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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Highlights
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.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Office of the Comptroller of the Currency | 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. |
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.
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| Office of Thrift Supervision | 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. |
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.
|
| Board of Governors | 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. |
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.
|
| Federal Deposit Insurance Corporation | 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. |
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.
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| Federal Trade Commission | 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. |
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.
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| Department of Housing and Urban Development | 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. |
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.
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| Department of Housing and Urban Development | 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. |
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.
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| Department of Housing and Urban Development | 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. |
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.
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| Department of Housing and Urban Development | 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. |
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.
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| Department of Housing and Urban Development | 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. |
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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Bank loansBanking lawBanking regulationClaimsConsumer protectionElderly personsExpense claimsFederal agenciesFederal regulationsHousingHousing programsInsurance premiumsInterest ratesInternal controlsLending institutionsMarketingMortgage loansMortgage programsMortgage protection insuranceRegulatory agencies