Reverse Mortgages:

Product Complexity and Consumer Protection Issues Underscore Need for Improved Controls over Counseling for Borrowers

GAO-09-606: Published: Jun 29, 2009. Publicly Released: Jun 29, 2009.

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Reverse mortgages--a type of loan against the borrower's home that is available to seniors--are growing in popularity. However, concerns have emerged about the adequacy of consumer protections for this product. Most reverse mortgages are made under the Department of Housing and Urban Development's (HUD) Home Equity Conversion Mortgage (HECM) program. HUD insures the mortgages, which are made by private lenders, and oversees the agencies that provide mandatory counseling to prospective HECM borrowers. GAO was asked to examine issues and federal activities related to (1) the potential benefits and costs of HECMs to borrowers, (2) misleading HECM marketing, (3) the sale of potentially unsuitable products in conjunction with HECMs, and (4) oversight of HECM counseling providers. To address these objectives, GAO reviewed program rules; examined HECM advertisements; analyzed consumer complaint data; performed limited tests of HUD's internal controls; and interviewed HECM borrowers and agency, industry, and nonprofit officials.

HECMs can provide borrowers with multiple benefits, but they also have substantial costs and are relatively complex. HECMs allow seniors to convert their home equity into flexible cash advances while living in their homes. Additionally, the borrowers or their heirs can fully pay off the HECM by selling the home, even if the amount owed exceeds the current home value. However, HECMs also have large insurance and origination costs. Furthermore, the long-term financial implications of a HECM can be difficult to assess because the borrower's remaining home equity depends on the amount of cash advances and interest rate and house price trends. Various federal agencies have responsibilities for protecting consumers from the misleading marketing of mortgages. Although these agencies have reported few HECM marketing complaints, GAO's limited review of selected marketing materials for reverse mortgages found some examples of claims that were potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics. Federal agency officials indicated that some of these claims raised concerns. For example, the claim of "lifetime income" is potentially misleading because there are a number of circumstances in which the borrower would no longer receive cash advances. Federal agencies have had a limited role in addressing concerns about the sale of potentially unsuitable financial products in conjunction with HECMs ("inappropriate cross-selling"). For example, an annuity that defers payments for a number of years may be unsuitable for an elderly person. HUD is responsible for implementing a provision in the Housing and Economic Recovery Act of 2008 that is intended to restrict inappropriate cross-selling, but the agency is still in the preliminary stages of developing regulations. Some of the states GAO contacted reported cases of inappropriate cross-selling involving violations of state laws governing the sale of insurance and annuities. HUD's internal controls do not provide reasonable assurance that counseling providers are complying with HECM counseling requirements. GAO's undercover participation in 15 HECM counseling sessions found that while the counselors generally conveyed accurate and useful information, none of the counselors covered all of the topics required by HUD, and some overstated the length of the sessions in HUD records. For example, 7 of the 15 counselors did not discuss required information about alternatives to HECMs. HUD has several internal controls designed to ensure that counselors convey the required information to prospective HECM borrowers, but the department has not tested the effectiveness of these controls and lacks procedures to ensure that records of counseling sessions are accurate. Because of these weaknesses, some prospective borrowers may not be receiving the information necessary to make informed decisions about obtaining a HECM.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To enhance consumer protection from potentially misleading marketing, the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, should take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report. These steps might include developing guidance, potentially through the Federal Financial Institutions Examination Council, to help bank examiners identify these types of claims; incorporating discussion of these claims in consumer education materials; and reviewing each advertisement we identified and referred to the appropriate agency and taking the appropriate follow-up actions.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

    Status: Closed - Implemented

    Comments: On August 17, 2010, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration issued guidance to supervised financial institutions on managing the compliance and reputation risks of reverse mortgages. The guidance states that institutions should be attentive to the timing, content, and clarity of all information presented to consumers from the moment a consumer begins shopping for a reverse mortgage to the time the mortgage is closed. The guidance states that institutions should use promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgages. In addition, the guidance states that institutions offering proprietary reverse mortgage products should require that the consumer obtain counseling from a qualified independent counselor before the institution processes an application or charges an application fee. The guidance indicates that institutions should have policies and procedures addressing these issues and effective internal controls to monitor whether actual practices are consistent with policies and operating procedures relating to reverse mortgages.

    Recommendation: To enhance consumer protection from potentially misleading marketing, the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, should take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report. These steps might include developing guidance, potentially through the Federal Financial Institutions Examination Council, to help bank examiners identify these types of claims; incorporating discussion of these claims in consumer education materials; and reviewing each advertisement we identified and referred to the appropriate agency and taking the appropriate follow-up actions.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Closed - Implemented

    Comments: On August 17, 2010, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration issued guidance to supervised financial institutions on managing the compliance and reputation risks of reverse mortgages. The guidance states that institutions should be attentive to the timing, content, and clarity of all information presented to consumers from the moment a consumer begins shopping for a reverse mortgage to the time the mortgage is closed. The guidance states that institutions should use promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgages. In addition, the guidance states that institutions offering proprietary reverse mortgage products should require that the consumer obtain counseling from a qualified independent counselor before the institution processes an application or charges an application fee. The guidance indicates that institutions should have policies and procedures addressing these issues and effective internal controls to monitor whether actual practices are consistent with policies and operating procedures relating to reverse mortgages.

    Recommendation: To enhance consumer protection from potentially misleading marketing, the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, should take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report. These steps might include developing guidance, potentially through the Federal Financial Institutions Examination Council, to help bank examiners identify these types of claims; incorporating discussion of these claims in consumer education materials; and reviewing each advertisement we identified and referred to the appropriate agency and taking the appropriate follow-up actions.

    Agency Affected: Federal Reserve System: Board of Governors

    Status: Closed - Implemented

    Comments: On August 17, 2010, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration issued guidance to supervised financial institutions on managing the compliance and reputation risks of reverse mortgages. The guidance states that institutions should be attentive to the timing, content, and clarity of all information presented to consumers from the moment a consumer begins shopping for a reverse mortgage to the time the mortgage is closed. The guidance states that institutions should use promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgages. In addition, the guidance states that institutions offering proprietary reverse mortgage products should require that the consumer obtain counseling from a qualified independent counselor before the institution processes an application or charges an application fee. The guidance indicates that institutions should have policies and procedures addressing these issues and effective internal controls to monitor whether actual practices are consistent with policies and operating procedures relating to reverse mortgages.

    Recommendation: To enhance consumer protection from potentially misleading marketing, the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, should take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report. These steps might include developing guidance, potentially through the Federal Financial Institutions Examination Council, to help bank examiners identify these types of claims; incorporating discussion of these claims in consumer education materials; and reviewing each advertisement we identified and referred to the appropriate agency and taking the appropriate follow-up actions.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Closed - Implemented

    Comments: On August 17, 2010, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration issued guidance to supervised financial institutions on managing the compliance and reputation risks of reverse mortgages. The guidance states that institutions should be attentive to the timing, content, and clarity of all information presented to consumers from the moment a consumer begins shopping for a reverse mortgage to the time the mortgage is closed. The guidance states that institutions should use promotional materials and other product descriptions that provide information about the costs, terms, features, and risks of reverse mortgages. In addition, the guidance states that institutions offering proprietary reverse mortgage products should require that the consumer obtain counseling from a qualified independent counselor before the institution processes an application or charges an application fee. The guidance indicates that institutions should have policies and procedures addressing these issues and effective internal controls to monitor whether actual practices are consistent with policies and operating procedures relating to reverse mortgages.

    Recommendation: To enhance consumer protection from potentially misleading marketing, the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, should take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report. These steps might include developing guidance, potentially through the Federal Financial Institutions Examination Council, to help bank examiners identify these types of claims; incorporating discussion of these claims in consumer education materials; and reviewing each advertisement we identified and referred to the appropriate agency and taking the appropriate follow-up actions.

    Agency Affected: Federal Trade Commission

    Status: Closed - Implemented

    Comments: In June 2009, FTC posted a business alert on its Bureau of Consumer Protection website entitled "Housing Counselors: How to Help People Avoid Reverse Mortgage Missteps." The article provides tips on how to spot deceptive claims and practices, contains examples of potentially deceptive claims, and provides instructions to counselors on where to report such practices.

    Recommendation: To enhance consumer protection from potentially misleading marketing, the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, should take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report. These steps might include developing guidance, potentially through the Federal Financial Institutions Examination Council, to help bank examiners identify these types of claims; incorporating discussion of these claims in consumer education materials; and reviewing each advertisement we identified and referred to the appropriate agency and taking the appropriate follow-up actions.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: HUD responded to this recommendation by posting links to an FTC fact sheet ("Get the Facts Before Cashing in on Your Home's Equity") and business alert ("Housing Counselors: How to Help People Avoid Reverse Mortgage Missteps ") to the reverse mortgage portion of its website. The fact sheet provides information about the features and costs of reverse mortgages and warns consumers to be wary of sales pitches involving combinations of reverse mortgages and other financial products. The business alert provides tips for spotting deceptive claims and practices, contains examples of potentially deceptive claims, and provides instructions to reverse mortgage counselors on where to report such practices.

    Recommendation: To improve HUD's oversight of HECM counseling, the Secretary of HUD should improve the effectiveness of the agency's internal controls so that they provide reasonable assurance of compliance with HECM counseling requirements. In doing so, HUD should implement methods to verify the content and length of HECM counseling sessions.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: In response to our recommendation, HUD's Office of Housing implemented a mystery shopping initiative that evaluated 103 counseling sessions for Home Equity Conversion Mortgages (HECM). NeighborWorks America conducted the evaluations, which took place from 9/11/2010 to 2/01/2011. As part of the evaluation, the mystery shoppers recorded whether HECM counselors provided information required by HUD, such as information on borrower obligations and alternatives to reverse mortgages, and recorded the length of each session. Neighborworks also scored each session. HUD expects to continue this mystery shopping, which is performed under contract, as long as the program receives 2012 funding.

    Recommendation: To improve HUD's oversight of HECM counseling, the Secretary of HUD should improve the effectiveness of the agency's internal controls so that they provide reasonable assurance of compliance with HECM counseling requirements. In doing so, HUD should issue detailed guidance for HECM counseling providers about how to record the amount of counseling time on the counseling certificate.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: On February 4, 2011, HUD published Mortgagee Letter 2011-09. The letter provides detailed instructions on how counselors should record the length of reverse mortgage counseling sessions. The instructions indicate that counselors should only record the amount of time they spend counseling the client on the Certificate of HECM Counseling.

    Recommendation: To improve HUD's oversight of HECM counseling, the Secretary of HUD should improve the effectiveness of the agency's internal controls so that they provide reasonable assurance of compliance with HECM counseling requirements. In doing so, HUD should issue detailed procedures for HECM counseling providers on how to assess prospective counselees' ability to pay for HECM counseling.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: In response to this recommendation, HUD issued Mortgagee Letter 2011-09 on February 4, 2011. This letter provides specific guidance on when counseling agencies should waive the counseling fee and the documentation they must obtain from counseling clients for fee waivers.

    Recommendation: To improve HUD's oversight of HECM counseling, the Secretary of HUD should improve the effectiveness of the agency's internal controls so that they provide reasonable assurance of compliance with HECM counseling requirements. In doing so, HUD should implement internal controls to ensure that HECM providers comply with counselor referral requirements.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: On November 8, 2010, HUD issued Mortgagee Letter 2010-37, which describes HUD's procedures for ensuring that lenders provide clients with a list of nine HECM counseling agencies, as required. The Mortgagee Letter instructs lenders to input the names of the nine counseling agencies into HUD's mortgage case management system prior to HUD endorsing the HECM for insurance.

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