Consumers Union to CFPB: Only as a “Last Resort”

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See the full comments from the Consumers Union to the CFPB here.

CFPB Changes To Reverse Mortgage Program

CFPB Changes To Reverse Mortgage Program

Two consumer groups are urging the CFPB to make drastic changes to the reverse mortgage program. Chief among them is a suitability standard and fiduciary duty. In the words of the Consumers Union they recommend that a reverse mortgage be a loan of last resort when there is no other viable option. A look at the consumer protection and overreaching regulations.

10 comments

JimGras September 10, 2012 at 4:55 am

As reported on http://money.msn.com/retirement/article.aspx?post=ef8358d1-8eb7-4986-9253-6962f004408c. The Consumer Financial Protection Bureau gives the example of a $166,434 reverse mortgage: After 10 years, the fees and interest could amount to $56,300.
Really? The real problem is the senior could have paid off a loan of $166,434.00 at 6% interest and in 10 years would have saved $221,731.03 in payments. Who is really losing on this deal? The banks.

They also don’t tell Congress what happens to a senior who takes out a standards line of credit with a bank and after spending the whole line can’t make the payments or the payments are eating up their savings. Are they going to require the banks to adhere to the same set of rules and regulations as the reverse mortgage industry when it comes to lending to seniors?

Don’t be fooled by these do gooder’s who are only after the fees they can collect from the reverse mortgage industry.

As a 78 year old senior I don’t want anybody telling me how I can use the equity I paid dearly for over the last 30 years.

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The_Critic September 10, 2012 at 5:11 pm

Mr. Gras,

You claim the bank would lose something, but what? The only thing that is apparent is the interest of $55,297. But then after the 10 years are up, there is nothing for them to lose. If the senior got a HECM, the bank would have received the $166,434.

Your interpretation of your own example is off. Look at it again.

Then there is the economics of the transaction, you have yet to explain. If the cash paid out is about equal to the balance due on the HECM, at the end of the amortization period, then the only real difference between the two is 1) the borrowing power the senior has left at the end of the full amortization period, and 2) earnings on the available cash.

Preserving cash is a positive part about a reverse mortgage as is reducing the negative impact of the accrued costs when an adjustable rate HECM is used and a financial plan is carefully created and followed.. The reason is the line of credit with the adjustable rate HECM which the fixed rate does not have.

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Jim Warns September 10, 2012 at 7:57 am

The CU’s and CFPB’s concerns are grounded almost exclusively in the traditional NEEDS-based application of the HECM program. It completely ignores the DISCRETIONARY use of the program as a contingency planning and risk management tool – a pro-active part of a comprehensive retirement plan. I wonder how they will balance their proposed “last resort” restriction against the growing use of the program by savvy borrowers and financial planners as a powerful discretionary tool.

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The_Critic September 10, 2012 at 5:13 pm

Jim Warns,

Why do you ignore the use of proceeds earlier in retirement such as the model developed by the Sacks brothers?

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Jim Warns September 12, 2012 at 7:30 am

Sorry, Critic – while I did not mention the Sacks and Salter/Evensky studies by name, I thought they and other strategies were encompassed by the phrase, “a pro-active part of a comprehensive retirement plan.”

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The_Critic September 12, 2012 at 4:14 pm

Jim Warns,

Much of the retirement planning of just two decades ago has proved to be less than reliable whether it was comprehensive or not. Such phrasing is more cliche than clarifying.

The Sacks and Salter/Evensky strategies have substance which others feign. It is the level of peer review to which these strategies have been examined which make them standouts.

Few “comprehensive retirement plans” are prepared using anything close to the standards placed on these studies by their designers. Most such plans are based on “conventional wisdom” which has proved less than adequate.

Personally I would not lower these studies to the level of “a comprehensive retirement plan” unless such planning has been subjected to the same vigorous and rigorous standards.

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William Orcutt September 13, 2012 at 12:30 pm

A reverse mortgage is a needs based product. If you need money to live on or to do anything you fell like doing with it, is personal driven decision. Get your head out of the business of those decisions and ask the client if there is a need to get this money out of the house. If at some time in the future they have the ability to redeposit any money that also is their choice. It’s unfortunate that rules have been made preventing any good sound financial planning to occur using insurance products. It simply handcuffs every financial planners ability to do what is needed by preventing the recipient of a reverse mortgage the estate planning tools specifically designed by no other entity except by an insurance company. Loans without interest would be nice but I need to laugh at those comments and critics after I read their unsophisticated remarks as to what is the best way advise a borrower. Having to answer the questions, to help a bank or help a borrower is a worthless conversation piece and has already been answered by the development of the reverse mortgage during it’s inception years ago. I still get a charge out of the TALC guy who developed a strategy to calculate the cost based on an annual average. I still spew water every time I drink water when I think about it because it reminds me of the old Ethnic joke about the million dollars lottery winner who gets a dollar a year for a million years. Mathematics is a pure science. Figures don’t lie but unfortunately liars can figure. To continue this fight about what is the best thing for your client is best settled by the borrowers needs.My recommendation: Just ask and you shall receive the answer.

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James E. Veale, CPA, MBT September 14, 2012 at 11:51 am

Mr. Orcutt,

As to your view that originators should not be looking at use of funds, not only does HERA require consideration of use of funds when it comes to HECMs but in some states like California, state law is far more reaching. For instance California Civil Code Sections 1923-1923.10 is even more restrictive than HERA and applies to all reverse mortgages.

It seems your concern is principally use of proceeds to acquire insurance products yet the restrictions exceed that limited group of products and then again not all insurance products are restricted. Do you sell insurance products?

As to TALC, its purpose is understandable, wanting to give adjustable rate borrowers some idea of what APR might be over time. The problem is not in the goal but rather the assumptions underlying the computation. For example, if the borrower never intends to access the line of credit, what should the APR be? It is laughable when one reads it is less than 10% due to the assumption that 50% of the line of credit will be taken immediately following funding.

While your argument about accruing interest feigns financial planning it mocks the other side of the net estate question, the accruing costs (beyond mere interest, particularly when it comes to HECMs) in using reverse mortgages. If your concept is valid, why mock such considerations? Your mocking says all the wrong things specifically that your espoused uses cannot withstand such simple and competent testing. Your position in this regard is reminiscent of those who when selling their businesses want buyers to only look at revenues, ignore the related costs, place a premium on “their” assets, but do not question the liabilities. Perhaps that is your way of doing business but it is not mine.

To say that figures do not lie shows a very naive understanding when it comes to financial planning and reporting. I have reviewed the workpapers of very careful accountants and planners who were NOT trying to lie but their incorrect calculations produced wrong figures. The workpaper preparer lacked the requisite intent to be accused of lying yet the figures misrepresented the financial result and would have given the potential user incorrect information. In those cases no one was lying but the figures because an incorrect calculation or transposition took place. Old surviving adages like the following usually have a great deal of truth in what they purport or their use by the most sophisticated would have died decades ago: “Figures lie and liars figure.”

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William Orcutt September 21, 2012 at 10:11 am

HERA’s activities include:
Providing consumer education,
Providing legal services to individuals,
training legal professionals, community-based agencies, and governmental entities,
researching and documenting the scope and impact of housing discrimination and predatory lending practices, organizing and capacity building of relevant entities in order to fight abuse of consumers, pursuing policy and legislative redress, and creating alternative consumer institutions.
Financial planning tools are developed by insurance companies. To not include insurance products could be and should be considered a major oversight teetering on abusive behavior in itself. Predatory lending practices or abuse all refers to excessive fees and is a Real Estate issue, not a financial planning tool to reach a goal. Insurance products design estate tools and products. Even the lenders themselves use such products. Why would they be restricted from use by the cosumer. This restriction is levied under false pretenses that there is something out there that is better than insurance based/designed estate planning tools. What could that be and what type of company could offer such a mystifying product that exceeds the benefits of an insurance product designed to do just that? This excommunication all started because of a few bad eggs in the insurance industry. WE have bad cops, bad governors, bad mayors, bad Presidential incumbents and bad teachers and bad everything you can possibly think of. It is totally unfair, unethical, improper to impedes the ability of the reverse mortgage beneficiary to limit or erase from their selection of financial products offered by insurance companies in their quest for estate planning. I would assume these preventative laws preventing the use of Insurance products was nudged a little by the unscrupulous SEC under the guise of a widely used word that conveys a false safety net called diversification of assets.
And to respond accordingly to your comments above, I still do believe that originators should not be looking at use of funds. It merely takes away a persons freedom of choice. Control Control Control is what’s it’s all about. All of my 250+ borrowers have told me what they want to do with their money. None of them wanted to be restricted as to what they can not do with their money. It’s now a 250 to 1 argument heavily weighted against these controlling factors. HERA problem is that they are meddling in affairs that is personal and that is their problem. To take away freedom of choice is not the originators problem other than to deal with HERA.

CIVIL CODE
SECTION 1923-1923.10

1923. For purposes of this chapter, “reverse mortgage” means a
nonrecourse loan secured by real property that meets all of the
following criteria:
(a) The loan provides cash advances to a borrower based on the
equity or the value in a borrower’s owner-occupied principal
residence.
(b) The loan requires no payment of principal or interest until
the entire loan becomes due and payable.
(c) The loan is made by a lender licensed or chartered pursuant to
the laws of this state or the United States.
1923.2. A reverse mortgage loan shall comply with all of the
following requirements:
(a) Prepayment, in whole or in part, shall be permitted without
penalty at any time during the term of the reverse mortgage loan.
For the purposes of this section, penalty does not include any fees,
payments, or other charges that would have otherwise been due upon
the reverse mortgage being due and payable.
(b) A reverse mortgage loan may provide for a fixed or adjustable
interest rate or combination thereof, including compound interest,
and may also provide for interest that is contingent on the value of
the property upon execution of the loan or at maturity, or on changes
in value between closing and maturity.
(c) A reverse mortgage may include costs and fees that are charged
by the lender, or the lender’s designee, originator, or servicer,
including costs and fees charged upon execution of the loan, on a
periodic basis, or upon maturity.
(d) If a reverse mortgage loan provides for periodic advances to a
borrower, these advances shall not be reduced in amount or number
based on any adjustment in the interest rate.
(e) A lender who fails to make loan advances as required in the
loan documents, and fails to cure an actual default after notice as
specified in the loan documents, shall forfeit to the borrower treble
the amount wrongfully withheld plus interest at the legal rate.
(f) The reverse mortgage loan may become due and payable upon the
occurrence of any one of the following events:
(1) The home securing the loan is sold or title to the home is
otherwise transferred.
(2) All borrowers cease occupying the home as a principal
residence, except as provided in subdivision (h).
(3) Any fixed maturity date agreed to by the lender and the
borrower occurs.
(4) An event occurs which is specified in the loan documents and
which jeopardizes the lender’s security.
(g) Repayment of the reverse mortgage loan shall be subject to the
following additional conditions:
(1) Temporary absences from the home not exceeding 60 consecutive
days shall not cause the mortgage to become due and payable.
(2) Extended absences from the home exceeding 60 consecutive days,
but less than one year, shall not cause the mortgage to become due
and payable if the borrower has taken prior action which secures and
protects the home in a manner satisfactory to the lender, as
specified in the loan documents.
(3) The lender’s right to collect reverse mortgage loan proceeds
shall be subject to the applicable statute of limitations for written
loan contracts. Notwithstanding any other provision of law, the
statute of limitations shall commence on the date that the reverse
mortgage loan becomes due and payable as provided in the loan
agreement.
(4) The lender shall prominently disclose in the loan agreement
any interest rate or other fees to be charged during the period that
commences on the date that the reverse mortgage loan becomes due and
payable, and that ends when repayment in full is made.
(h) The first page of any deed of trust securing a reverse
mortgage loan shall contain the following statement in 10-point
boldface type: “This deed of trust secures a reverse mortgage loan.”
1923.3. A reverse mortgage shall constitute a lien against the
subject property to the extent of all advances made pursuant to the
reverse mortgage and all interest accrued on these advances, and that
lien shall have priority over any lien filed or recorded after
recordation of a reverse mortgage loan.
1923.4. For the purposes of this chapter, a property shall be
deemed to be owner-occupied, notwithstanding that the legal title to
the property is held in the name of a trust, provided that the
occupant of the property is a beneficiary of that trust.
1923.5. (a) No reverse mortgage loan application shall be taken by
a lender unless the loan applicant has received from the lender the
following plain language statement in conspicuous 16-point type or
larger, advising the prospective borrower about counseling prior to
obtaining the reverse mortgage loan:
IMPORTANT NOTICE
TO REVERSE MORTGAGE LOAN APPLICANT
THE REVERSE MORTGAGE WHICH YOU ARE
CONSIDERING:
_
|_| DOES
_
|_| DOES NOT
REQUIRE THAT YOU PURCHASE AN ANNUITY IN
CONNECTION WITH THE REVERSE MORTGAGE
TRANSACTION.
A REVERSE MORTGAGE IS A COMPLEX FINANCIAL TRANSACTION THAT PROVIDES
A MEANS OF USING THE EQUITY YOU HAVE BUILT UP IN YOUR HOME, OR THE
VALUE OF YOUR HOME, AS A SOURCE OF ADDITIONAL INCOME. IF YOU DECIDE
TO OBTAIN A REVERSE MORTGAGE LOAN, YOU WILL SIGN BINDING LEGAL
DOCUMENTS THAT WILL HAVE IMPORTANT LEGAL AND FINANCIAL IMPLICATIONS
FOR YOU AND YOUR ESTATE. IT IS THEREFORE IMPORTANT TO UNDERSTAND THE
TERMS OF THE REVERSE MORTGAGE AND ITS EFFECT.
AS IS TRUE BEFORE ENTERING INTO ANY COMPLEX FINANCIAL ARRANGEMENT,
IT IS WISE TO SEEK THE COUNSELING AND ADVICE OF APPROPRIATE
PROFESSIONALS SUCH AS ATTORNEYS, FINANCIAL ADVISERS, AND ACCOUNTANTS.
COUNSELORS TRAINED ON REVERSE MORTGAGES MAY ALSO BE AVAILABLE. YOU
MAY ALSO WANT TO DISCUSS YOUR DECISION WITH FAMILY MEMBERS OR OTHERS
ON WHOM YOU RELY FOR FINANCIAL ADVICE.
(b) Before giving the prospective borrower the statement described
in subdivision (a), the lender shall mark the appropriate box
concerning annuity requirements.
1923.6. The lender shall be presumed to have satisfied any
disclosure duty imposed by this chapter if the lender provides a
disclosure statement in the same form as provided in this chapter.
1923.7. No arrangement, transfer, or lien subject to this chapter
shall be invalidated solely because of the failure of a lender to
comply with any provision of this chapter. However, nothing in this
section shall preclude the application of any other existing civil
remedies provided by law.
1923.9. (a) To the extent that implementation of this section does
not conflict with federal law resulting in the loss of federal
funding, reverse mortgage loan payments made to a borrower shall be
treated as proceeds from a loan and not as income for the purpose of
determining eligibility and benefits under means-tested programs of
aid to individuals.
(b) Undisbursed reverse mortgage funds shall be treated as equity
in the borrower’s home and not as proceeds from a loan, resources, or
assets for the purpose of determining eligibility and benefits under
means-tested programs of aid to individuals.
(c) This section applies to any law or program relating to
payments, allowances, benefits, or services provided on a
means-tested basis, by this state, including, but not limited to,
optional state supplements to the federal supplemental security
income program, low-income energy assistance, property tax relief,
general assistance, and medical assistance only to the extent this
section does not conflict with Title 19 of the federal Social
Security Act.
(d) For the purposes of this section, “means-tested programs and
aid to individuals” includes, but is not limited to, programs set
forth in Chapter 2 (commencing with Section 11200) of Part 3 of
Division 9, and Part 5 (commencing with Section 17000) of Division 9,
of the Welfare and Institutions Code.
1923.10. This chapter shall only apply to those reverse mortgage
loans executed on or after January 1, 1998.
Here again, I see only restrictions as to where the borrower is prevented from choosing to immediately buy an annuity until a specified cooling off period of time passes by after the closing of their loan,
Yet the lender can offer it immediately ..DUH. You don’t have to be a rocket scientist to see the fraud in this behavior.
Not that I believe annuities are the proper use all the time mind you but the business doesn’t go to any financial planner unless the financial planner has complete control of his client to wait out the time requirement before he/she does sell that annuity. You personal attack on me stating that I sell annuities to client is only an assumption. I never did and never would churn the accounts of my clients. But to have say that CIVIL CODE
SECTION 1923-1923.10 or HERA is doing the right thing to eliminate all insurance products without any restrictions on SEC products or use of Attorneys who use similar products is a blatant egregious method to control all the financial planning business yielded from reverse mortgages business. Why not, they make the laws to keep the business. Why isn’t this egregious behavior disclosed as well? Why isn’t this egregious behavior restricted as well?.

YOU ASKED: and then again not all insurance products are restricted?
What other type of insurance besides annuities and or life insurance products are there that would be more applicable in financial planning that complies with suitability for seniors, has a higher APR or yield than the consistent cost of the loan by the way. Please don’t mention a well diversified non guaranteed. This has already been mentioned. 90% of all financial planning tools belong in the annuity market and in life insurance. Restricting these estate preservation products and / or monopolizing these estate preservation products is definitely not to the advantage of any reverse mortgage borrower..Yet, it’s exactly what’s happening.

Pertaining to you comment on TALC. I tend to believe that the entire TALC is more misleading and less beneficial to know as you mentioned (laughable) and adds only to distrust in a seniors mind that might dissuade a person who would really benefit from a reverse mortgage. Unless this senior is a mechanical engineer in his/her youth no one would understand its applicability. And further more since it only needs to be repaid after death it would not matter that much to the borrower anyway. More so I believe it would affect the beneficiaries. I can imagine it won’t be long before the next appendage to control by HERA or California Civil Code Sections 1923-1923.10 would reach out to the benefactors and further hinder the decision process to do the loan.

My argument about accruing interest does not feign financial planning it does not mock the other side of the net estate question, the accruing costs (beyond mere interest, particularly when it comes to HECMs) is important up to a point .This point is met when the loan value has reached the equity limit available . I have no problems with complete disclosure with and amortization schedule including interest and assorted fees…

Pertaining to your last paragraph. I agree with both statements . First and second. Figures don’t lie but liars can figure. Your statement that Figures lie and Liars Figure .. Mine is based on willful desire to lie. Your statement is based on the lack of due diligence to double check a persons work. No malice intentions here…both are right.

Thank you for your wonderful response

Reply
James E. Veale, CPA, MBT September 23, 2012 at 11:36 am

With all due respect, you make several false and misleading statements. Have you even read HERA or current California law? (Why do you quote outdated law? Try http://www.leginfo.ca.gov/.)

If you look at either HERA Section 2122(a)(9) or California Civil Code 1923(i), you will notice that Congress is referring to all financial products not just specific insurance products. Most analysts read those laws to include “publicly traded” securities, specifically those controlled by the SEC and state governments. The difference is California law includes all reverse mortgages, not just HECMs while HERA just refers to HECMs.

For example you state: “And further more since it only needs to be repaid after death it would not matter that much to the borrower anyway.” If you are talking about HECMs, the due and payable clause can be triggered due to a variety of situations including borrowers selling the home, the collateral no longer being occupied by a borrower, nonpayment of insurance and taxes, and, yes, the death of the last surviving borrower.

You also state: “My argument about accruing interest does not feign financial planning it does not mock the other side of the net estate question, the accruing costs (beyond mere interest, particularly when it comes to HECMs) is important up to a point .This point is met when the loan value has reached the equity limit available .” What does your last sentence mean? Are you presenting the point where the balance due equals the then current value of the home? Unless one believes a HECM is the right of all senior homeowners (which I do not), then it is also very important to American taxpayers what occurs after the balance due exceeds the value of the home.

You even have the nerve to state: “Predatory lending practices or abuse all refers to excessive fees and is a Real Estate issue, not a financial planning tool to reach a goal.” In fact, most loans have absolutely nothing to do with real estate including credit cards, personal lines of credit, car loans, student loans, equipment loans, receivables financing, and on and on. The only thing mortgages have to do with real estate is that an intangible (the note) is secured by a tangible (real estate). Most securities are either equity or debt. No one who deals in debt is required to be a real estate licensee. Predatory lending practices are a financial services abuse, plain and simple. Mortgages can be bought and sold no matter who the owner of the property is. Mortgages are not real estate; they are a security.

As to your analysis of TALC, you fail to see one of its best uses and that is in emphasizing that the annual percentage rate is far greater on a HECM if the intended holding period is shorter rather than longer. However, the Fed requirement that 50% of the line of credit be considered as disbursed at funding seems odd and very misleading.

Perhaps your most difficult statements to swallow are: “Financial planning tools are developed by insurance companies…. Why would they be restricted from use by the cosumer.” Under what law are consumers restricted from obtaining insurance products? Under HERA, the insurer (the federal government) warns the principal beneficiary (the lender) that if it participates in certain activities or knowingly allows those activities to occur, FHA will not honor its obligation to reimburse the lender for any insured loss. Insurance companies do that all of the time. For example, suicide clauses in life insurance policies and intentional act clauses such as a beneficiary intentionally killing the insured to collect a claim. How about intentionally setting a fire to collect on fire insurance?

Where do you get this: “You personal attack on me stating that I sell annuities to client is only an assumption”? (Sic) The only thing I asked or said about YOUR personal involvement in anything related to insurance or annuities is the following: “It seems your concern is principally use of proceeds to acquire insurance products yet the restrictions exceed that limited group of products and then again not all insurance products are restricted. Do you sell insurance products?”

Yes, your response sounded like you sell insurance products but not every insurance salesperson sells annuities. But how odd to add: “I never did and never would churn the accounts of my clients.” I will not touch that last quotation with a ten foot pole. Why write such a thing when all I did was ask if you sold insurance products?

Do I agree with your response? As a whole, absolutely not!!! BUT thank you for your response.

Reply

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