Judge: Contract Trumps Banker’s Bad Reverse Mortgage Advice

A federal judge in Massachusetts this week ruled that bad advice from a banker doesn’t prevent a non-borrower from facing foreclosure after the death of a reverse mortgage holder.

Back in 2009, a Bank of America employee told John Consolo that if his mother took out a reverse mortgage on her Boston home, he could continue living in an apartment on the property after she died. Armed with power of attorney, Consolo signed the Home Equity Conversion Mortgage paperwork on her behalf.

The banker’s statement wasn’t true, and when Mary Consolo died three years later, Bank of America and Nationstar Mortgage moved to foreclose on the property. John Consolo fought back with a lawsuit claiming that because he relied on banker Tim Keough’s erroneous advice, the foreclosure represented a breach of contract.

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That’s all according to this decision — found by the Boston news blog Universal Hub — from U.S. District Judge Denise J. Casper, who ruled against Consolo and granted Nationstar and Bank of America’s request to dismiss the case yesterday. Citing a variety of legal precedents, Casper decided that Consolo had multiple opportunities to realize the residency implications of his mother’s HECM, but elected not to probe the matter any further after consulting with Keough.

Consolo, 61 at the time his 94-year-old mother took out the HECM, was listed in mortgage documents as a “remainderman,” a term that simply signifies that he and his brother Gaetano, a fellow remainderman, stood to inherit the property from their mother once she died. According to Consolo, however, Keough took a more literal approach when describing the term, telling him that it meant “exactly what it says, remain … once your mother passes, you [and your brother] remain in the house.”

Such a statement would have been incorrect both in 2009 and at present, as only named borrowers — and, after 2014, non-borrowing spouses in most cases — may remain in the home after the death of the last remaining HECM mortgagor, not children. In addition, Consolo was not eligible to be considered a borrower at the time, as he was a year shy of the HECM program’s age requirement of 62. But according to the court, Consolo took Keough at his word and signed on the dotted lines.

And for Consolo, that was a big problem. Casper laid out a swath of legal precedent that puts the onus on the person entering the contract to fully understand the ramifications of the deal; in other words, as long as no one prevented Consolo from reading and comprehending the text of the mortgage on his own, he can’t claim he was legally fooled just because he declined to poke through the fine print or question his bank’s counsel.

“Viewed in this light, the Court cannot find Consolo’s reliance on Keough’s statements to be reasonable,” Casper wrote in her decision.

Consolo also argued that the mortgage document listed him and his brother as “mortgagors,” a fact that the court did not dispute. But all other paperwork associated with the transaction, including the note itself, listed only his mother as a mortgagor.

“Because the Court must view the Mortgage in conjunction with the other Loan documents including the Note, the Court holds that the contract may not be viewed as ambiguous since the clear intent was that Mary Consolo was the borrower for the Loan transaction,” Casper wrote.

Written by Alex Spanko

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  • It seems from the article above Consolo was misled. Although I agree, as a consumer, we should fully understand the documents we are signing, the loan docs were inconsistent. This leads me to believe, there was some advantage taken by the banker. I see fault on both sides.

    • “Consolo was misled”?!? Ya think? 😉 just a little. I kinda think I sorta agree with you on that. But, my 1st impulse is if you’re willing to be so brazen as to blatantly lie to a Borrower? File the suit against the Bank LO and the Bank (“Respondiate Superiore”) and go forth not being stupid anymore.
      I’ve believed for YEARS the horrific Reverse Mortgage reputation wasn’t earned; it was build by cads like Mr. Keough (who should never be allowed to work in this profession again). The WRONG people are underwriting this loan. The Financial Services folks should be implementing this with LO’s who can demonstrate more than an intermediate level of education, training, and experience in financial/estate planning, money and risk management; and that question J on the 1009 Uniform Application should be replaced with “Does the Borrower have any intention of flying to Las Vegas and blowing their equity on one-armed bandits, show girls, craps, and Red-13?”

      • Dan,

        Not only were the other “two mortgagors” misled by the originator but also by the every typed in terms in the loan. All portions typed in the loan were done by the lender or at least there was no fact established to the contrary.

        It is not necessary that lending personnel be trained in all of the disciplines you describe but it is necessary that they be trained in properly completing mortgage applications and that the lender as the trainer be held accountable for the actions of its agents.

        Since the lender named the two ineligible children as mortgagors, the mortgage cannot be held to be a HECM, meaning that since they are mortgagors on this loan and they have not passed away, the loan is not in default at the death of the mother. If there is any blame for the loan not being eligible to be considered a HECM it is solely the fault of the lender and those agents responsible for creating valid mortgage documents.

    • When I was working as reverse mortgage originator several years ago, the bank would send someone from a document signing company out to the house with at least 30 to 40 pages of documents. They would say to the borrower(s), just sign where indicated and they would not answer any questions as they said that they were not attorneys. If the borrower relies on what the bank has told them, how can they not misinterpret the regulations?

      • Big_d62,

        Since when is a borrower responsible for interpreting regs? The law and regs are between the insurer and the insured (the lender). The borrower is responsible for reading, agreeing to, and complying with the terms in the loan document; that is it.

        Borrowers cannot even pay the upfront or ongoing MIP directly to HUD. It is the lenders insurance, not the borrowers. The borrowers are simply reimbursing the lender for its costs in offering and maintaining the mortgage.

    • Although I disagree with your belief about the bank taking advantage, inconsistencies should not be tolerated by the courts since the lender created the documents, the typo was clearly their fault, and they controlled the transaction both by superior knowledge and actual physical control over the written mortgage documents.

      The court should have found that since the other two named mortgagors could not be HECM mortgagors, the classification of the mortgage as a HECM was invalid and the lender could be sued accordingly since the lender was not providing a HECM even though it represented the loan as a HECM. Invalidation of the HECM as such opened the door to loan terms outside of a HECM including the children being mortgagors as named in the loan documents prepared by the lender and thus the loan did not go into default on the death of the mother.

      A finding of a different kind of mortgage other than a HECM would have been equitable and have held the mortgagee to its superior position throughout the loan process. The ONLY errors cited above were those of the mortgagee not the “mortgagors.”

  • The judge ruled correctly. Whether obtaining a mortgage, leasing office space, or subscribing to mobile phone serevice, one should never rely on the verbal statements of the “representative” over the written agreement. Three comments:

    Kay: There are many instances in the “forward” mortgage world where a Non-Borrower is required to sign the “mortgage” or “deed of trust”, but no other documents such as the note. While this non-borrower is not obligated under the note, signing the mortgage or DOT signifies his/her understanding that the property being pledged as collateral is subject to a claim by the lender under circumstances outlined in that document. A common example would be for a not-borrowing spouse who is quit-claiming off of title to be required to sign the mortgage/DOT in order to protect the lender from the NBS claiming that “I had no idea that if my husband/wife and I failed to make the payments that we could be foreclosed on and thrown in the street.” So what may appear inconsistent is actually not.

    Big: It is never the responsibility of the Settlement agent or notary to explain the terms and conditions of a mortgage loan. As a MLO, I take issue with those attempting to do so, which is why I attend all of my closings in order to answer remaining borrower questions during signing, and why we provide a sample note, mortgage/DOT and Loan Agreement to borrowers at time of application. Not to mention numerous discussions regarding All aspects of the transaction.

    Lastly, if our regulators and lawmakers were truly concerned about the Reverse Mortgage consumer, Specific Licensing for Reverse MLO’s would be required, over and above “ordinary” MLO licensing. Those originators that have sketchy knowledge of reverse mortgages, such as forward MLO’s who have a forward / reverse origination split of 98% / 2%, should stay out of the business. Any mortgage brokerage or lender that promotes this situation should excuse themselves from this market. The Wholesale Lenders looking for business, should also consider the wisdom of seeking out certain channels/originators.

  • John C. might have misled the borrower but RMD is misleading its readers with the following: “Such a statement would have been incorrect both in 2009 and at present, as only named borrowers — and, after 2014, non-borrowing spouses — may remain in the home after the death of the last remaining HECM mortgagor, not children.”

    If you are asking why the quotation above is wrong, then you do NOT understand what an eligible versus an ineligible non-borrowing spouse is. You need to reread Mortgagee Letters 2014-07 and 2015-02. For example a non-borrowing spouse who married a borrowing spouse AFTER HECM closing, can never be an eligible non-borrowing spouse as to that HECM, period,i.e., eligible to enter into a deferral agreement with FHA. Assuming that the borrowing spouse is the sole surviving borrower at the time of that person’s death and the non-borrowing spouse is the survivor means the loan becomes due and payable as of the date of the borrowing spouse’s death and the HECM is in default with no cure or deferral available to that surviving spouse.

    Even if the non-borrowing spouse is eligible unlike a surviving borrowing spouse, an eligible non-borrowing spouse does NOT automatically receive deferral. The surviving eligible non-borrowing spouse must still satisfy the conditions to deferral even following the death of the borrowing spouse.

    It seems none of the prior commenters all (except Kay) of whom claim to be originators did not pick up on that issue. Does that mean that these originators are also misleading consumers? Nothing in their comments provides any evidence to the contrary.

    • Thanks for the clarification — I updated the post to reflect that in most cases the non-borrowing spouse can stay, but a great point that it’s not automatic and that there are instances where it’s not true at all.

      Thanks for reading!

      • Alex,

        A difficult but factual term to describe non-borrowing spouses who were eligible at the time of the death of their respective borrowing spouses (and were the sole surviving borrowers on the HECM at the time of death) and elected to defer would be: a deferring eligible HECM non-borrowing spouse.I think that gives a full description in 5 words or less.

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