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1 REVERSE MORTGAGE LENDING PROJECT: An investigation into the existing state of consumer protections, issues, and practices relative to reverse mortgage lending in the Commonwealth of Massachusetts Prepared for the Massachusetts Community and Banking Council by Bonnie Heudorfer May 1, 2011

2 Contents Executive Summary 3 1. Introduction 9 2. Reverse Mortgage Lending: An Industry in Transition Requirements for Reverse Mortgage Industry Participants Suitability Standards, Fiduciary Duties, Fees, and Compensation Cross-Sell Restrictions Lump Sum Payouts Counseling Requirements Taxes and Insurance Data Collection and Reporting Conclusions and Next Steps 66 Appendices A. Principal federal and state regulations governing reverse mortgages 68 B. The SAFE Act 73 C. Descriptions of Massachusetts-approved reverse mortgage lenders and products 77 D. Massachusetts-approved reverse mortgage counselors 84 E. Topics to be covered in the counseling session and review questions designed gauge an applicant s understanding of reverse mortgage basics 86 2

3 Executive Summary The Massachusetts Community and Banking Council (MCBC) launched its Reverse Mortgage Lending Project to ensure that the state s senior homeowners who may be considering reverse mortgage loans receive adequate, appropriate and timely counseling and other consumer protections. The purpose of the nine month study was to diagnose gaps in seven specific areas identified by MCBC s Working Group on Reverse Mortgage Lending, identify appropriate actions to fill those gaps, and recommend next steps. The process involved an investigation of existing consumer protections laws, regulations, practices and emerging trends. The seven areas of particular concern were: the requirements for reverse mortgage industry participants; suitability standards, fees and compensation; restrictions on cross-selling of annuities and other products; restrictions on lump sum payouts; counseling requirements; issues related to borrower responsibilities, such as the timely payment of real estate taxes and hazard insurance premiums; and data collection and reporting. The project could not have been more timely. The issues identified by the Working Group were the focus of legislative action at the federal and state level, regulatory scrutiny by federal banking agencies and their state counterparts, media attention, advocacy efforts, and litigation throughout 2010 and continuing into At the same time, these stakeholders were addressing a host of related consumer protection and safety and soundness concerns in the much larger forward mortgage market. Section 2 of this report, Reverse Mortgage Lending: An Industry in Transition, describes more than a dozen actions taken in 2010 that will influence how mortgage lending including reverse mortgage lending is practiced going forward. Section 10, Conclusions and Next Steps, identifies areas that may warrant continued scrutiny or opportunities for further MCBC engagement. The remainder of the report is organized thematically around the seven issues identified by the Working Group. Highlights By year end 2010, more than 16,000 federally-insured Home Equity Conversion Mortgages (called HECMs) had been originated in the Massachusetts, 85 percent of which remain outstanding. Lending activity in the state peaked in 2007, and has declined each year since volume of 1,588 originations was down 30 percent from 2009 and more than 51 percent from Despite this recent decline, the number of seniors considering reverse mortgages to supplement their income is likely to increase with the aging of the baby boom generation. The first of the state s 1.9 million + baby boomers began turning 62 in 2008, and many of them are approaching retirement with increasing life expectancies and shrinking or non-existent pensions, 401Ks and investment portfolios. Many have also seen their home equity eroded as the result falling home values and/or refinancings. HECM loans have been made in all but about a dozen Massachusetts cities and towns, with especially high concentrations on the Cape and South Shore. The Cape has long been a favored destination for retirees and it has the highest 1 Because of the lack of data on proprietary mortgages, the numbers in this report include only the federally-insured HECMs unless otherwise noted. 3

4 concentration of older homeowners in the state, but its share of Massachusetts HECM borrowers is even greater. The market for proprietary reverse mortgages other than those offered to low income seniors by the nonprofit Homeowner Options for Massachusetts Elders is currently dormant. HECM loans have dominated the reverse mortgage market since the product was introduced more than two decades ago, but in recent years its market share has risen to well over 95 percent, by most estimates, as HUD has introduced broader, more flexible options for these federally-insured mortgages. Increased loan limits ($625,500 nationwide), new lower cost products (HECM Saver), and even a product that allows seniors to purchase a new home using a reverse mortgage (HECM for Purchase), have been promoted by the industry and the agency to expand the market and in the case of the HECM Saver to reduce FHA s risk exposure. 2 There is widespread agreement among public officials, consumer advocates and the reverse mortgage industry on some of the issues identified by MCBC s Working Group on Reverse Mortgage Lending the need to curb fraudulent and misleading advertising, improve and expand counseling, improve disclosures to facilitate comparison among products, ban cross selling, and establish set asides for taxes and insurance, for example and measures are underway to do so. Still unanswered, however, is the more fundamental question of whether reverse mortgages have proven to be a positive financial tool for seniors over the longer term. Myriad regulations, reforms, guidance, and litigation some overlapping and/or conflicting and much of it confusing for lenders and consumers alike have been put forth over the past eighteen months. With the creation of the Bureau of Consumer Financial Protection under the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), there will be a single federal regulator with rulemaking, supervisory and enforcement responsibilities over reverse mortgage counseling agencies and lenders for the first time ever. Until the new Bureau becomes fully operational, however, a balkanized regulatory framework remains in place. The transition is already raising as many questions as it answers, with the agencies that currently oversee mortgage lending and consumer protection issuing guidance and proposing rule changes that some have suggested conflict with other existing laws and with the mandates of Dodd-Frank. Consumer protection issues associated with reverse mortgage lending are expected to receive continued scrutiny for the foreseeable future. Requirements for reverse mortgage industry participants New national standards have raised the bar for all mortgage industry participants (forward and reverse). The 2008 Secure and Fair Enforcement for Mortgage Lending Act established minimum standards for mortgage loan originators including those licensed by the states, and a nationwide licensing system and registry became fully operational in January The Dodd- Frank Act includes numerous provisions intended to reform the mortgage industry and enhance consumer protections. Massachusetts reverse mortgage regulations include most, but not all best practices. Provisions in the Mortgage Bankers Association Reverse Mortgage Model State Legislation missing in the Massachusetts statute are cross-selling prohibitions and tax and 2 The U.S. Department of Housing and Urban Development (HUD) is the parent agency of the Federal Housing Administration (FHA), the nation s home mortgage insurance program. 4

5 insurance escrowing requirements. The requirement that the Division of Banks approve all lenders and products prior to their being offered in Massachusetts provides a significant level of protection. Suitability Standards, Fiduciary Duties, Compensation, Fees New rules governing loan originator compensation for both forward and reverse mortgages took effect on April 1, Under these new rules, loan originators are prohibited from increasing their own compensation by increasing the interest rate or points paid by the consumer. Originators are also prohibited from steering a consumer to a mortgage loan that is not in the consumer s interest in order to increase the originator s compensation. The concerns that have prompted calls for the imposition of fiduciary responsibilities on mortgage brokers and/or the adoption of suitability standards for all mortgage lenders are amplified when it comes to reverse mortgages. These loans are being aggressively marketed by lenders and brokers who shoulder almost no responsibility for determining whether the loans are suitable for the borrowers. Federal regulatory agencies have resisted the urging of consumer advocates to establish suitability standards, however, opting instead for improved disclosures, counseling and controls on misleading and fraudulent advertising. The courts and state legislatures have been more proactive, and Dodd-Frank paves the way for additional reverse mortgage consumer protection measures. Cross-Sell Restrictions One of the most common abuses associated with reverse mortgages relates to the practice of selling annuities, deferred annuities, long term care insurance, or other financial products to be paid for with reverse mortgage equity. These products are typically not in the best interest of the homeowner, who may be unaware that the entity marketing the product is being generously compensated for the sale. The Housing and Economic Recovery Act of 2008 (HERA) prohibited such cross-selling in the federally-insured Home Equity Conversion Mortgage (HECM) program, but with a number of loopholes. Consumer advocates would like to see the restrictions and sanctions go further, and several states have implemented or proposed more far-reaching and restrictive laws. Under HERA, a lender or any other party is prohibited from conditioning a HECM on the purchase of other financial or insurance products (other than appropriate title, flood or hazard insurance). The Act also prohibits HECM lenders from being associated with any other "financial or insurance activity" unless they prove to HUD they maintain appropriate firewalls to ensure originators do not have an incentive to sell other products. HUD has yet to issue final guidance on what would constitute appropriate firewalls. The Massachusetts reverse mortgage statutes do not directly address cross-selling, but the Division of Banks cautions borrowers to beware of sales tactics involving the required or suggested purchase of annuities, other investments, long term care insurance or other types of insurance policies with proceeds from the loan on its Reverse Mortgage website. Lump Sum Payouts 5

6 The issue of lump sum payouts is one of growing concern to consumer advocates as fixed rate HECM loans have come to dominate market in the past eighteen months. Unlike adjustable rate HECMs, these fixed rate mortgages require borrowers to draw down the entire principal amount of the loan at closing. As a result, borrowers electing this option pay compounding interest over the life of the loan on the full amount plus any financed closing costs and insurance premiums, whether or not they have an immediate need for the funds. In contrast, with a HECM line of credit, funds are drawn and interest begins accruing only as they are needed. The unused balance on the credit line can actually increase over time. There are other risks associated with lump sum payouts. The senior may become an easy target for abuse or jeopardize her eligibility for certain means tested programs. There are currently no restrictions on lump sum payouts other than the prohibitions against tying reverse mortgages to the purchase of another financial product. Indeed, the HECM fixed rate program requires the borrower to take the full loan amount in lump sum payout at the loan closing. Counseling Requirements Massachusetts requires counseling for all reverse mortgages; counseling is a requirement, also, of HECM program. There has been no standard curriculum or requirements for counselor training, however, and no rigorous or systematic oversight of the counseling provided, most of which is done over the telephone. There has also not been a consistent and predictable source of funding. In wake of critical reports from the Government Accountability Office and others, HUD issued new counseling protocols (effective September 2010), which include both counselor and borrower testing. The new test for counselors covers reverse mortgage basics, HECM costs and benefits, alternatives to reverse mortgages, and HECM counseling requirements. Topics to be covered in the HECM counseling session include: reverse mortgage information, HECMspecific information, including loan terms and options, obligations of the borrower, tax implications, etc.; and alternatives and options available to the applicant. Under the new HUD protocol, counselors may withhold the counseling certificate if they reasonably believe that the client does not have an adequate understanding of a reverse mortgage, its implications for the client s unique situation, and the client s own responsibilities as a reverse mortgage borrower. And they must withhold it if the client cannot successfully answer five of ten review questions about reverse mortgages in general, and those appropriate to their specific situation. Massachusetts has 15 approved counseling agencies with 27 counselors. Eight of the agencies (11 counselors) are affiliates of the same one, Money Management International, whose intake center is in Arizona. Identified gaps in the present system include an inadequate number of counselors, insufficient geographic coverage, and too few non-english speaking counselors. The system is likely to be stressed further when a new state law requiring in-person counseling for low income seniors takes effect in August A recent NRMLA survey of its members found that 95 percent of the reverse mortgage counseling in Massachusetts is now conducted by phone. Taxes and Insurance HECMs do not provide for escrowing of taxes and insurance and the failure of borrowers to keep current their property taxes and insurance coverage have resulted in a growing number of loans 6

7 that are in default. These tax and insurance defaults represent the accumulation over many years of cases where HECM borrowers did not meet their loan obligation to pay taxes and insurance, but were carried by servicers who made payments on their behalf pending any instruction to the contrary from HUD. According to an analysis of HECM servicer data by the National Reverse Mortgage Lenders Association (NRMLA), nearly 30,000 loans (6 percent of all outstanding HECMs) are in technical default, the result of owners not having paid these property charges. The problem loans had been allowed to grow because Fannie Mae, the investor owner of most reverse mortgages, and HUD, the parent agency of insurer FHA, had explicitly elected not to have servicers follow established HUD guidelines regarding tax and insurance defaults. Many industry analysts attribute the reluctance of HUD and Fannie Mae to cure the defaults to fears that such action would generate negative publicity for the agencies. The NRMLA survey estimated that 75 percent of defaults had balances due for repayment of advances made by loan servicer of less than $5,000; 10 percent had balances due of between $5,000 and $7,500; and just one percent owed amounts greater than $20,000. In January 2011, HUD issued long-awaited guidance for dealing with HECMs where the borrower was delinquent in paying property charges and/or the mortgagee had advanced corporate funds to satisfy an unpaid property charge on behalf of the borrower. The new rules require that a borrower be notified within 30 days of the first missed payment that the mortgage is out of compliance. Lenders must offer loss mitigation options (e.g. establishing a realistic payment plan for the delinquent charges; counseling to find some viable resolution to their delinquency; refinancing into a new HECM, if possible). If keeping the home is no longer an option, the counselors will help the borrower transition to alternative housing. HUD will provide nearly $3 million to housing counseling agencies to assist in this effort, and the agency has identified a 125-counselor task force that is being trained to deal specifically with these cases. The number and status of delinquent Massachusetts loans has not yet been ascertained, but if the rate of technical defaults here mirrors the national rate, the number of affected homeowners would be close to 1,000. Data Collection and Reporting The industry, as well as the advocacy community, has expressed frustration at the lack of data on reverse mortgages. Lenders originating reverse mortgages under the federally-insured HECM program are required to report basic loan and borrower characteristics to HUD, but no comparable information is available for non-hecm loans. There is no accessible data repository on seniors who receive HECM counseling but do not obtain a loan. Growing concern over the mounting tax and delinquency defaults has generated new demands for information on reverse mortgage foreclosures. The Home Mortgage Disclosure Act (HMDA), one of the most widely used tools for gaining insight into trends and practices in the mortgage industry, is of little utility for analyzing reverse mortgage lending for two reasons. First, the statute covers few, if any, reverse mortgage transactions. Reporting is only required for home purchase, home improvement or refinancing applications/loans, where refinancing is defined as a new obligation that satisfies and replaces an existing obligation by the same borrower. Lenders are not required to report reverse mortgages where the borrower s home is owned free and clear. Second, reporting is optional if the reverse mortgage includes a line of credit for home improvement or home purchase. These two exceptions eliminate required reporting of most 7

8 reverse mortgages. Even where/if reverse mortgages are reported, they are indistinguishable from forward mortgages. Expansion of HMDA reporting requirements to reverse mortgages is under consideration. The Dodd-Frank Act adds significantly more detail to the information that must be reported under HMDA. While it does not specifically mention expanding coverage to reverse mortgages, it leaves the door open to that possibility if the new Consumer Financial Protection Bureau deems it appropriate. Also in the summer of 2010, the Federal Reserve Board held public hearings and solicited comment on potential revisions to Regulation C (the HMDA implementing regulation), and the possible expansion of reporting requirements to reverse mortgages was one of the areas in which the Board sought comments. Twelve of the 36 comments submitted urged the Board to extend HMDA reporting to the growing reverse mortgage business. Conclusions and Next Steps A number of the issues identified by the Working Group will be addressed by the new Consumer Financial Protection Bureau when it takes ownership of the federal consumer protection laws and the regulatory and rule making authority that goes with that, beginning in July Reverse mortgages have been identified as a top priority for the Bureau. The Dodd-Frank Act specifically directs the Bureau to investigate the use of reverse mortgages to fund investments, annuities, and other investment products, and that process has already begun. Observers expect this to be the subject of early rulemaking by the Bureau. MCBC can serve an important role as these issues get addressed. Particular focus should be given to understanding the nature and extent of reverse mortgage lending in the Commonwealth and ensuring that existing and new regulations governing the business are adequate and effective. MCBC should work closely with the Division of Banks and major reverse mortgage servicers to determine the scope of the tax and insurance delinquency problem in Massachusetts and develop appropriate strategies to address it. MCBC can also ensure that its members are familiar with the new HUD counseling protocols and monitor the compliance and effectiveness of counseling in Massachusetts. The Council is uniquely situated to assist the Division of Banks in gauging the ability of the existing counseling system to absorb the increased demands of the expanded in-person counseling requirements that will become effective in August MCBC should work with the Division to ensure that the Commonwealth s reverse mortgage laws represent industry best practices and provide at least the level of consumer protection provided in federal statutes. 8

9 1. Introduction Background In 2009, the Mortgage Lending Committee of the Massachusetts Community and Banking Council (MCBC) began a series of discussions on reverse mortgages. The number of such mortgages had increased dramatically in recent years, both in Massachusetts and across the country. MCBC members representing banks and mortgage companies, home buyer counseling and foreclosure prevention agencies, public officials, and consumer advocacy organizations wanted to ensure that adequate consumer protections were in place for Massachusetts seniors considering reverse mortgages. Most reverse mortgages are federally-insured home equity conversion mortgages, or HECMs. 3 These are non-recourse loans insured by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). The amount that may be borrowed is based on the appraised value of the home, subject to FHA limits, the interest rate and the age of the borrower. Borrowers must be at least 62 years old to qualify for a HECM loan. 4 Funds are advanced against the value of the home, and interest accrues on the outstanding loan balance. No loan repayment is required until the home is sold or the borrower(s) die, at which point the mortgage must be repaid. The homeowner must live in the home, maintain it, and pay the property taxes and hazard insurance. While reverse mortgages can be beneficial for seniors who need to cash out some of the equity from their homes to supplement Social Security or other retirement income, meet medical costs, or make needed home repairs, they are complicated financial transactions. And the opportunities for abuse abound. HECMs were first introduced in Massachusetts in 1993, when four loans were originated. Annual loan volume remained under 100 through 2000, then rose rapidly, peaking at over 3,200 new loans in Over the past three years loan volume has dropped off considerably volume of 1,588 originations was 30 percent lower than 2009 volume and more than 51 percent below the peak year, Today there are nearly 14,000 HECMs outstanding in Massachusetts. With this growth has come increasing concern that some of the issues that arose during the subprime lending crisis including aggressive marketing, anti-consumer broker incentives, loan securitization, and, in some cases, outright fraud and abuse were appearing in the reverse mortgage market. Figures 1-1 and 1-2 document the growth of the Massachusetts HECM market since the product was first introduced here in By year end 2010, some 16,000 HECMs had been originated in the state, more than 85 percent of which remain outstanding. In addition to the federallyinsured HECM loans, various proprietary loans have been approved by the Commissioner of Banks, although the number of such loans is not known. The 27-year old nonprofit Homeowner 3 The HECM program is authorized under Section 255 of the National Housing Act (12 U.S.C. 1715z-20). Implementing regulations are found at 24 CFR parts 200 and Under Massachusetts law the minimum age for reverse mortgage borrowers, if not otherwise restricted by the loan program, is 60. (MGL Chapter 283, Section 14A 9

10 Options for Massachusetts Elders (HOME) has closed about 5,000 loans under one of the three proprietary loans it offers through its partner banks and credit unions. (A similar number of HOME s counselees have opted for HECMs and are counted in those numbers.) Figure 1-1 HECMS Originated in MA Figure 1-2 Cumulative MA HECM Originations 3,500 3,250 3,000 # HECMs Originated Annually in MA 18,000 16,000 Cumulative Number of HECMs in MA 2,750 2,500 2,250 14,000 12,000 2,000 1,750 1,500 10,000 8,000 1,250 1,000 6, , , # HECMs # HECMs Source: HUD HECM loans have been made in all but about a dozen Massachusetts cities and towns. As Table 1-1 illustrates, a disproportionate share of these reverse mortgages have been made to Barnstable County (Cape Cod) homeowners. The Cape has long been a favored destination for retirees and it has the highest concentration of older homeowners in the state. The Cape s share of Massachusetts reverse mortgages (HECMs) far exceeds its share of older homeowners (11.9% v. 7.3%), suggesting a particularly active market in that part of the state. Plymouth, Bristol and Dukes County also have higher shares of the state s reverse mortgage loans than of the state s older homeowners. 10

11 Table 1-1 Distribution of Massachusetts Home Equity Conversion Mortgages Massachusetts 16, , Barnstable 11.9% 48.5% 7.3% 1.64 Berkshire 1.2% 39.1% 2.9% 0.42 Bristol 11.3% 31.7% 8.1% 1.40 Dukes 0.5% 42.3% 0.4% 1.22 Essex 10.7% 31.8% 11.1% 0.96 Franklin 0.9% 33.0% 1.3% 0.69 Hampden 5.7% 34.5% 7.4% 0.77 Hampshire 1.4% 34.8% 2.6% 0.54 Middlesex 16.2% 32.2% 22.4% 0.72 Nantucket 0.1% 32.0% 0.2% 0.59 Norfolk 10.5% 31.9% 10.9% 0.96 Plymouth 12.2% 31.8% 8.3% 1.47 Suffolk 5.6% 29.8% 6.0% 0.94 Worcester 11.7% 28.9% 11.1% 1.06 Source: Author s analysis of HUD HECM data through December 2010 and American Community Survey Purpose and Organization of the Report While reverse mortgage lending activity has abated in recent years, MCBC s commitment to ensuring that senior homeowners who are considering reverse mortgage loans receive adequate, appropriate and timely counseling and other consumer protections, has not. The first of the state s 1.9 million + baby boomers began turning 62 in As more of them approach retirement with increasing life expectancies and shrinking or non-existent pensions, 401Ks and investment portfolios, the number of seniors considering reverse mortgages to supplement their income is likely to increase. In the spring of 2010, the Reverse Mortgage Working Group, a subcommittee of MCBC s Mortgage Lending Committee, identified a series of issues relating to reverse mortgages and their sale and marketing in Massachusetts about which it wanted further information, to determine whether reforms were warranted. The issues identified by the committee include: What federal and state licensing standards and other requirements must originators and intermediaries of reverse mortgage transactions in Massachusetts meet? What sanctions and enforcement activities are in place to ensure compliance with those requirements? What, if any, federal and/or state suitability standards such as restrictions on payments or origination fees, yield spread premiums or other compensation impose a duty on originators 11

12 and other intermediaries in reverse mortgage transactions to act in their borrowers best interests? How are they enforced? What federal and/or state agencies have the authority to restrict cross-selling arrangements of annuities, long-term care insurance and/or other financial products using the proceeds of reverse mortgage transactions? What activities and resources are used to enforce those restrictions? What federal and/or state laws or regulations limit the payout of reverse mortgage proceeds in lump sums at the time of the transaction? How many agencies and individuals in Massachusetts are certified by HUD and approved by the state to counsel prospective reverse mortgage borrowers? What are the quantity and source of funding and resources available to support that counseling? What topics and standards are mandated for that counseling and how are those mandates enforced? What federal and/or state laws or regulations require escrow accounts for insurance and taxes as part of reverse mortgage transactions? What data or records are currently available to the public that identify the number, location and terms of reverse mortgage loans in Massachusetts? What state or federal data gathering or reporting requirements would ensure the future availability of such data? In the summer of 2010, MCBC engaged a consultant to work with its Reverse Mortgage Lending Working Group to perform the following tasks: Diagnose gaps in seven specific areas, Identify actions necessary to fill those gaps, and Recommend next steps. This report represents the first phase of the committee s work and the basis on which it may make recommendations for legislative or regulatory changes at the federal and/or state level. The report is organized around the seven study areas identified by the work group. In addition, it describes the existing regulatory framework that governs reverse mortgage lending in Massachusetts. It also details the significant changes that have occurred relative to the regulation of the mortgage industry in general and the reverse mortgage industry in particular in These topics are covered in the following section, Reverse Mortgage Lending: An Industry in Transition. Thereafter the report is organized thematically in response to the seven questions posed by MCBC. The final section (Section 10) offers conclusions and suggested next steps. 12

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