Proposed State HECM Reverse Mortgage Laws Are Experiments That Can Explode

At the NRMLA mini conference at Boston, the industry was treated to a symposium with three state officials; a Lieutenant Governor, Acting General Counsel to Executive Office of Elder Affairs and a Risk Officer to a division of Banks. 

For purposes of this article, I will refer to these individuals as “state officials”. These state officials clearly believe, like all caring and concerned people of this industry do, that it is important to protect our seniors from any kind of abuse the reverse mortgage industry could expose seniors to. Now what was fascinating (at least for me) was how each wanted to learn more about the reverse mortgage industry and work with it to fashion legislation  and regulations that achieve this important aim.  One couldn’t help but be buoyed by the prospect of working together with those who wish to craft reasonable rules and legislation.

However, as the meeting wore on, it became clearer that some already had a well defined idea what these rules and legislation should look like. And if the industry agreed, there was no problem. The kind of thinking evinced at this meeting reminded me how government -crafted policy can sometimes get in the way of a good idea and become antithetical to achieving the desired result.

Remember when the government’s goal was to get help as many as possible partake in the American dream of homeownership? It was Fed policy that kept the interest rates artificially low beginning in 2002. It was government policy that extended home ownership to those who couldn’t afford it (Community Reinvestment Act) and compelled the GSE’s to later purchase rather exotic loans that couldn’t get paid back.

By way of digression, it is important to note how HUD’s rules and regulation have evolved over time to protect seniors. These rules and regulations take up many hundreds of pages in the federal register, HUD handbooks, mortgagee letters and legislation and have evolved over a twenty year span; and are still evolving.  If one were to view HUD has a laboratory, one could see that they have experimented with different prophylactic concepts. It is also important to note that the industry, also concerned about protecting those same borrowers, has also created additional protection that goes beyond HUD’s laboratory results.  A review of counseling requirements for the non borrowing spouse is a case in point. HUD does not require it. Most of the wholesalers do. This rule still works within the overall framework of the HECM loan.

The states declaim that they too are laboratories experimenting for even better results. These state scientists (legislators/regulators) want to recreate from scratch, through independent experiments (rules/regulations), a means to achieve ABSOLUTE PROTECTION. There is a fundamental difference with the states’ experiments.  Their experiments have lead them to misinterpret their test results. The states‘hypothesis is that more stringent regulation better protects seniors.  Stricter regulation proposed in a vacuum will not work. Stricter regulation proposed without understanding the experiment (about reverse mortgages) will not work.  Rules and laws that comport with those in place for the federal HECM program will work.

It appears that some of the states proffering new reverse mortgage legislation have chosen to ignore the fact that their experiments do not support their proffered hypothesis. Stricter regulation often will conflict with existing federal law. And these puritanical rules will make it infinitely more difficult for seniors to obtain a reverse mortgage. Likewise lenders will find it impossible to comply with differing standards between federal and state law.

Uncertainty will adversely affect reverse mortgage lenders.  In New York for example, there was the issue of lien priority. It wasn’t until this issue was resolved in 1994 that reverse mortgage lenders came into the state.  I think that it is also clear that reverse mortgage lenders will not do business in an environment (state) where draconian rules add layers of uncertainty.  The state officials’ perfect solution of protecting seniors will force lenders out of their states.

To all state officials I suggest the following: Work with the lenders. Voice the concerns. Understand how the industry works. Remember that this is not a new program. The federal government insures these loans. You want tougher laws. Fine. Make them work within the existing system.  Your hypothesis of stricter laws better protect seniors can work with properly crafted experimental techniques.

Comments

[James E. Veale, CPA, MBT]

Dennis,

It is my belief that much of the well meaning but overly ambitious and draconian state proposals are the direct result of industry inaction. While some may want to blame NRMLA, it is just over one decade old. Quite frankly, it is not surprising that state officials are willing to work with us if we accept their legislation. Why weren’t we more proactively involved much earlier so that we are on a more “level playing field”?

HECMs are wonderful products but some of the laws, regulations, and particularly the enforcement surrounding them need to be strengthened. Some aspects have holes so big; a truck can be driven through them.

For example, under federal law there is nothing to prevent felons (even those convicted of senior financial abuse) from becoming either HECM originators or counselors. As of yet there is little effort to enforce the cross selling provisions of HERA. There is also little effort to pursue those who violate the prohibition on HECM originators being involved in real estate transactions requiring a real estate license.

Licensing and determining who is qualified to sell or counsel on financial products is normally not a federal function. Further, some state legislators do not believe that the cross selling rules of HERA go far enough. Others believe that suitability determinations should be provided for seniors.

Certainly the biggest potential problem is that the only federal rules governing proprietary reverse mortgages are the rules that generally govern forward mortgages. FHA has no jurisdiction over proprietary reverse mortgages; however, during 2006 - 2008 when proprietary lending was on the rise, lender behavior in providing proprietary reverse mortgages was in most ways exemplary.

Even though many in our industry endorse and support the idea that only federal law should oversee the reverse mortgage industry, there is no constitutional restriction, federal statute, or Supreme Court decision that prohibits the states from creating most of the laws now under contemplation. Of course, I am not attorney or other legal expert; so please correct any errors in my conclusion, Dennis.

Again even though it is long overdue, I personally support proactive measures to combat the current state legislative onslaught we are enduring. The best that can be said about the current situation is that a yeoman’s effort is being made by NRMLA staff and volunteers to REACT. Although Minnesota has reduced its rescission proposal to 10 days, it is hardly anything to write home about.

To be proactive and to avoid offending state legislators, it would have been appropriate to have convened a meeting between reverse mortgage industry leaders and various representatives from the states to hammer out some kind of state model act years ago. Such an act could have included HECM guidelines as well as licensing rules, counseling standards, origination and lender standards, punitive measures against violators, and other relevant provisions. States that deviate from the model could easily have pressure applied not only from the industry but also other states. Model acts have worked well in the past including in the area of taxation.

We may not want over 50 different jurisdictions overseeing our activities with very divergent rules but unless we act in a proactive way, such will be the result.

[RickM]

Dennis, I commend you, not for voicing your opinion but for it to make so much sense (even for an attorney).

[James E. Veale, CPA, MBT]

Scott,

I disagree with your remarks.

AARP, HUD/FHA, NRMLA, the lenders, and others have not created a rock solid program. The HECM program in areas has holes so large you can drive a truck through them. For example, the state of Washington passed a law to prohibit felons from offering HECMs. There is no federal law prohibiting felons from being HECM originators or counselors. (The headline risk on this front is enormous.)

Most lenders have not put into place the cross selling rules of HERA. Many licensed insurance and investment salespeople are still selling HECMs with no significant change in lender oversight (other than perhaps some of the larger lenders).

What about different lender standards in education and discipline? No government agency performs that task today. NRMLA is totally ineffectual at enforcing its own rules on nonmember lenders. These are normally the domain of state government as is the case with attorneys, CPAs, insurance agents, and other licensed professional disciplines. The foregoing is but a few of the issues.

Finally, not all reverse mortgages are governed by FHA the same way that HECMs are. In 2006, 2007, and 2008, we had a substantial increase in proprietary reverse mortgages. As to FHA they have no oversight. As to HUD, the oversight is no different than any forward mortgage. Fortunately in most regards, the behavior of lenders was exemplary. Since we expect to see these products return it is important that the states take the actions they are.

For example, there is no federal law that requires counseling on any reverse mortgage other than HECMs. There is no federal law that states what counseling on reverse mortgages other than HECMs must consist of. Etc. Etc. Etc. The HECM rules do not apply to proprietary reverse mortgages.

No, Scott, even as a reverse mortgage originator I fundamentally disagree.

[Scott Tucker]

Dennis,

I'm very concerned with the attitude that state governments can add layers of "protection" to an already rock-solid federal program, that already has oversight from HUD, and mortgage insurance from the FHA.

I mean if AARP, FHA, HUD, and NRMLA can't get it right...which they have...how arrogant of state law-makers to think that they somehow know best...when they (in most cases) have taken zero time with reverse mortgage originators in their own backyards to LEARN about the FHA-insured reverse mortgage.

Clearly they care more about grabbing headlines than helping our seniors.

Thanks for speaking-out on this.

Sincerely,

Scott Tucker
http://blog.MortgageMarketingGenius.com