Reverse Mortgage Lenders Advised Against Unethical HECM Prepayments

The National Reverse Mortgage Lenders Association (NRMLA) recently issued an advisory aimed at preventing what it deems unethical planned prepayments of Home Equity Conversion Mortgages.

Through Ethics Advisory Opinion 2016-1, NRMLA defines a “planned prepayment HECM” as one in which the HECM borrower has reached an understanding with the lender or loan originator that the borrower shall repay their HECM loan-drawn proceeds by a later date following loan closing. Such an “understanding” applies to both oral or written agreements.

For the sake of illustration, NRMLA classifies a planned prepayment HECM as an understanding or agreement that “the borrower shall draw down any portion of the amount permitted to be drawn at closing under applicable HECM variable rate loan requirements of the FHA to be followed by the prepayment of all or part of such drawn proceeds at a later date (which then, for example, may permit the borrower to establish a revolving line of credit under the terms of the existing HECM loan).


As such, within the meaning of Ethics Advisory Opinion 2016-1, NRMLA Members are advised that they may not offer, nor provide or assist in arranging such a transaction.

NRMLA does acknowledge, however, that not all instances of HECM prepayment would be considered unethical.

One such instance would be if a borrower agrees to make periodic, planned partial prepayments over time of any portion of the amount they are allowed to withdraw at loan closing, that is, if these planned prepayments are part of an aging in place or retirement planning strategy.

“In such situations, NRMLA Members further are advised to retain appropriate documentation of the bases of their actions,” NRMLA states in the Ethics Advisory.

Ethics Advisory Opinion 2016-1 is the latest update to NRMLA’s Code of Ethics and Responsibility, which over the past year has introduced several other advisories.

In February 2015, NRMLA issued Ethics Advisory Opinion 2015-1, also known as Freedom of Choice Remaining Draw Options After 12 Months/Ethical Obligations and Restrictions.

Released in part in reliance upon HUD Mortgagee Letter 2014-11, the Advisory advocated that NRMLA Members are generally required to honor the right of all HECM loan applicants and borrowers to determine “in their discretion and according to their views of their needs and without ‘encouragement’ from mortgagees to do otherwise,” the amount and timing of, among other things, the respective draws available to them under the terms of their HECM loans.

Later that year, NRMLA issued Ethics Advisory Opinion 2015-2 in October, which restricted NRMLA Members from refinancing previous HECM loans that failed to meet certain seasoning requirements, both in order to serve the best interests of the HECM borrowers and to “help foster the development and vitality of the secondary market for such HECM loans.”

“NRMLA Members routinely and overwhelmingly engage in ethical HECM loan activities for the benefit of the seniors they are pledged to serve,” NRMLA writes in Ethics Advisory Opinion 2016-1. “All the more reason, then, that there is no place in NRMLA for NRMLA Members that offer or originate Unethical Planned Prepayment HECM Loans.”

View a copy of NRMLA’s Ethics Advisory Opinion 2016-1.

Written by Jason Oliva

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  • This rule is needed but there are just too many ways around it and for non-members there is no real punitive cost to ignoring it.

    The problem is premiums are much higher than the interest rate for a year plus the ongoing MIP rate of 1.25%. Sharing that difference with the borrower through lender credits is not unusual.

  • I wonder how NRMLA determined this to be a hot button issue and who determined that a repayment of a loan by the borrower could be “unethical”? I assume this all has to do with the new concept of “low utilization”, which is nothing more than a “prepaid Prepayment Penalty” which is not really the way HECM’s were structured to function.

  • Investors ought to examine which of their customers are engaging in early pay off strategies and other unethical practices and cut off the offenders. When the perpetrators have no outlet to sell or place their loans, the practice will be marginalized and we will all be better off for it. Once again, the good guys subsidize the bad guys. More rules will not fix the problem, but fear of consequences will lead to a better result.

  • HECM ARMS are set up as lines of credit and are allowed to be drawn down and paid back. How is it “unethical” to pay a loan balance down? I can understand how lenders want to keep the balances high but borrowers have every right to reduce the balance. This is in fact how a HECM can be used as a great financial planning tool. Lenders for forward first mortgages discourage early prepayments, generally those within the first year as these loans are not set up as lines of credit as are HECM’s.

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