The past year has seen several reverse mortgage laws make their ways through various state legislatures and to governors’ desks, where they are ultimately signed into law.
Each piece of legislation has largely aimed to protect potential borrowers from blundering into a reverse mortgage when it is not the right financial choice, and as a result, regulators have called for tweaks to frontline processes such as origination and counseling.
But even with extended “cooling-off” periods and face-to-face counseling requirements that prolong the sales process—all within the context of Financial Assessment environment—reverse mortgage originators working in these targeted states, for the most part, are reporting business as usual.
Last week, Illinois became one of the most recent states to pass new reverse mortgage regulations when Governor Bruce Rauner signed the Reverse Mortgage Act. The law, which takes effect January 1, 2016, will require reverse mortgage lenders to abide by a three-day “cooling-off” period, during which time a potential borrower cannot be required to close or proceed with the loan.
The law also explicitly prohibits any cross-selling of financial products that requires loan applicants to purchase additional investments like annuities, life insurance or long-term care insurance products, and puts enforcement action against violators in control of the Illinois’ Office of the Attorney General.
Illinois State Senator Jacqueline Collins (D-Chicago 16th District) introduced the Reverse Mortgage Act in response to a series of allegations dating back decades and a 2009 lawsuit filed by the state against Mark Diamond, a Chicago remodeler who allegedly coerced seniors living in Chicago’s west and southside neighborhoods into taking out reverse mortgages.
The lawsuit filed by Attorney General Lisa Madigan’s office accuses Diamond of bilking senior homeowners out of more than $1.3 million through a reverse mortgage/home repair scam, in which borrowers would pay him their loan proceeds in exchange for various home renovation projects, many of which were either performed to a “substandard” degree or left unfinished altogether. The suit also alleges that on many occasions, Diamond allegedly pocketed a portion of the money for his personal benefit rather than completing the home repair projects.
Because of the scheme, the lawsuit indicate that 12 homeowners ended up in default on their reverse mortgages while two borrowers lost their homes to foreclosure. Additionally, at the time the lawsuit was filed in 2009, Madigan’s Consumer Fraud Bureau had received 36 complaints against Diamond and the affiliated mortgage and home repair companies with whom he operated.
While much of the language in Illinois’ Reverse Mortgage Act is aimed at preventing the possibility of future scenarios to befall seniors, loan originators in the state view the law positively, especially for its aim to weed-out bad actors that give the reverse mortgage a bad reputation in the public eye.
“For us in the industry that have been doing business the right way, I don’t think it’s going to change anything,” says Larry Hanover, a certified reverse mortgage professional (CRMP) with Universal Lending Corporation in Mount Prospect, Ill. “It will get rid of some bad people that give the reverse mortgage industry a black eye, but I don’t see it [the law] as negative in any way to my business.”
The state’s Reverse Mortgage Act also reiterates the mandatory counseling requirement, as is customary with all Home Equity Conversion Mortgages. As redundant as the new reverse mortgage protections appear for those who have been operating in the state, there is little concern that the new law will have much impact on originator’s day-to-day business.
“Hopefully the long-term effect will be good,” says Hanover. “But as far as my business goes, it’s not going to change the way I do business.”
On the first day of 2015, reverse mortgage professionals in the California were also required to comply with new rules that change the way lenders do business in the state.
Similar to Illinois, lenders in the State of California are required their own observe their own “cooling off” period, though this is a week-long waiting time rather than just three days. What this means is that lenders have to wait seven days from the start of HECM counseling before they can assess fees or order appraisals, credit, title or other services.
Now eight months following the law’s passage, if anything, where the seven-day cooling period has really had more of a noticeable effect is on the HECM for Purchase side, says Dean Jones, a CRMP with Senior Funding Associates in San Diego.
“On a ‘Purchase,’ everyone is ready to go but we have to wait until the eighth day,” Jones says. “It’s still business as usual, but since we’re a broker, we just have to make sure we’re doing the proper timelines.”
As counseling agencies have reported longer session times following the Financial Assessment, a seven-day stalling period has undoubtedly made the origination process longer, too.
“A lot of these borrowers we’re talking to for days, weeks and months,” Jones says. “I think most of the borrowers are ready to proceed, but because of the regulation we just have to follow it within that fashion now.”
California’s law also replaces a former Reverse Mortgage Counseling Checklist with a new Reverse Mortgage Worksheet Guide to be provided to borrowers prior to counseling sessions. But while the intent of the worksheet is to make borrowers aware of the various scenarios and considerations when determining if a reverse mortgage is right for them, some have argued that this part of the legislation is redundant at best.
“I’m sure there’s some redundancy there, however, I think that worksheet probably brought in-line more actual things for the borrower to think about or question,” Jones says.
Because there could be questions a homeowner forgets to think about at the time when meeting with an originator, Jones suggests the worksheet could serve as a resource and encourage them to ask additional questions.
Perhaps where reverse mortgage professionals are feeling the most pressure from recent state laws is in Massachusetts, which has a mandatory face-to-face counseling policy that has stirred up several issues for both counselors and seniors.
In late July 2014, the Massachusetts State Legislature passed a bill to delay until 2016 the face-to-face requirement for borrowers that meet a certain low income threshold as determined by the Department of Housing and Urban Development (HUD).
But even though the law is delayed, then-Governor Deval Patrick added an amendment that delayed the signing of the bill into law but essentially implemented the rule until legislation is finally passed.
Until then, if a borrower has income below 50% of the HUD median income for the area and he/she has assets exclusive of their home of less than $120,000, then they must be counseled face-to-face, says George Downey, CRMP and founder of Harbor Mortgage Solutions in Braintree, Mass.
Downey has been fighting against the legislation since 2010, when the face-to-face requirement first came about in the State Legislature. He notes that two other states, North Carolina and California, have similar face-to-face rules, but that they also have opt-out provisions.
While there is a dearth of counselors in the Commonwealth of Massachusetts in general, Downey notes there are only six to seven counseling agencies concentrated geographically in Eastern Mass., and that two-thirds of Western Mass. is virtually without representation.
“The enormous burden this places is not only on the counselors, but on the seniors themselves,” Downey says, noting that many seniors might be housebound or have mobility issues that prevent them from traveling to see a counselor. “This has discouraged people from even thinking about getting a reverse mortgage.”
There are some counseling agencies that travel and make appointments at a senior’s house, Downey says, but getting appointment with those firms could take several months. Other than that, the majority of counseling takes place in the agency’s offices.
“So we have this mandated face-to-face counseling but there are many seniors not able to get the counseling, and so we continue to fight the fight,” says Downey.
Written by Jason Oliva