Balancing Regulatory Risks and Rewards When Working with Financial Advisors

Work with financial planners to legitimize the reverse mortgage in the mind of the skeptical consumer. Use planners as key sources of referrals. Reverse mortgages can be the cornerstone of a smart retirement blueprint.

It’s a refrain that many lenders and originators have been hearing for years now, and it contains a decent amount of truth — the Home Equity Conversion Mortgage has garnered positive coverage in the mainstream media thanks to academic research into its applications as a retirement planning tool, as well as growing awareness of home equity’s outsized role in the average American’s retirement wealth.

But bringing reverse mortgages and financial planning together as bedfellows can expose folks on both sides of the equation to substantial regulatory risk, especially given inconsistent state laws and the general sensitivity involved in working with older borrowers and their families.

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A 2012 Consumer Financial Protection Bureau report on the state of the reverse mortgage claimed that cross-selling was less of a regulatory concern after the implementation of the Housing and Economic Recovery Act of 2008, which explicitly bans HECM lenders from requiring borrowers to buy annuities or “similar” investment products. Furthermore, the CFPB noted, reverse mortgage lenders can’t employ people who “participate in or [are] associated with any other financial or insurance activity” unless they build solid walls between the two sides of the operation. Several other states took the HERA restrictions further, establishing mandatory waiting periods before a lender could refer a HECM borrower to a financial professional.

But how can an originator prove that the barrier between the HECM operation and his or her financial referral partners is airtight? To figure out how both HECM originators and financial planners can protect themselves from potential regulatory headaches, RMD reached out to players on both sides to hear how they stay on the straight and narrow while still tapping into an important referral source.

Crazy quilt of regulations, enforcement

The first problem: There’s no one-size-fits-all guideline for taking referrals from reverse mortgage originators or financial planners, and a lot of your risk could simply depend on where you live.

“The rules vary by state, and I think even how aggressive state regulators are varies significantly from state to state,” says Jamie Hopkins, associate professor at the American College of Financial Planning in Bryn Mawr, Pa., adding that you might find more active enforcement in states such as New York, California, and Massachusetts.

Hopkins emphasized that regulations remain important for consumers, but admitted that some people who work for state agencies may not know the best practices that people in the regulated industries use to protect themselves and the public.

“That’s a good job to have, but are [they] doing it to the detriment of something else?” Hopkins asked.

Shelley Giordano, the chair of the Funding Longevity Task Force, says it’s also incumbent upon HECM originators to not represent themselves as financial-planning experts, even if they have a solid knowledge of the ways that reverse mortgages can be used in retirement.

“One of the things we’ve been really upfront about is people in the HECM space overstepping their bounds and being too enthusiastic, representing themselves as experts in retirement income and retirement planning, which they’re clearly not,” Giordano said. “So there’s need for willingness on both sides of the equation.”

Take a page from comedy: the rule of threes

It may seem obvious, but there was one suggestion that most of the experts told RMD immediately: Just don’t receive any kind of direct compensation from your referral partners.

“Those are the first-order trip wires,” says Tom Davison, a wealth manager who blogs about retirement issues on his Tools for Retirement Planning site; like Giordano, he also participates in the Funding Longevity Task Force.

Davison told RMD the story of a HECM originator who knew that one of his customers was about to invest the proceeds in a particular type of product. In order to protect himself, the reverse originator had the homeowner write and sign a letter explaining his intentions — and emphasizing that the HECM originator had no influence over the investment decision.

Alain Valles, president of Direct Finance Corp. in Norwell, Mass., took a similar approach after running into a regulatory issue with his state’s attorney general’s office in 2015. As RMD reported last month, Valles was swept up in an enforcement action involving one of his brokers, who had steered borrowers to a specific financial planner. After receiving complaints, Massachusetts attorney general Maura Healey filed suit against Direct Finance, the broker, and the advisor for violating cross-selling rules.

Valles disputed those claims, and the case was closed this year without Direct Finance contributing any money toward a $137,500 settlement shouldered entirely by the advisor — despite the fact, Valles claims, that no party received any kickbacks as part of their relationship.

To prevent future issues, Valles now requires all borrowers to sign a form indicating that Direct Finance doesn’t encourage the investment of HECM proceeds into any investments, and that the company receives no referral fees from its advisory partners.

Valles and Direct Finance also provide borrowers with a list of three potential financial planners, another common strategy to prevent even the hint of impropriety. Laurie MacNaughton, a reverse mortgage specialist with Atlantic Coast Mortgage in the Virginia suburbs of Washington, D.C., says she often gets requests for all kinds of referrals from clients, who ask for the names of elder law attorneys, financial planners, real estate agents, and home health care agencies.

“It can be hard, because there are people you love dearly in that industry, and you want to be like, ‘Oh, yeah, I’ll send you all my business,’” MacNaughton told RMD. “But you can’t do that.”

Instead, she asks a few questions to gauge the customer’s wants, then provides a list of referral partners who meet those criteria — for instance, some clients prefer working with a lawyer or caregiver of a specific gender — as well as an additional wild-card option.

Hopkins recommends that HECM originators look to their state’s rules for selling insurance products. Even if a particular jurisdiction doesn’t have specific regulations about reverse mortgage cross-selling, many regulators are more familiar with the world of annuity sales, and the products have a similarly checkered past due to their connections with elder scams. And once you’ve studied up on those rules, draft up some papers that prove it.

“It might not be bad to set up a document that says: Not only do I do everything that’s required for the mortgage world, but I also make sure that I meet the state suitability requirements, too,” Hopkins says. “That could be helpful.”

A financial planner speaks

RMD reached out to a financial planner who agreed to share his documentation-heavy approach on one condition: that we not mention his name, as his firm’s compliance department wanted to avoid even the appearance of recommending HECMs.

The planner told RMD that he takes detailed notes of each meeting with clients to establish a clear record of his interactions.

“It’s not enough for me to say that I talked to them about the risks,” he says. For example, if a client with an adult child living at home was considering a HECM, he would describe — in writing — how they discussed the child’s eventual plans were the borrower to pass away or move out of the home. That way, in case the client indeed takes out a HECM and runs into problems with a non-borrowing resident in the future, the planner can demonstrate that he fully explored the issue before the application was even submitted.

“Undoubtedly, that’s going to be better than what the client recalls,” he says.

The planner also discloses upfront that he receives no compensation from his HECM partners, instead painting his relationships with originators as added protection for potential clients.

“I meet with this person, we have lunch often, so I always hear what’s going on,” the planner says he tells clients. “It keeps them accountable to me to make sure that they take good care of you.”

In the end, smart compliance rests on providing a full breakdown of the products and working with reverse mortgage originators who go the extra mile for clients, he says, telling the story of a HECM partner who made a 100-mile round trip twice to answer questions about a loan in person before closing the deal.

“It could make the sale more difficult, of course, but better upfront than down the road,” he says.

Written by Alex Spanko