, why not have borrowers do it through reimbursement to lenders at closing?

        As a suggested variation of the endorsement fee presented above, all counselees who do not meet the income threshold of Mortgagee Letter 2011-09 could be charged a counseling fee.  Then the endorsement fee could be less, say
        $200 but that would mean those who could exceed threshold income  would currently incur a total cost of about $325 in total while those with lower income only $200.  The endorsement fee concept still meets the spirit of the HERA funding requirement while at the same time allows for self funding of counseling.

  • Whether paid by lenders via a funded “pool” or from an “endorsement fee”, HECM borrowers will end up footing the bill.  The key is the borrowers’ ability to finance the counseling vs. having to come out-of-pocket.

    • REVGUYJIM,

      The only way the borrower pays the cost of counseling under the endorsement fee concept is if the borrower reimburses it; UNLESS you are suggesting that lenders will increase margins (adjustable rate) or total interest rates (fixed).

      Once you get into a game of counselees paying their counseling fee at closing, counseling automatically has a vested interest in the outcome of counseling, making it no longer independent as to that counseling engagement.

      So on all accounts, I must most respectfully disagree with your observations.  

  • What about doing counseling at a differernt stage of the process and keeping the cost low? Instead of making it the first thing borrowers do, make sure it’s just done prior to closing. The borrower still gets all the necessary education and by this point would have better questions to ask. If the borrower chose to do it first, great! But as a former counselor, too many borrowers are counseled and have no idea why they are being counseled. Those are the people that end up not closing and ultimately paying for their counseling. The savvy borrowers may know it’s smarter to do it first (to make sure your lender isn’t giving false information) but those are the borrower’s that pay upfront anyway.

    James, what problems do you see? Do you think this would just raise costs for lenders?

    • RMSmart,

      I apologize.  I thought I had responded.

      We agree that counseling should follow application and BCU but perhaps for different reasons.  It is just before costs begin being incurred where counselors bring the highest consumer protection.

      Counseling executives want to make counseling into an education and financial assessment provider.  They believe the best assurance as to consumer protection is an educated senior.

      As a CPA and a licensed real estate broker, I interviewed a half dozen originators in 2004 to determine whether or not a reverse mortgage was right for a widow.  At the time I hardly knew what a reverse mortgage was.  Each of the six gave a different prospective of the product, most of which made no sense at all.  Rather than present a nonrecourse negatively amortizing mortgage with a no pay option, I had to hear about and AGREE TO converting equity into income, how a reverse mortgage is a mortgage but in reverse and other less than intelligible theories.  Somehow the proceeds were not paid from a lender but from the house and on and on.

      After application the widow, a college professor, and I jointly did counseling.  The counselor had difficulties explaining the HECM.  Even she could not state how tenure, term payouts, servicing fee set asides, or “growth” in the line of credit were computed.  BUT what she did was 1) talk to the widow to determine if she was contractually competent and 2) if the option we were selecting made sense to her based on the facts the widow disclosed.

      It is the function of consumer protection which should be the principal function of counseling.  With most seniors I deal with, they retain a large percentage of the information presented but little technical or detailed information.  We usually go over the information more than once particularly the financial portion but rarely the portion on how much their costs will be or the amount of money they will get under each loan presented.  So what is it that counselees walk away with from counseling which makes them better consumers?  Surely counseling execs do not believe they educate that much better do they?  In an hour and knowing that seniors will cover financial assessment what is it that they will get across which will stick?

      Let the counselor look over the option that the senior has selected.  Let the counselor review BCU input and results with the senior to make sure the senior understands available options.  Why should counseling be a party to the education portion of origination rather than a reviewer of it?  It is in review where counselors can provide the most insight to what prospects believe they understand about reverse mortgages.

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