Consumers Union: Reverse Mortgage Originators Must Have Fiduciary Role

Consumer advocacy group Consumers Union today issued a statement in conjunction with California Advocates for Nursing Home Reform urging more reverse mortgage protections implemented by the Consumer Financial Protection Bureau. Included in the recommendations: make changes to reverse mortgage counseling, require originators and lead generators to register with the CFPB, and establish new standards for those obtaining and originating the loans. 

The recommendation, made in response to a request for comments from the CFPB following its recent reverse mortgage study, comes after a separate, but similar, statement issued in June that also urges the CFPB toward greater oversight of the reverse mortgage market. This time, CU stresses inadequate counseling as well as a push toward both a fiduciary responsibility of reverse mortgage originators and a suitability standard for borrowers. 

“The CFPB should establish a suitability standard that promotes long-range solutions and includes strong consumer protections for violating that standard,” the comments state. “As a matter of public policy, a reverse mortgage should be considered suitable only when a senior has no other viable option.”

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With regard to reverse mortgage counseling, CU says there are “holes in the counseling safety net.” One of the concerns is that borrowers may have already made the decision to obtain a reverse mortgage before attending counseling. To bolster the process, face to face counseling should be required, CU writes, and when not available, should be provided via video technology. Additionally, it should be broken into two segments and borrowers should go through a required pre-counseling questionnaire. 

“Seniors can be an easy target for unscrupulous reverse mortgage lenders who prey on borrowers who may not fully understand the complex nature of these loans,” said Norma Garcia, senior attorney and manager of Consumer Union’s financial services program. “It’s time to strengthen oversight of the reverse mortgage industry to rein in abuses and protect seniors from losing their most valuable asset—their homes.”

Reverse mortgages may be appropriate for some low-income, healthy seniors who lack other retirement assets and do not qualify for other options, Consumers Union states, but should be considered as a last resort. 

Other points of issue noted by CU are lenders and brokers adherence to a fiduciary responsibility, the outlaw of deceptive marketing, stronger prohibitions on cross-selling, and the protection of non-borrowing spouses and tenants. 

“We are concerned about seniors who have taken out reverse mortgages without fully understanding what they were getting themselves into,” said Prescott Cole, senior attorney for California Advocates for Nursing Home Reform. “Reverse mortgages may be an appropriate option for some seniors, but for borrowers who deplete their equity prematurely or who can’t keep up with the terms of the loan, the consequences can be devastating.”

Upon the release of a similar statement in June, RMD spoke with CU’s Garcia, who said the market has shown some improvement, but that self-regulation is still needed on the part of the reverse mortgage industry. 

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Written by Elizabeth Ecker

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  • Mr. Prescott Cole is a very bright attorney.  I do not know and have not spoken to Ms. Norma Garcia.  HOWEVER, both seem ignorant of the research being done by Texas Tech University in a very academic and scholarly manner.  It is very doubtful either Mr. Cole or Ms. Garcia has read about the use of a Saver as a “Standby” Reverse Mortgage as advocated by Dr. John Salter, CFP or Mr. Harold Evensky, CFP.

    It is doubtful if either Mr. Cole or Ms. Garcia has investigated the recent writings of the Sacks brothers on the value of the early use of Saver proceeds by  more affluent retirees (homes worth at least $500K and other assets worth between $200K and $1 Million) or the research completed at Texas Tech University Department of Personal Financial Planning on the same subject.  Unlike Dr. Salter or Mr. Evensky, Mr. Cole and Ms. Garcia are not qualified in the field of personal finances.  They are both irresponsible for stating that reverse mortgages should only be for the financially destitute. 

    Adding formal college level course education requirements, specific HECM testing requirements, and fiduciary standards to originator qualifications and standards would not be horrific.  To add suitability rules to be completed by originators would be draconian.  Those proposed in recent California Assembly legislation as advocated by Mr. Cole (the original AB 329) included the following:  “Any other factor that the court determines relevant in light of the totality of the circumstances.” 

    Imagine the horror of finding out that a court or the CFPB has decided that a NEW “factor” applied retroactively to originations that were closed two or three years before.  Others may find that acceptable; I do not. Originators should NOT be expected to provide suitability standard testing.  Originators have a vested interest in the outcome of the transaction, so how can they be expected to evaluate suitability impartially?  That should not be the responsibility of counseling which after the issuance of ML 2011-09 can no longer automatically be considered as independent.  Worse counselors are not properly trained in such matters. To meet this standard it seems we need to add a layer of qualified financial advisor such as CFPs who have absolutely no stake in the outcome of the transaction to achieve that very lofty (and unrealistic) goal.

    If the CFPB goes to the extremes suggested by Mr. Cole and Ms. Garcia, even those few seniors who can be helped by HECMs will be helped far too late.  If the Bureau requires the suitability services presented in this comment, out-of-pocket costs will soar and HECMs will become out-of-pocket cash cost prohibitive for seniors who are destitute.  Funding is needed.  The best compromise would be for Congressional funding but that would be practically impossible.   I strongly advocate the idea of an endorsement fee on HECMs to cover the costs of counseling and if deemed required, suitability standard testing costs.

  • California Advocates for Nursing Home Reform, Prescott Cole can be reached at 800-474-1116  http://www.canhr.org/thanks.html
    Mr. Cole,I am reading your comments about the suitability of reverse mortgages in Reverse Mortgage Daily.Can you please explain what you mean by your statement, “but for borrowers who deplete their equity prematurely or who can’t keep up with the terms of the loan, the consequences can be devastating.” ?You do make an important point when you say that,”“We are concerned about seniors who have taken out reverse mortgages without fully understanding what they were getting themselves into”.  We in the industry are concerned that many senior advocates like yourself comment without fully understanding Reverse Mortgages.  You owe it to yourself to become educated on this subject if you choose to continue to opine on the subject.

      • pessimism has little to do with it. At best his perspective is unreasonably narrow and harmful to the very audience he purports to want to protect..Mr. Veale, are you employed by Security One Lending?

        Jim Spicka
        Subject: [reversemortgagedaily] Re: Consumers Union: Reverse Mortgage Originators Must Have Fiduciary Role

      • Mr. Spicka,

        I have been a SVP at S1L since its second HECM application was submitted for processing.  
        As to pessimism and Mr. Cole, he views HECMs as mainly terminating in foreclosure when the HECM becomes due and payable simply because the balance due is greater than the value of the home at termination.  He does not view the product as one which can extend cash flow or increase income through risk sensitive reemployment of cash reserves into higher earning assets.  He does not see it as a cash, financial, or income tax planning tool.

        Mr. Cole has no vision of this product as a financial plan implementation tool for the more affluent (than our traditional market segment).  He believes the product is so bad it should only be made available to those who need it as a last resort.


  • Reverse mortgages may be appropriate for some low-income, healthy seniors who lack other retirement assets and do not qualify for other options, Consumers Union states, but should be considered as a last resort. ”  So if I have this right, Some entity, gets to decide whether or no I need a reverse mortgage? It seems like equity stripping to me. I think they are forgetting who owns the home. CFPB or Consumers Union doesnt.
    But it seems like they want to control the asset.

  • Perhaps government should make it illegal to refinance and remove any equity from any property regardless of the property owner’s age.
     
    By allowing homeowners to refinance we’re allowing them to “deplete their equity prematurely or who can’t keep up with the terms of the loan, the consequences can be devastating.”
     
    Let’s begin today by eliminating refinancing.  “The CFPB should establish a suitability standard that promotes long-range solutions and includes strong consumer protections for violating that standard.”  Let’s declare that refinancing is suitable for no one.  If a homeowner attempts to release equity by selling their home all net proceeds shall be transferred to a 401k plan that can only be accessed at age 70 by the government.  Those funds can only be used by the CFPB to provide a level of care deemed appropriate by a panel of experts with many initials after their name. 
     
    Homeowners “can be an easy target for unscrupulous mortgage lenders who prey on borrowers who may not fully understand the complex nature of loans.”
     
    Let’s eliminate equity stripping today and make it a Federal crime to assist any homeowner in removing equity from their property how else can we “strengthen oversight of the industry to rein in abuses and protect homeowners from losing their most valuable asset—their homes.” 

    Let’s start a campaign today with the slogan “Refinance, I don’t need no stinking refinance”. 

  • Below is what the CA Advocates for Nursing Home Reform’s website says about reverse mortgage originators. 

     “Because of these fears,(running out of money and going into nursing homes)  seniors have become easy targets for professional financial predators. The predators are savvy salespersons who use TV and radio advertisements, direct mail, and telephone solicitations to lure seniors into attending “free seminars”. Although enticing, seniors should avoid being tempted and stay as far away as possible from these “free seminar” and unscrupulous agents.” I am incensed that they have painted an entire industry including myself  as Predators,   I don’t believe that all nursing home workers and managers are predators, but there are always going to be dishonest people around money.  Hopefully the NMLS licensing process has eliminated the bad apples. 
     The problem with this white wash approach is that it keeps people with legitimate needs from seeking help.  I have been in the RM industry for over 8 years, originated 100’s and 100’s of loans and have ZERO complaints. I always try and make sure the mortgage is structured for the exact needs of my client and do not just sell the loan that makes me the most money.  I believe the industry goes a good job and does not deserve this blanket vilification. 

    • Dave,

      Perhaps you were not in the industry when John Yedinak wrote the following in a RMD September 19, 2008 post:  “Florida Democratic Party Chairwoman Karen Thurman said, ‘John McCain should be ashamed of himself for preying on seniors like a bogus reverse-mortgage peddler.'”  You can find the quotation at:  http://floridaspeaks.blogspot.com/2008/09/fdp-exposes-mccain-dirty-tricks.html

      If all you see is that a HECM amortizes negatively and most borrowers have little equity at termination, you might say some of the same things yourself.  But we see many of those little equity at termination were in danger of losing their homes when they got the HECM.  We also know that seniors are choosing to conserve and even increase their cash reserves by getting the HECM in the first place.

      Yeah, it is no fun to be called names but that is what happens when you try to do something that is important to others.  Just appreciate those moments when your borrower embraces you and asks you to pray with them in thanksgiving to God for answering their prayers.  It is sometimes amazing what people call you then.

  • I would disagree to the statement that Mr. Cole is knowledgeable about the HECM product. He may know about them and how they work but that does not make him knowledgeable. His statement ““Reverse mortgages may be an appropriate option for some seniors, but for borrowers who deplete their equity prematurely or who can’t keep up with the terms of the loan, the consequences can be devastating.” shows that he does not understand our product or our industry. Can’t keep up with the terms of the loan? I can only assume he means paying the taxes and insurance since there is no monthly payment required. Can someone help me understand how is it when seniors who have taken out a Reverse Mortgage fall into foreclosure because they cannot afford to pay their taxes; it is the Reverse Mortgage that caused this to happen? Correct me if I am wrong but if that same person or couple had a forward mortgage but failed to pay their taxes the home could also fall into foreclosure, it could do so even if there was no mortgage on the home so why is it that it is always the RM and the industry professional’s fault?
    And why is it that Mr. Cole and Ms. Garcia get to use their considerable influence and play “Financial Experts” to a entire social class?  “As a matter of public policy, a reverse mortgage should be considered suitable only when a senior has no other viable option.” Are you kidding me? Public Policy??? It is these kind of ridicules and frivolous statements that make them AND us look foolish. Why are the same people always the ones that get all the attention and press?

    • EricSD,

      We need to hear what Mr. Cole is saying.  

      In some cases it should be obvious that seniors cannot afford to continue in their home even with a reverse mortgage.  NRMLA argued that position in its letter on financial assessment last year.  I believe that position is correct.

      On Monday Mr. Peter Davis stated the following over at the RMD Linked In site: “He has a very expensive home in a very expensive country club. The dues , HOA , property taxes, & home owners insurance amounts to nearly $50,000 per year.”
      In reading what Mr. Davis wrote, there appears to be no problem originating the HECM but someone could certainly disagree with that position.  Many would harp on suitability.

      Mr. Cole and I agree more than we disagree but where we disagree, we really disagree.  Mr. Cole is not misinformed.  It is like the $16 trillion dollar deficit.  Almost all of us agree it is a real potential problem but few of us agree on what needs to be done and when.

      I strongly support HECMs and believe they should be used as loans of last resort BUT I also believe they are much more and should be used as loans of first resort in the right circumstances such as a Standby Reverse Mortgage or in the circumstances described by the Sacks brothers in their February 2012 article in the Journal of Financial Planning. 

      • James,

        You appear to be much better at looking objectively at statements such as what Mr. Coal and Ms. Garcia make than I, must be my Irish Blood! Suitability, accountability, these are items that we should all agree on, both of them included. But when they come out with the statements such as these there is no way I believe they have a clue to what they are so strongly express with their opinions about, and that is just what they are, THEIR opinions.
        Most of us here and in the industry agree that RM’s are not for everyone and that for some applicants not even the right thing, but Mr. Cole and Ms. Garcia only stands on their soap boxes and tells of the evils that lurk around every corner. It would be so refreshing if any of these naysayers would spend some time with any LO out in the field, at our offices, and see what it is we actually do!

      • EricSD,

        You are fortunate.  My ancestors were not only principally Irish but also Scottish, Cornish with a little Castilian/Mexican thrown in as well.  So when my blood boils it sometimes feels like I have stirred up a war inside of myself (LOL).I am an originator also but I would not want either Mr. Cole or Ms. Garcia to accompany me on any appointment.  However, I have no problem allowing their video team to tape some sessions (along with my family doing the same).  As to their attendance at a seminar, well, I would most likely bore them into submission.I do not want any detractor on an appointment because I care that each and every prospect receives a factual presentation without distraction or interruption.  I have “enjoyed” a few detractors at seminars.  While the “facts” they have brought up about reverse mortgages were less than factual, answering a couple of these detractors was more than a little challenging since listening and being polite did not seem to be among their cultivated virtues.  My half hour weekly radio shows on reverse mortgages which reached tens of thousands of listeners received no negative responses based on data the radio station gathers and calls we received directly at our office.  (However, that most likely was due to the on-air time of my wife and oldest son who shared air time with me.)If you are expecting a “religious conversion” by their attendance at your presentations, well you have “faith” I do not.  I do not doubt there is hope for many of our detractors but I am not so sure about Mr. Cole and Ms. Garcia in particular.  But I have been very wrong before.

  • Mr. Cole may very well be a bright attorney but he makes the most vivid case for keeping attorneys OUT of this process.  If ever there were a clear case of advocating change to drive litigation, the suggestions coming from the CA consumer union and nursing home crowd are worthy of gilt framing.  I’m not sure how much more can be demanded of originators.  We already one of the most regulated non-medical professions in existence.  

    As Mr. Stryker indicates, new reverse originators are coming to the table with a better understanding of product suitability as well as greater empathy for the long term impact on seniors. To NOW look to hang greater restrictions and regulation on originators because of the excesses and failures of past originators will do nothing to resolve those shortcomings and make employing this valuable financial tool for seniors even more restricted.  Certainly not what the framers of the program had in mind.  Finally, to call Reverse Mortgages a remedy of “last resort” is uber-disservice to seniors…but boy it sure could drive law suits!  

    • Regulations on reverse mortgages are hardly as draconian as you make them out to be.  Try the nuclear energy industry or the architectural and construction industries.  Try the income tax or securities industries.  In the securities industry, suitability testing has been incorporated for years and is becoming more restrictive over time.  How about the insurance industry?  What about the oil and gas industry and how regulated their product production and products are.

      We are certainly the most regulated mortgage but there are many, many other industries which are far more regulated than ours.  We make ourselves look very unprofessional when we make such claims.

      The underlying issue is whether any new or change in regulation is substantially needed and if the costs are appropriate when compared to their benefits.

  • Mr. Strycker,

    I disagree.  Suitability should always be an issue in buying any significant good or service.  The argument is whose standard should apply.  With reverse mortgages many times, heirs argue it is their standard which should apply and, yes, sometimes the heirs are not arguing from a position of greed but of concern about their parents.  In a couple of cases, the children were right (early and barely detectable dementia and undisclosed health issues).  

    The trouble begins when the argument moves to the realm of legislation and regulators.  Is it our job to determine suitability?  Some well meaning senior advocates say “yes.”  That would be OK if it stopped there.  It becomes horrific when suitability begins getting defined by legislation or regulation and applied retroactively. 

    How in the world can any originator make an impartial assessment regarding suitability.  As long as we have a vested interest in the outcome, we are vested in that decision bringing into question our assessment of suitability.

    Some industries have bright line tests.  We do not.  So how do you suggest we get there?

  • Suitability as applied to lawnmowers means you shouldn’t buy one if you don’t have a lawn or minimal lawn, but the higher priority is that one has the right to buy one anyway in case a lawn should grow or if one should decide to give the lawnmower to his heirs who does. Suitability argues that one loses his right of purchase if he doesn’t “need” a lawnmower. Given that a reverse mortgage is the wise use of resources, one should have the right to use his own resources, government suitability rules aside. This is NOT a gift of government and government does not have the right to tell us what is suitable in the use of our own resources. Suitable is what we think is a wise use of resources given our ability to reason and will change with the situation. What this arugment does (in a free country) is drive the industry under the table to devise alternate routes around the latest rules of suitability. The cost of governing suitability raises the price of the product. Is that upcharge for government intervention justified? Already we know, borrowers are happy with the RM decision (that’s why we don’t ask them any more) — so what’s the beef?

    • Mr. Strycker,

      Last I checked this is not Stalin’s USSR.  If one lender denies a HECM over suitability issues, another lender could easily step forward and do the same loan instead.  Look what happened to MetLife when they tried to take the lead in financial assessment.

      What a reverse mortgage is is NOT “the wise use of resources.”  It may or it may not be.  Except for upfront costs and any costs that accrued on them, how is it a use of funds at all?  It is simply a loan collateralized by the principal residence (in the case of HECMs).  We simply provide a loan whose proceeds at funding may all have to be used to pay off liens or even never used at all except to pay for upfront costs and costs accruing on them.  

      We should have absolutely nothing to do with the use of funds.  A suitable use of funds is not “what we think is a wise use of resources given our ability to reason and will change with the situation.”  Some believe that we need to understand the use of funds in order to be able to remind the senior why they are looking for a HECM.  While that idea can be disputed, that still does not bring us into the realm of determining if the use is wise or not.

      Even in a free society, those who are incompetent to contract should not be required to live up to a responsibility in a contract they sign.  We as an industry are supposed to be monitoring for such situations to avoid lending to those who do not qualify by law. Also if the purpose of the loan is an illegal purpose, such as embezzling funds from one of the borrowers or starting up a meth lab, such use of funds are illegal and must be disclosed to lender management so that they can take appropriate action.

      We already perform suitability testing to a limited degree.  The question before us is how far should originators be required to perform such investigations. As to denial of the loan, that is a lender determination, not that of an originator.

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